UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
File No. 333-76511
PRE-EFFECTIVE AMENDMENT NO. 2
FORM SB-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
CHINA PREMIUM FOOD CORPORATION
----------------------------------------------
(Name of Small Business Issuer in its Amended Charter)
Delaware 2026 62-1681831
------------------------------- ---------- -------------------
(State or other jurisdiction of SIC Number (I.R.S. Employer
incorporation or organization) Identification No.)
11300 US Highway 1, Suite 202, North Palm Beach, Florida 33408 USA
------------------------------------------------------------------
(Address of principal executive offices)
Telephone number: (561) 625-1411
--------------
Susan Lurvey, Secretary
China Premium Food Corporation
11300 US Highway 1, Suite 202
North Palm Beach, FL 33408
(561) 625-1411
(Name, address and telephone number of agent for service)
Copies To:
Roy D. Toulan, Jr., Esquire
Stibel & Toulan LLP
183 State Street
Boston, Massachusetts 02109
(617) 523-6000
_____________
Approximate date of proposed sale to the public: From time to time after the
effective date of this Registration Statement.
<PAGE>
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 426(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each Proposed Proposed
class of Number of maximum maximum
securities Securities offering aggregate Amount of
to be to be Dollar amount price offer registration
registered registered to be registered per unit (3) price (2)(3) fee
------------- ---------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
<C>
Common Stock, 12,000,000(2) $12,000,000 $1.00 $12,000,000 $3,336
$.001 par value
per share (1)
<FN>
<F1> Common Stock issued upon conversion of Series D Convertible Preferred
Stock, dividends payable in connection therewith, and the exercise of
Warrants issued in connection therewith. The issue of Series D
Convertible Preferred Stock took place pursuant to a Subscription
Agreement, dated March 9, 1999.
<F2> Pursuant to Rule 416 under the Securities Act of 1933, also includes
an indeterminate number of additional shares of Common Stock that may
become issuable to prevent dilution resulting from stock splits, stock
dividends and conversion price or exercise price adjustments.
<F3> Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
</FN>
</TABLE>
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
section 8(a) of the securities act of 1933 or until the registration
statement shall become effective on such date as the commission, acting
pursuant to said section 8(a), may determine.
<PAGE> (ii)
SUBJECT TO COMPLETION, DATED AUGUST ___, 2000
PROSPECTUS
[COMPANY LOGO]
---------------------------------
THE RESALE OF
12,000,000 SHARES OF COMMON STOCK
---------------------------------
This prospectus relates to the public offering, which is not being
underwritten, of up to 12,000,000 shares of our common stock by the selling
stockholders identified in this prospectus.
The prices at which the selling stockholders may sell the shares will be
determined by the prevailing market prices for the shares or in negotiated
transactions. We will not receive any of the proceeds from the sale of the
shares.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"CHPF." On August , 2000, the last sale price for our common stock as
reported on the OTC Bulletin Board was $ per share.
Investing in the common stock involves risks. See "Risk Factors" beginning
on page 5
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense
The date of this Prospectus is , 2000.
============================================================================
The information in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
============================================================================
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY 4
The Company 4
The Offering 4
RISK FACTORS 5
We have a limited operating history 5
We will have a need for additional financing 6
Additional financing will result in dilution 6
We depend upon key personnel 6
There is a limited market for our common stock 6
There exist potential risks of low priced "penny" stock 7
Future sales of common stock could depress the market price 7
We have significant competition in China 7
We do not control our distribution channels 8
Risks associated with doing business in China 8
SELLING SHAREHOLDERS 9
PLAN OF DISTRIBUTION 12
LEGAL PROCEEDINGS 14
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS 14
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 18
DESCRIPTION OF SECURITIES 21
Common Stock 22
Series A Convertible Preferred Stock 23
Series B Convertible Preferred Stock 24
Series C Convertible Preferred Stock 25
Series D Convertible Preferred Stock 26
Series E Convertible Preferred Stock 28
Series F Convertible Preferred Stock 29
Series G Convertible Preferred Stock 31
INTEREST OF NAMED EXPERTS AND COUNSEL 32
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES 32
<PAGE> 2
THE COMPANY 33
Background 33
Our business 38
Principal Products, Markets and Distribution 43
Marketing and advertising 44
Employees 45
ADDITIONAL INFORMATION 45
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATIONS 45
Basis of reporting 45
Years ended December 31, 1998 and 1999 46
Liquidity and capital resources 48
Period from January 1, 2000 to June 30, 2000 49
Liquidity and capital resources 51
Debt structure 54
Effects of inflation 54
Effect of fluctuation in foreign exchange rates 54
New accounting standards not yet adopted 54
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS 55
DESCRIPTION OF PROPERTY 55
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 56
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 57
EXECUTIVE COMPENSATION 59
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 61
FINANCIAL STATEMENTS F-1
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from
that contained in this prospectus. The selling stockholders listed in this
prospectus on page 11 are offering to sell, and seeking offers to buy, shares
of our common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
You can contact us by mail at China Premium Food Corporation, 11300 Us
Highway 1, Suite 202, North Palm Beach, Fl 33408 or by phone at (561) 625-
1411.
<PAGE> 3
PROSPECTUS SUMMARY
The Company
China Premium Food Corporation is a Delaware corporation formed on
April 26, 1996. Through our Chinese subsidiaries in the Shanghai and
Hangzhou PRC urban markets, we license, market and distribute branded Looney
Tunes(TM) milk products and import branded Looney Tunes(TM) snack crackers
for sale in supermarkets and convenience stores. In addition, through
production arrangements between our U.S. subsidiary and regional dairies, we
will market branded Looney Tunes(TM) flavored milk products for sale in the
United States, commencing in September of 2000.
In the past eight months, we have refocused our business from
producing milk products in China to the licensing, marketing, importation
and distribution of food products, both in China and in the United States.
Our business strategy is to
* develop sales of these branded products
* develop efficient distribution systems in Shanghai and Hangzhou for
these products
* expand the products imported to China by our Chinese import/export
wholly owned subsidiary
* finalize the formation of a Chinese joint venture company to
distribute premium food products to major hotels in China using a
business to business e-commerce portal
In order to implement this business strategy, we will need to raise
additional capital through the sale of our equity.
Financial Matters
Starting with the audited financial statements in our 1999 Annual
Report, we stopped reporting the financial affairs of our Chinese
subsidiaries in Shanghai and Hangzhou on a consolidated basis and began to
report our investment in these subsidiaries on an equity basis. As a
result, we have not reported any income for the last two quarters.
For the year ended December 31, 1999, we had an accumulated deficit of
$12,360,537. As of December 31, 1999, we had cash on hand of $16,854 and
total shareholders' equity of $840,057.
As of June 30, 2000, we had an accumulated deficit of $15,344,972.
As of June 30, 2000, we had cash on hand of $1,161,327 and reported total
shareholders' equity of $2,515,362.
The Offering
The common stock offered by the selling shareholders includes shares
of common stock issued upon conversion of convertible preferred stock and
common stock that we may issue to the selling shareholders to prevent
dilution resulting from stock splits, stock dividends and conversion price
or warrant exercise price adjustments.
We will not receive any proceeds from the resale of the common stock
covered by this Prospectus, all of which will be paid to the selling
shareholders.
<PAGE> 4
RISK FACTORS
An investment in the common stock offered by this prospectus involves
a high degree of risk. You should carefully consider the risks described
below before deciding to purchase the shares of common stock. The risks
described below are not the only ones that we face. Additional risks that
generally apply to publicly traded companies, that are not yet identified or
that we currently think are immaterial, may also adversely affect our
company.
Any of the following factors could adversely affect our business,
financial condition or results of operations. The trading price of our
common stock could, in turn, decline and you could lose all or part of your
investment.
Because we have a limited operating history and recently have refocused our
business strategy from production to licensing, marketing and distribution,
our business projections may not be accurate and our plans may not be
successful
----------------------------------------------------------------------------
While we anticipate favorable results from our business strategy, we
have yet to realize any income from this new business direction. Without
income and profitability, our business may fail and our common stock will be
worthless.
During the first two quarters of 2000, we continued to shift ours
business focus and strategy from the production of milk products to a
company involved in the marketing and distribution of a broad range of food
products in China, including premium branded items. Our strategy of
distributing branded Looney Tunes(TM) retail consumer food products at
premium prices in China is untested. We have not as yet sold sufficient
products to determine whether this strategy or any projections of
profitability based upon this strategy will be successful.
Similarly, our U.S. strategy of alliances with regional dairies to
produce Looney Tunes(TM) flavored milk products is untested. We anticipate
initial sales of these flavored milks to begin in late September of 2000.
Since we are not yet a profitable business, we will have a need for
additional financing; our failure to raise additional money may have an
adverse effect on our business plans
---------------------------------------------------------------------------
Our failure to obtain additional financing could materially slow or
prevent
* our development of a distribution system in China for our food
products
* our formation of a new Chinese joint venture to distribute premium
food products to major hotels in China
* our development of a business to business e-commerce portal as a
sales tool for our new premium food joint venture
* our ability to increase sales in these areas or achieve and sustain
profitability.
We require approximately $2,000,000 to fund our immediate capital
needs in three areas: first, the launch of Looney Tunes(TM) milk products
and snack crackers in China; second, our contribution of approximately
$1,200,000 in registered capital for a new joint venture; and third, the
development of a
<PAGE> 5
distribution system for our food products produced locally or imported into
China. While we have been successful to date in raising sufficient money to
support our marketing and development efforts, there can be no assurance
that additional financing will be available on satisfactory terms or at all.
If we obtain additional financing through more sales of our stock,
stockholders' investments may be worth less
---------------------------------------------------------------------------
We may be required or may choose to sell equity securities to obtain
financing in the future including the sale of additional preferred stock to
the selling security holders. If we sell additional equity securities at a
price per share less than the purchase price at which the shares of common
stock are offered, investors purchasing common stock in this offering would
incur additional dilution. As a result, shareholders' investments may be
worth less than they may have anticipated.
Since we depend upon key personnel, the loss of one or more of our
management team may have a negative effect on our business
---------------------------------------------------------------------------
The unexpected loss of the services of any member of the management
team could have a material adverse effect on our ability to conduct and grow
both our local and import businesses in China. We are and will be dependent
on our current management teams for the foreseeable future
* to obtain needed additional financing
* to develop and maintain government and private contacts in
China for the local production of our Looney Tunes(TM) branded milk
products
* to develop and maintain government and private contacts in
China for the importation of food products into China by our wholly
owned Chinese subsidiary
Our President and CEO, Roy Warren, has developed important contacts
with Chinese entrepreneurs with whom we either consult or plan business
ventures in China. He also has developed a significant and crucial network
of existing and potential investor contacts in the United States. In
addition, Steve Langley, our Chief Operating Officer in China, has the
benefit of important business contacts developed during his living and
working in China for the past six years. A loss of any member of our
management team would require us to seek a replacement and reestablish the
personal contacts lost.
Since there is a limited market for our common stock, the resale of the
common stock covered by this prospectus may depress the price of our stock
and we may not meet NASDAQ qualifications
---------------------------------------------------------------------------
There can be no assurance that a broader market for our common stock
will develop subsequent to this offering. Failure of such a market to
develop could have a material adverse effect on the liquidity of the common
stock and, therefore, on an investment in the shares. This would
significantly increase the risks of such an investment.
In November of 1997, our common stock began trading on the OTC
Bulletin Board and now trades under the trading symbol "CHPF." Prior to
that time there was no public market for the common stock. Since it has
begun trading, there has been a limited inter-dealer market for the common
stock. Assuming we can meet the minimum listing requirements, we intend to
apply for a listing of our common stock on NASDAQ. There can be no
assurance, however, that we will meet the
<PAGE> 6
listing requirements of NASDAQ or that our common stock will be approved for
trading. In addition, sales of substantial numbers of the common stock
covered by this Prospectus into the existing inter-dealer market could have
a depressive effect on the market price of our common stock. Such
depressive effect could keep the price per share of the common stock below
that required for initial listing of our common stock for trading on NASDAQ.
Since our common stock is "penny" stock, the price of our stock in the
market may be adversely effected
---------------------------------------------------------------------------
The penny stock rules could have the effect of limiting the trading
market for our common stock and the ability of purchasers in this offering
to sell any shares of our common stock in the market. If the trading market
for our common stock were so limited, it could have an adverse effect on the
liquidity of the shares and could have the effect of materially increasing
the risks of an investment in our common stock.
If the price per share of our common stock on the OTC Bulletin Board
continues to trade at below $5 per share, the common stock will come within
the definition of "penny stock," as contained in certain rules and
regulations of the SEC. Under those regulations, any broker-dealer seeking
to effect a transaction in a penny stock not otherwise exempt from the
rules must first deliver to the potential customer a standardized risk
disclosure document in a form prepared by the SEC, which provides
information about penny stocks and the nature and level of risks in the
penny stock market.
The broker-dealer must also provide the customer with current bid and
offer quotations for the penny stock, the compensation of the broker-dealer
and its salespersons in the transaction and monthly account statements
showing the market value of each penny stock held in the customer's account.
This information must be given to the customer orally or in writing before
the transaction and in writing before or with delivery of the customer's
confirmation of the transaction. Under the penny stock rules, the broker-
dealer must make a special determination of the suitability of the suggested
investment for the individual customer and must receive the customer's
written consent to the transaction.
Approximately 71% of our common stock will be available for resale which
could depress the market price
---------------------------------------------------------------------------
After the offering, we will have outstanding approximately 24,700,000
shares of common stock. Of that amount, approximately 17,500,000 shares or
71%, will be available for resale. While we cannot predict the impact of
the public resale into the market of any of these shares on the public
trading price of our common stock, sales of substantial amounts of our
shares or the availability of substantial amounts of our common stock for
sale could lower market prices.
Since we are smaller than most of our competitors in Shanghai, and have
limited resources, we have difficulty incurring our market share in the
consumer milk and snack foods markets
---------------------------------------------------------------------------
The ability of our competition to sell dairy and other food products
at prices below prices charged by us for our products may represent an
obstacle to our ability to secure a market share at revenue levels
sufficient to achieve profitability.
In Shanghai, our largest milk competitor controls 80% of the consumer
dairy market, is well financed, and has an experienced and long term
management team in place. Similarly, our largest competitor in the snack
cracker market is large and well financed. We will require a significant
<PAGE> 7
expenditure of money to provide marketing and logistic support our Looney
Tunes(TM) premium milk products and imported snack crackers through an
initial launch and on a continuing basis. In addition, our competitors
enjoy long term relationships with local food stores and store chains, and
are better financed and benefit from an enhanced distribution system when
compared to that employed by us.
Since we are dependent on distributors to sell our products, we do not
control our distribution channels
---------------------------------------------------------------------------
A reduction in sales effort or discontinuance of sales of our products
by our distributors could lead to reduced sales.
We sell our products primarily through distributors. Our agreements
with distributors, in large part, are nonexclusive and may be terminated on
short notice by either party without cause. Our distributors are not within
our control, are not obligated to purchase products from us and may
represent other lines of products. While we are using several "jobber"
distributors to cover the various areas of our market in China for our
Looney Tunes(TM) branded milk products and snack crackers, the loss or
ineffectiveness of any of our major distributors could adversely affect our
operating results.
Doing business in China is subject to unpredictable political and economic
conditions, which may disrupt our operations if these conditions become
unfavorable to our business
---------------------------------------------------------------------------
Investments in China involve several risks including internal and
international political risks, evolving national economic policies as well
as financial and accounting standards, expropriation and the potential for a
reversal in economic conditions.
The revenues of our Chinese subsidiaries will be in Chinese renminbi
("RMB). In order to pay fees and dividends to us, these subsidiaries will
need to convert RMB into US dollars. Under current Chinese law, the
conversion of RMB into foreign currency requires government consent. At
present, standardized procedures are in place to convert RMB to US dollars
for the payment of current accounts, including loan repayments, and
dividends based on profits. Government authorities, however, may impose
restrictions, which could impact this established procedure.
To form a new Chinese joint venture, we will need various levels of
central and local government approval. These approvals may include site
permits, building permits, and approval for transfer of assets. While we
believe that, because of the importance attached to nutrition and
agricultural issues by the central government, the cooperation of local and
national governmental approval agencies will be forthcoming, there can be no
assurance of continuation of government support for these projects.
With respect to the conditions and activities of Chinese companies
with which the Company is involved pursuant to its joint venture contracts,
the operations of these joint venture companies must be viewed in the
context of the Chinese business environment existing in the People's
Republic of China. There can be no assurance that the sources from which
information is provided concerning the day to day activities of such joint
ventures, including their respective relationships to local governmental and
regulatory authorities, are wholly reliable. Official statistics also may
be produced on a basis different to that used in western countries. Any of
the statements as to operations contained in this document must be subject
to some degree of uncertainty due to doubts about the reliability of
available information from and with regard to the respective joint ventures.
<PAGE> 8
Moreover, while the government of the People's Republic of China has
pursued a policy which has prioritized the development of children's food,
in particular milk products, to better serve its people resulting in a focus
on the role of agriculture, in general, in China, there can be no assurance
that this policy will continue in the long term. Similarly, the recent
changes in the laws of China pertaining to the future ownership of
commercial facilities presently owned by the state, which has resulted in a
perceived policy shift from a controlled economy to a free market system in
the dairy industry, may not be accurate in concept or in execution. As
such, the risk is present that the acquisition strategy set forth in this
document may not be successful owing to a change in government approach, or
that the very existence of the joint venture businesses in which the we have
controlling interests may be affected adversely.
Furthermore, many countries in Asia have experienced significant
economic downturns since the middle of 1997, resulting in slower real gross
domestic product growth for the entire region as a result of higher interest
rates and currency fluctuations. Declining economic growth rates could
disrupt consumer spending for premium products and negatively affect our
business and our profitability over time. The economic downturn in Asia also
could lead to a devaluation of the currency of China, which would decrease
our revenues U.S. dollar terms. In addition, economic reforms in the region
could affect our business in ways that are difficult to predict. For
example, since the late 1970s, the Chinese government has been reforming the
Chinese economic system to emphasize enterprise autonomy and the utilization
of market mechanisms. Although we believe that these reforms measures have
had a positive effect on the economic development in China, we cannot be
sure that they will be effective or that they will benefit our business.
SELLING SHAREHOLDERS
The following table lists the beneficial ownership of our common stock
by the selling shareholders as of the effective date of this registration
statement, the number of shares of common stock covered by this prospectus,
and includes
* the names and addresses of the selling shareholders
* the number of shares of common stock that each selling shareholder
owns, assuming full conversion of the preferred at $0.80 per share
and the exercise of all warrants
* the percentage of all outstanding shares of common stock that
ownership represents
* the number of shares of common stock owned by each selling
shareholder that may be offered for sale from time to time by this
prospectus
* the number of shares of common stock owned assuming the sale of all
shares covered by this prospectus and the percentage of all
outstanding shares of common stock that ownership represents
The shares may be offered by the selling stockholders or by pledgees,
donees, transferees or other successors in interest that receive such shares
as a gift or through another non-sale related transfer. We may amend or
supplement this prospectus from time to time to update the information
provided in the table.
<PAGE> 9
<TABLE>
<CAPTION>
Number of Shares Number of Shares Number of Shares
Beneficially Owned Being Offered Beneficially Owned
Prior to Offering After Offering
Name and Address
Of Stockholder # of Shares % of Class # of Shares # of Shares % of Class
----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
AUSTINVEST ANSTALT BALZERS 2,625,755 11% 2,625,755 -0- -0-
(A Lichenstein corporation)
Landstrasse 938
9494 Furstentums
Balzers, Liechtenstein
ESQUIRE TRADE & FINANCE INC. 2,625,755 11% 2,625,755 -0- -0-
(A B.V.I. corporation)
Trident Chambers
P.O. Box 146
Road Town, Tortola, B.V.I.
AMRO INTERNATIONAL, S.A. 2,726,198 11.5% 2,726,198 -0- -0-
(A Panama corporation)
c/o Ultra Finanz
Grossmuenster Platz 26
P.O. Box 4401
Zurich, Switzerland CH 8022
SETTONDOWN CAPITAL 201,493 0.85% 201,493 -0- -0-
INTERNATIONAL, LTD.
600 California Street, 14th Floor
San Franciso, CA 94108
LIBRA FINANCE, S.A. 1,662,500 7% 1,662,500 -0- -0-
P.O. Box 4603
Zurich, Switzerland
THE KESHET FUND L.P. 250,000 1.05% 250,000 -0- -0-
Ragnall House, 18 Peel Road
Douglas, Isle of Man
1M1 4L2, United Kingdom
KESHET L.P. 268,750 1.13% 268,750 -0- -0-
Ragnall House, 18 Peel Road
Douglas, Isle of Man
1M1 4L2, United Kingdom
NESHER LTD. 218,750 0.92% 218,750 -0- -0-
Ragnall House, 18 Peel Road
Douglas, Isle of Man
1M1 4L2, United Kingdom
<PAGE> 10
TALBIYA B. INVESTMENTS LTD. 200,000 0.84% 200,000 -0- -0-
Ragnall House, 18 Peel Road
Douglas, Isle of Man
1M1 4L2, United Kingdom
ALON ENTERPRISES LTD. 344,330 1.45% 344,330 -0- -0-
Ragnall House, 18 Peel Road
Douglas, Isle of Man
1M1 4L2, United Kingdom
</TABLE>
The following table lists the source, by amount, of the shares offered for
resale.
<TABLE>
<CAPTION>
Selling Shareholder Preferred Preferred Common Warrants (and extra
Now Owned Series Now Owned Common Issued Upon
Warrant Exercise*)
<S> <C> <C> <C> <C>
AUSTINVEST 34,625 D 132,943 422,500
ANSTALT BALZERS 50,000 F - 1,000,000
ESQUIRE TRADE 34,625 D 132,943 422,500
& FINANCE INC. 50,000 F - 1,000,000
AMRO INTERNATIONAL, 35,750 D 161,823 455,000
S.A. 50,000 F - 1,000,000 +12,500*
SETTONDOWN CAPITAL - D 151,493 50,000
INTERNATIONAL, LTD.
(finder's fee only)
LIBRA FINANCE, S.A. - F 1,600,000 + 62,500*
(finder's fee only)
THE KESHET FUND L.P. 20,000 G - -
KESHET L.P. 21,500 G - -
NESHER LTD. 17,500 G - -
TALBIYA B. 16,000 G - -
INVESTMENTS LTD.
ALON ENTERPRISES LTD. - G - 344,330
(finder's fee only)
</TABLE>
The Series D, F and G selling shareholders have agreed to restrict their
ownership of the common stock to no more than 9.999% of the issued and
outstanding shares of common stock.
<PAGE> 11
BENEFICIAL OWNERS
Austinvest Anstalt Balzers, is owned by Bank fur Arbeit und Wirtschaft
AG (B.A.W. A.G. Bank), Vienna, Austria. B.A.W. A.G. Bank is involved in
involved in banking services in Austria and Central Europe and maintains
strategic partners and alliances in the world's major financial centers.
Esquire Trade & Finance Inc., is owned by Mr. Matithyahu Kaniel,
Israel. Esquire is an international investment entity.
Amro International, S.A., is owned by Mr. Mark Perkins, Monte Carlo,
Monaco. Mr. Perkins is a British citizen. Amro is an investment firm with
world wide interests.
Settondown Capital International, Ltd., is owned by Mr. Anthony
Inderriden, Nassau, Bahamas. Settondown is a financial advisor and
consulting firm, which assists small companies in obtaining financing
through the introduction of sophisticated financial sources.
Libra Finance, S.A. is an international investment and financial
consultant entity. Among other investment activities, Libra advises
investors on financially assisting small companies in need of capital.
The Keshet Fund L.P. is a New York limited partnership, which is a
resident of and conducts its investment business from the Isle of Man,
United Kingdom. Keshet Management, Ltd., a U.K. Isle of Man corporation, is
the general partner.
Keshet L.P. is a British Virgin Island limited partnership, which is a
resident of and conducts its investment business from the Isle of Man,
United Kingdom. Keshet Management, Ltd., a U.K. Isle of Man corporation, is
the general partner.
Nesher Ltd. and Talbiya B. Investments Ltd. are U.K. Isle of Man
corporations owned by Mr. Abraham Grin, who is responsible for the
investment business of these entities.
Alon Enterprises Ltd. is a B.V.I. corporation owned by Mr. Shmuel
Lmakias, Jerusalem, Israel, who is responsible for the computer related and
investment business of this entity.
None of the selling shareholders or their beneficial owners are
affiliates of our company.
PLAN OF DISTRIBUTION
The shares of common stock covered by this prospectus may be offered
and sold from time to time by the selling shareholders. The selling
shareholders will act independently of us in making decisions with respect
to the timing, manner and size of each sale of the common stock offered.
The selling shareholders may sell the shares offered through the OTC
Bulletin Board or otherwise. The shares may be offered at market prices and
at terms then prevailing or in private sales at negotiated prices. Private
sales may be made directly or through a broker or brokers, who may act as
agent or as principal or by a combination of such methods of sale. The
selling shareholders and any underwriter, dealer or agent who participates
in the distribution of these shares may be deemed to be "underwriters" under
the Securities Act, and any discount, commission or concession received
might be deemed to be an underwriting discount or commission under the
Securities Act.
<PAGE> 12
The selling shareholders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with these
transactions, broker-dealers or other financial institutions may engage in
short sales of our common stock in the course of hedging the positions they
assume with selling shareholders. The selling shareholders may also sell
our common stock short and deliver the shares offered to close out such
short positions. The selling shareholders also may enter into option or
other transactions with broker-dealer or other financial institutions.
These transactions may require the delivery of shares offered to broker-
dealers or other financial institution, who may resell the shares pursuant
to this prospectus (as supplemented or amended to reflect such transaction).
The selling shareholders also may pledge the shares offered under this
prospectus to a broker-dealer or other financial institution. If a default
occurs under the pledge, such broker-dealer or other financial institution
may effect sales of the pledged shares pursuant to this prospectus (as
supplemented or amended to reflect such transaction). In addition, any
shares offered that qualify for sale pursuant to Rule 144 may be sold under
Rule 144 rather than under this prospectus.
Any broker-dealer participating as an agent in the sale of the shares
offered may receive commissions from the selling shareholders (and, if
acting as agent for the purchaser of shares, from that purchaser). Usual
and customary brokerage fees will be paid by the selling shareholders.
Broker-dealers may agree with the selling shareholders to sell a specified
number of shares at a stipulated price per share. To the extent a broker-
dealer is unable to sell all of the shares allotted, it may purchase as
principal any unsold shares at the price required to fulfill the broker-
dealer commitment to the selling shareholders. Broker-dealers who acquire
shares as principal may resell such shares from time to time in transactions
in the over-the-counter market, in negotiated transactions or by a
combination of these methods of sale. These resales may be at market prices
prevailing at the time of sale or at negotiated prices. Broker-dealers may
pay to or receive commissions from the purchasers of such shares.
We have advised the selling shareholders that the anti-manipulation of
Regulation M under the Exchange Act may apply to sales of shares in the
market and to the activities of the selling shareholders and their
affiliates. We will make copies of this prospectus available to the selling
shareholders and we have informed them of the need for delivery of copies of
this prospectus to purchasers on or prior to sales of the shares offered.
The selling shareholders may indemnify any broker-dealer that participates
in transactions involving the sale of the shares against certain
liabilities, including liabilities arising under the Securities Act. If any
broker-dealers purchase shares as principal, commissions paid or any
discounts or concessions allowed to any broker-dealers, and any profits
received on the resale of the shares, may be deemed to be underwriting
discounts and commissions under the Securities Act.
In order to comply with the securities laws of certain states, the
common stock will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states, the common
stock may not be sold unless the shares have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is met.
We cannot guarantee that the selling stockholders will sell all or any
of the shares of common stock offered under this prospectus.
<PAGE> 13
LEGAL PROCEEDINGS
In June of 1998, Green Food Peregrine entered into an agreement with
State Development Bank of China and the Construction Bank of China with
respect to two loans aggregating approximately US $1,200,000. These
agreements called for the quarterly payment of approximately US $50,000 to
each bank. We did not guaranty or collateralize these loans. In late
December 1999, the State Development Bank of China and the Construction Bank
of China commenced lawsuits against Green Food Peregrine aggregating
approximately US $1,200,000.
In early December 1999, Eastsea Cow Farm, a raw milk supplier,
commenced an action to recover approximately US $43,000. In January 2000,
another milk supplier, the Zhejiang Xing Ye Group Co., Ltd., commenced an
action for approximately US $6,600 and has obtained a court order seizing
the property (including production and office facilities) of Green Food
Peregrine.
In October 1999, a Green Food Peregrine truck driver was adjudicated
responsible for an accident which injured another person. The compensation
due is approximately US $7,800 and may be paid from available insurance
proceeds.
We have retained Llinks Law Office, a Chinese law firm located in
Shanghai, PRC, to represent our business interests generally in China. While
judgments have been entered against Green Food Peregrin in these lawsuits, we
have been advised by our Chinese counsel that we do not have any liability
with respect to these claims against Green Food Peregrine.
In January 2000, we commenced a non-judicial procedure to terminate
the Green Food Peregrine joint venture, based upon our Chinese partner's
breach of the joint venture contract. In May 2000, we met with
representatives of the PRC's Ministry of Foreign Trade and Economic
Cooperation, which has jurisdiction over the Green Food Peregrine joint
venture. At that meeting, the MOFTEC representatives agreed with the
termination of the joint venture. We continue to pursue the termination
process and expect formal termination during 2000.
DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS
The directors, executive officers and significant employees/advisors
are as follows. Our directors serve for staggered terms of two years or
until their successors are elected. Officers are appointed by, and serve at
the pleasure of, the board of directors.
<TABLE>
<CAPTION>
Name of Officer Position with the Company
--------------- -------------------------
<S> <C>
Roy G. Warren President, Chief Executive Officer and Director
Stephen Langley Chief Operating Officer (China Operations)
Michael L. Davis Chief Financial Officer
Susan E. Lurvey Treasurer and Secretary
Nancy Yuan Chief Financial Officer (China Operations)
Robert Cummings Director
Paul Downes Director
George Holdsworth Director
Michael Lucci Director
John McCormack Director
Phillip Pearce Director
</TABLE>
<PAGE> 14
The experience and background of our executive officers follows:
Mr. Roy Warren - President Since August, 1997; CEO Since May, 1999
Mr. Warren serves as our President and Chief Executive Officer and as
a director. Mr. Warren has been in charge of our day to day US operations
and, along with Mr. Downes, charted the course for our initial fund raising
efforts. In addition to his day to day operational duties, Mr. Warren
continues to develop strategy for our growth and external financial matters.
For 15 years from 1981 through 1996, Mr. Warren enjoyed an active
career in the securities brokerage industry. During those years, Mr. Warren
acted as executive officer, principal, securities broker, and partner with
brokerage firms in Florida, most notably Kemper Financial Companies, Alex
Brown & Sons and Laffer Warren & Company. Mr. Warren currently serves on the
Executive Committee of our board of directors.
Mr. Warren also serves as a director of our U.S. subsidiary, Bravo!
Foods, Inc. and our wholly owned Chinese subsidiary, China Premium Food
Corporation (Shanghai) Co., Ltd.
Mr. Stephen Langley - Chief Operating Officer (China) Since October, 1999
Mr. Langley's entire 22 year career has been spent in agribusiness
sales, marketing, and management. Seventeen of those years have been with
multinational companies, including IBP Inc., a leading processor of fresh
beef and pork. While in middle management at IBP, the sales department under
his direct supervision accounted for annual sales of US $320 million and
sales volume of 1.25 million metric tons. In addition, Mr. Langley was
responsible for establishing a market presence for IBP in China. He opened
IBP's Shanghai Representative office in 1997 and sales of products imported
from IBP-US which amounted to US$ 250,000 in 1997, grew to over US $7
million in 1998. Mr. Langley developed the business strategy and directed
all sales activities in China for IBP, including negotiating pricing,
shipping, delivery, and other critical details of the supply of perishable
goods.
Mr. Langley and his family have lived in China continuously for the
last 6 years. He studied Chinese full time for two years from 1993-1995 and
achieved Chinese language Level 3 fluency (Foreign Service scale of 1-5,
with Level 5 equal to native speaker.)
Mr. Langley also serves as a director and General Manager of our
wholly owned Chinese subsidiary, China Premium Food Corporation (Shanghai)
Co., Ltd.
Mr. Michael L. Davis, Chief Financial Officer - CFO Since October, 1997
Entering the securities industry over 35 years ago as a securities and
special situations analyst with ValueLine, Mr. Davis proceeded to serve as a
Tactical Planner, General Portfolio Manager and Short Sale Portfolio Manager
with a number of hedge funds. In 1972, he was a member of the Investment
Committee at Anchor Corp. which supervised its $2.5 billion family of funds,
as well as serving as Anchor's Chief Market Analyst. From 1978 through 1989,
Mr. Davis was the Portfolio Manager of Merrill Lynch's Special Value Fund.
In addition to his position with us, for the past *** years, Mr. Davis has
operated a private consulting firm, M.L. Davis Financial Services. Mr.
Davis advises clients on stock selection and general market timing
considerations. He researches and writes investment reports on selected
small and mid-cap growth companies. In addition. Mr. Davis supervises
<PAGE> 15
an investment portfolio for a group of United Arab Emirates investors. Mr.
Davis has had 35 years of experience as a securities analyst and portfolio
manager for companies such as Value Line and Merrill Lynch. Mr. Davis was
appointed our Chief Financial Officer in the summer of 1997.
Ms. Nancy Yuan, Chief Financial Officer (China) - COO (China) Since October,
1999
Ms. Yuan is a Shanghai native and is fluent in English, Mandarin, and
the Shanghai dialect, with a working knowledge of Cantonese. Ms. Yuan has a
Master of Science in Accounting from Kent State University with successful
completion of the USA CPA exam. She also has an engineering background with
an undergraduate degree in that field.
For the past nine years, Ms. Yuan has had a cross- cultural working
experience in corporate accounting policy, procedure, control, and financial
analysis with knowledge of the accounting and auditing standards, US GAAP,
and PRC accounting and tax regulations. Ms. Yuan was trained at Coopers and
Lybrand in Hong Kong, where she was responsible for assessing corporate
internal control, corporate accounting policy and procedures, defining risk
areas, and auditing financial statements. She also was involved with the
flotation of a PRC company for listing in the HK Stock Exchange. In
addition, Ms. Yuan has been employed at Moen Incorporated, where she was
responsible for manufacturing quality, auditing and data analysis for Moen
faucets. Ms. Yuan also was an Assistant Professor at Qingdao University,
where she taught classes, established the Precision Measurement Lab, and
conducted research in the area of "Tolerance and Technical Measurements".
In addition to Mr. Warren, our directors are as follows:
Mr. Arthur W. Blanding - Director Since November, 1999
Mr. Blanding is president of The Omega Company, international
technical consultants to the dairy industry. He has over 50 years experience
in management of dairy processing, sales and strategic planning consulting.
He graduated from Michigan State University in 1956, with a degree in food
science, and in 1964 from Oregon State University with a degree in Food
Microbiology, and attended Harvard Business School.
As President of The Omega Company for the past 20 years, Mr. Blanding
has completed over 200 projects successfully, both in the U.S. and abroad.
Clients of The Omega Company include Abbott International, Cumberland Farms,
Dairy Gold, Farm Fresh, Inc., Haagen Dazs, Labatt, Ross Laboratories, and
Stop & Shop Company, among others. Mr. Blanding was a consultant for the
design and construction of the dairy processing facility built in Shanghai
by Green Food Peregrine. The Omega Company is a party to a consulting
contract with us concerning technical and production issues.
Mr. Blanding also serves as a director and Chairman of our U.S.
subsidiary, Bravo! Foods, Inc.
Mr. Robert J. Cummings - Director Since 1997
Mr. Cummings' work experience includes ten years in purchasing at Ford
Motor Company. In 1975, he founded and currently operates J & J Production
Service, Inc., a manufacturing representative business, which is currently
responsible for over $300 million in annual sales. Mr. Cummings currently
serves on the executive committee of the our board of directors.
<PAGE> 16
Mr. Paul Downes - Director Since 1997
Mr. Downes is a director and, from August of 1997 to April of 1998,
served as our Chairman. For the past 12 years, Mr. Downes has managed his
personal diverse portfolio of international investments with concentration
in the United Kingdom, Eastern Europe, North Africa and Asia. In 1985, he
founded a group of nursing homes for the elderly in Great Britain which he
sold in 1990. Prior to that time, Mr. Downes, who holds the distinction of
having won the title of English and European Amateur golf Champion, spent
several years organizing golf tournaments and international golf matches in
Malaysia, Singapore, Thailand, Philippines, Indonesia and Hong Kong,
spending two years living in Southeast Asia. Mr. Downes is one of our
"founders" and played a leading role in our initial raising efforts. From
March of 1999, Mr. Downes has served as the Chairman of a start up marble
quarry company located in Alabama.
Mr. George Holdsworth - Director Since 1997
From March of 1997 until May, 1998, Mr. Holdsworth was responsible for
the operational aspects of our China operations. Since 1998, Mr. Holdsworth
has managed his personal investment portfolio and has served as a director
and consultant to U.S. Stone Corporation, a start up marble quarry company
locate in Alabama.
Mr. Holdsworth is a graduate of the University of London with a B.S.
in Mathematics and an Associate of the London College of Music. He started
in business as a manufacturing manager in his father's company, Earlsdon
Components, Ltd., where he became Director of Operations, then owner and
Managing Director. In 1993, Mr. Holdsworth became owner of Earlsdon
Technology, Ltd., a JV Partner of Shanghai Earlsdon Valve Company, Ltd., and
lived in Shanghai for four years, until May, 1998. Mr. Holdsworth sold his
interest in Shanghai Earlsdon and commenced his duties for us in March,
1997.
Michael G. Lucci - Director Since 1998
Mr. Lucci is a former All Pro linebacker who played for the Detroit
Lions of the National Football League from 1964 through his retirement from
professional football in 1973. Mr. Lucci became associated with Bally's
Total Fitness Corporation in 1971 and rose through the ranks to become that
corporation's Vice President of club operations in the mid-west, Senior
Vice-President, and President and Chief Operating Officer in 1993. Mr. Lucci
retired in 1996 and, since that time, has managed a diverse investment
portfolio for himself and directed the business of his construction company
in the Detroit MI area. Along with Messrs. Warren and Cummings, Mr. Lucci
serves on the executive committee of our board of directors.
Mr. John McCormack - Director Since 1997
Mr. McCormack filled the directorship vacated by Mr. Dale Reese in the
Summer of 1997. For over 15 years, Mr. McCormack has served as an executive
with Dean Foods Co., the nation's leading processor and distributor of a
full line of branded and private label products, including fluid milk,
cottage cheese and ice cream. Dean Foods also is considered a leader in the
frozen vegetable business with brands which include BirdsEye, Freshlike and
Veg-All. Prior to a 1999 move to the Chicago area for Dean Foods, Mr.
McCormack managed McArthur Dairy in Miami, Florida, a wholly- owned
subsidiary of Dean Foods Co., and South Florida's leading dairy processor
and distributor. As a Vice
<PAGE> 17
President of Dean Foods, he is in charge of Dean Food's mid-western division
out of Chicago, Illinois. Mr. McCormack serves on the compensation committee
of our board of directors.
Mr. Phillip Pearce - Director Since 1997
Mr. Pearce is a "retired" member of the securities industry. Mr.
Pearce served as Chairman of the NASD during which time he was instrumental
in the founding of NASDAQ. Additionally, Mr. Pearce was a former Director of
E.F. Hutton and has served as Governor of the New York Stock Exchange. Since
his retirement in 1988, Mr. Pearce has remained active in the securities
industry as a corporate financial consultant. Mr. Pearce serves on the
compensation committee of our board of directors.
Mr. Pearce also serves as a director of our U.S. subsidiary, Bravo!
Foods, Inc.
--------------------
As of the date of this prospectus, there have been no family
relationships among the directors and executive officers. Further, no
director, executive officer, promoter or control person has been involved in
any legal proceedings during the past five years that are material to an
evaluation of the ability or integrity of such director, person nominated to
become a director, executive officer, promoter or control person of the
Company. None of the individuals listed in this Item 5 has had a bankruptcy
petition filed by or against any business of which such person was a general
partner or executive officer either at the time of such bankruptcy, if any,
or within two years prior to that time. No director, executive officer,
promoter or control person was or has been convicted in a criminal proceeding
or is subject to a pending criminal proceeding or subject to any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily enjoining,
borrowing, or otherwise limiting his or her involvement in any type of
business, securities or banking activities. No director, executive officer,
promoter or control person has been found by a court of competent
jurisdiction in a civil action to have violated federal or state securities
or commodities law.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our common stock
on of July 31, 2000, as to
* each person known by us to beneficially own more than 5% of our
common stock
* each of our directors
* each of our named executive officers
* all of our directors and officers as a group
The following conditions apply to all of the following tables:
* except as otherwise noted, the named beneficial owners have direct
ownership of the stock and have sole voting and investment power
with respect to the shares shown
* the class listed as "common" includes the shares of common stock
underlying our issued convertible preferred stock, options and
warrants
* Amro International, S.A., Austinvest Anstalt Balzers and Esquire
Trade & Finance Inc. have agreed to limit their ownership of our
outstanding common stock to not more than 9.999%.
<PAGE> 18
Holders of 5% or more of our common stock follows:
<TABLE>
<CAPTION>
Name & Address of Amount & Nature of Percent
Title of Class Beneficial owner Beneficial Ownership of Class
-------------- ----------------- -------------------- --------
<S> <C> <C> <C>
Common Amro International, S.A. 2,726,198 11.5%
Grossmuenster Platz 26
P.O. Box 4401
Zurich, Switzerland CH 8022
Common Austinvest Anstalt Balzers 2,625,755 11%
Landstrasse 938
9494 Furstentums
Balzers, Liechtenstein
Common Esquire Trade & Finance Inc. 2,625,755 11%
Trident Chambers
P.O. Box 146
Road Town, Tortola, B.V.I.
Common Mr. Dale Reese 2,457,985 10.4%
125 Kingston Road
Media, PA
Common Paul Downes 24,182 (direct) 0.102%
Tamarind Management Ltd. 2,098,145 (indirect/control) 8.83%
5646 Windrift Lane
Boca Raton, FL 33433
Common Libra Finance, S.A. 1,662,500 7%
P.O. Box 4603
Zurich, Switzerland
Common American Flavors China, Inc. 1,531,685 6.48%
1007 Chestnut Street
Newton, MA 02164
Common stock owned by our directors follows:
<CAPTION>
Name & Address of Amount & Nature of Percent
Title of Class Beneficial owner Beneficial Ownership of Class
-------------- ----------------- -------------------- --------
<S> <C> <C> <C>
Common Paul Downes 24,182 (direct) 0.102%
Tamarind Management Ltd. 2,098,145 (indirect/control) 8.83%
5646 Windrift Lane
Boca Raton, FL 33433
<PAGE> 19
Common Roy G. Warren 670,414 2.83%
1128 Country Club Road
N. Palm Beach, FL 33408
Common Robert Cummings 310,000 1.31%
2829 N.E. 44th Street
Lighthouse Point, FL 33064
Common Michael G. Lucci 210,000 0.88%
49 Spanish River Drive
Ocean Ridge, FL 33435
Common John McCormack 100,000 0.42%
8750 South Grant
Burridge, IL 60521
Common Mr. Arthur W. Blanding 47,426 0.20%
Janesville, WI 53545
Common Phillip Pearce 25,000 0.10%
6624 Glenleaf Court
Charlotte, NC 28270
Common stock owned by our executive officers follows:
<CAPTION>
Name & Address of Amount & Nature of Percent
Title of Class Beneficial Owner Beneficial Owner of Class
-------------- ----------------- ------------------ --------
<S> <C> <C> <C>
Common Roy G. Warren 670,414 2.83%
(President/CEO/Director)
1128 Country Club Road
N. Palm Beach, FL 33408
Common Stephen Langley 70,000 0.29%
(COO - China)
102 Greenwich Drive
983 Hua Mu Road
Pudong, Shanghai 201204, PRC
Common Michael L. Davis 25,000 0.10%
(CFO)
20 Harris Avenue
Hamptom Beach, NH 03843
Common Nancy Yuan 25,000 0.10%
(CFO - China)
c/o 333 Jiu Jiang Road
Finance Square
Shanghai 200001, PRC
<PAGE> 20
Common Susan Lurvey 12,000 0.05%
(Treasurer/Secretary)
6340 Fox Run Circle
Jupiter, FL 33458
Common stock owned by our directors and
executive officers as a group 802,414 3.37%
</TABLE>
The following is a breakdown of the amount of underlying common stock
the listed holders have the right to acquire within sixty (60) days from
convertible preferred stock, options and warrants. This underlying common
stock has been included as part of the "common stock" listed in the above
tables. For Amro International, S.A., Austinvest Anstalt Balzers, Esquire
Trade & Finance Inc., Libra Finance, S.A., please refer to page 11 of this
prospectus.
<TABLE>
<CAPTION>
Total Equity and Underlying
Holder Rights to Equity Type of Security Common Stock
------ ---------------- ---------------- ------------
<S> <C> <C> <C>
Mr. Dale Reese 2,457,985 Options 700,000
Tamarind 2,122,327 Series B Convertible 107,440
Management, Ltd. Preferred
(Mr. Paul Downes) Options 1,383,705
Roy G. Warren 670,414 Options 410,914
Michael L. Davis 25,000 Options 25,000
Steve Langley 70,000 Options 50,000
Nancy Yuan 25,000 Options 25,000
</TABLE>
There currently are no arrangements that may result in a change of
ownership or control of the Company.
DESCRIPTION OF SECURITIES
We are authorized to issue 20,000,000 shares of common stock, having a
par value of $0.001 per share, and 5,000,000 shares of preferred stock, also
having a par value of $0.001 per share. We have made five designations of
preferred stock:
* 500,000 Series A convertible preferred shares with a stated value
of $1.00 per share
* 1,260,000 Series B convertible preferred shares with a stated
value of $1.00 per share
* 400,000 Series C convertible preferred shares with a stated value
of $3.00 per share
* 165,000 Series D convertible preferred shares with a stated value
of $10.00 per share
* 1,500,000 Series E convertible preferred shares with a stated value
of $2.50 per share
* 165,000 Series F convertible preferred shares with a stated value
of $10.00 per share
* 200,000 Series G convertible preferred shares with a stated value
of $10.00 per share
<PAGE> 21
The following sets forth the number of issued and outstanding shares
of our common stock and preferred stock remaining, after conversion, as of
the date of this prospectus.
<TABLE>
<S> <C>
* Common Stock 12,915,242
* Series A Convertible Preferred Stock -0-
* Series B Convertible Preferred Stock 242,559
* Series C Convertible Preferred Stock -0-
* Series D Convertible Preferred Stock 105,000
* Series E Convertible Preferred Stock -0-
* Series F Convertible Preferred Stock 150,000
* Series G Convertible Preferred Stock 75,000
</TABLE>
We anticipate the issuance of additional convertible preferred stock
to fund our business plan during the third and fourth quarters of 2000.
Common Stock
The following is a summary of certain rights and provisions of the
shares of our common stock. This summary includes all of the material rights
and provisions of these shares.
Dividend Rights
---------------
The holders of common stock are entitled to receive dividends and
other distributions as and when declared by our board of directors out of
the assets and available funds. The availability of funds is dependent upon
dividends or distribution of profits from ours subsidiaries, and may be
subject to regulatory control and approval by the appropriate government
authorities on either a regional or national level in the People's Republic
of China.
Voting Rights
-------------
The holders of common stock are entitled to one vote per share on all
matters presented for a shareholder vote. There is no provision for
cumulative voting. Our business is controlled by our board of directors.
This board is elected by a majority vote of the shareholders and bylaws have
been adopted for our guidance and control. Amendments to the bylaws can be
made by majority vote of the board of directors. The vote of the holders of
a majority of the outstanding shares of the voting stock of the common
stock, Series A and Series B Convertible Preferred Stock is required for
mergers, consolidations or other similar transactions.
Liquidation Rights
------------------
Upon the voluntary or involuntary dissolution, liquidation, or winding
up of our business affairs, the holders of common will receive the remainder
of ours assets, if any, after
* the payment in full of our debts and other liabilities
* the payment of dividends due to the holders of preferred stock
* the distribution of assets to the holders of preferred stock
The directors, at their discretion, may authorize and issue debt
obligations, whether or not subordinated, without prior approval of the
shareholders. The issuance of debt obligations may reduce the liquidation
value of the shares of common stock.
<PAGE> 22
Preemptive Rights
-----------------
Owners of our common stock not have the preemptive right to purchase
additional shares offered by the Company in the future. That is, we may sell
additional shares of common stock to particular shareholders or to non-
shareholders without first offering shares to current shareholders.
Redemption
----------
We do not have the discretionary right to redeem our common stock.
Preferred Stock
Series A Convertible Preferred Stock consisting of 500,000 shares.
Dividends
---------
Series A Convertible Preferred Stock shall pay or accrue dividends
only to the extent that dividends are declared by the Board of Directors
with respect to our common stock. The availability of funds to pay dividends
is dependent upon dividends or distribution of profits from our
subsidiaries, and may be subject to regulatory control and approval by the
appropriate government authorities on either a regional or national level in
the People's Republic of China.
Voting
------
Voting rights of the Series A Convertible Preferred Stock shall be
equal to and same as that attributable to our common stock and shall be non-
cumulative.
Conversion
----------
Series A Convertible Preferred Stock is convertible anytime after
December 31, 1997 to our common stock at the fixed ratio of one share of
common stock for one share of Series A Convertible Preferred Stock
surrendered for conversion.
Adjustments to Conversion Ratio
-------------------------------
The ratio for conversion can be proportionally increased or reduced to
reflect
* a division of the common stock of the Corporation or a combination
thereof
* a reorganization or reclassification or distribution to the holders
of common stock of stock, debt securities or other assets
* a legal merger, consolidation, corporate combination, share
exchange, or a sale or lease of substantially all of our assets
resulting in the distribution to our common stock holders, stock,
debt securities or other assets
* the issuance or sale of common stock, options, warrants or other
rights to purchase the common stock of the Corporation for less
than the stated value
Liquidation Preference
----------------------
Holders of Series A Convertible Preferred Stock shall be entitled to
receive for each share of Series A Convertible Preferred Stock a cash
payment equal to the par value of such stock. If our
<PAGE> 23
assets are insufficient for the Corporation to make this payment, the assets
shall be distributed ratably to the holders of the Series A Convertible
Preferred Stock.
Liquidation
-----------
Upon any liquidation, dissolution or winding up of our business,
whether voluntary or involuntary, the holders of the Series A Convertible
Preferred Stock shall be entitled to receive for each share of Series A
Convertible Preferred Stock their Liquidation Preference in addition to
whatever rights such holders may have, by operation of law or otherwise, to
share in the liquidation value.
Series B Convertible Preferred Stock consisting of 1,260,000 shares.
Dividends
---------
Series B Convertible Preferred Stock shall pay or accrue dividends at
the rate of 9% per annum, payable only upon liquidation or redemption, as a
percentage of the stated value, out of the assets and available funds. The
availability of funds is dependent upon dividends or distribution of profits
from ours subsidiaries, and may be subject to regulatory control and
approval by the appropriate government authorities on either a regional or
national level in the People's Republic of China.
Voting Rights
-------------
Voting rights of the Series B Convertible Preferred Stock are the same
as our common stock.
Conversion
----------
Series B Convertible Preferred Stock is convertible anytime after
December 31, 1997 to our common stock at the fixed ratio of one share of
common stock for one share of Series B Convertible Preferred Stock
surrendered for conversion.
Adjustments to Conversion Ratio
-------------------------------
The ratio for conversion can be proportionally increased or reduced to
reflect
* a division of the common stock of the Corporation or a combination
thereof
* a reorganization or reclassification or distribution to the holders
of common stock of stock, debt securities or other assets
* a legal merger, consolidation, corporate combination, share
exchange, or a sale or lease of substantially all of our assets
resulting in the distribution to our common stock holders, stock,
debt securities or other assets
* the issuance or sale of common stock, options, warrants or other
rights to purchase the common stock of the Corporation for less
than the stated value
Liquidation Preference
----------------------
Holders of Series B Convertible Preferred Stock shall be entitled to
receive for each share of Series B Convertible Preferred Stock a cash
payment equal to the stated value plus all accrued dividends. If our assets
are insufficient to make the payment, the assets shall be distributed
ratably to the holders.
<PAGE> 24
Liquidation
-----------
Upon any liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary, the holders of the Series B Convertible
Preferred Stock shall be entitled to receive for each share of Series B
Convertible Preferred Stock an amount equal to the Stated Value plus all
accrued dividends attributable to each such share.
Redemption
----------
We have the right to redeem any or all of the outstanding shares of
Series B Convertible Preferred Stock at a redemption price equal to the
stated value of the Series B Convertible Preferred Stock redeemed plus
accumulated dividends.
Series C Convertible Preferred Stock consisting of 400,000 shares.
Dividends
---------
Series C Convertible Preferred Stock shall pay or accrue dividends at
the rate of 8% per annum, as a percentage of the stated value of the Series
C Convertible Preferred Stock, payable in cash or common stock quarterly, at
our option. Accrued dividends are be payable upon conversion or redemption.
The availability of funds for the payment is dependent upon dividends or
distribution of profits from our subsidiaries, and may be subject to
regulatory control and approval by the appropriate government authorities on
either a regional or national level in the People's Republic of China.
Voting Rights
-------------
Except as otherwise required by law, the Series C Convertible
Preferred Stock shall have no voting rights. So long as any shares of
Series C Convertible Preferred Stock are outstanding, we shall not
* alter or change adversely the powers, preferences or rights given
to the Series C Convertible Preferred Stock
* alter or amend the certificate of designation
* amend its certificate of incorporation, bylaws or other charter
documents so as to affect adversely any rights of any holders
* increase the authorized number of shares of Series C Convertible
Preferred Stock
* enter into any agreement with respect to the foregoing, without the
affirmative vote of the holders of a majority of the shares of the
Series C Convertible Preferred Stock then outstanding
Conversion
----------
Series C Convertible Preferred Stock is convertible to our common
stock at a per share conversion price based upon the lesser of 75% of the
average market price on the date of the applicable holder conversion notice
or $3.00 per share. The number of shares of common stock issuable upon
conversion of each share of Series D Preferred Stock shall equal the sum of
the stated value per share plus, at the holder's election, accrued and
unpaid dividends on such share, then divided by the conversion price.
<PAGE> 25
Adjustments to Conversion Price
-------------------------------
The conversion price will be adjusted if we
* pay a stock dividend or otherwise make a distribution or
distributions on shares of its junior securities payable in shares
of common stock
* subdivide outstanding shares of common stock into a larger number
of shares
* combine outstanding shares of common stock into a smaller number of
shares
* issue capital stock by reclassification of shares of our common
stock
Liquidation Preference
----------------------
Upon any liquidation, dissolution or winding-up of our business,
whether voluntary or involuntary, after the payments of debts and
liabilities, and subject to the liquidation rights of the holders of Series
A and Series B Convertible Preferred Stock, the holders of Series C
Convertible Preferred Stock shall be entitled to receive for each share of
Series C Convertible Preferred Stock an amount equal to the stated value
plus all accrued but unpaid dividends. This payment will be before any
distribution or payment shall be made to the holders of any junior
securities. If our assets shall be insufficient to make this payment, then
our entire assets will be distributed to the holders of Series C Convertible
Preferred Stock..
Redemption
----------
We have the right to redeem all or a portion of the Series C
Convertible Preferred Stock at a price per share equal to the sum of the
stated value plus ten percent (10%) of the stated value, computed on a
simple interest, non-compounded, and non-annualized basis.
Series D Convertible Preferred Stock consisting of 165,000 shares.
Dividends
---------
Each share of Series D Convertible preferred stock entitles the holder
to receive or accrue dividends at the rate of 6% simple interest per annum,
as a percentage of the stated value of the Series D Convertible Preferred
Stock. Dividends are payable in cash or common stock quarterly at our
option. The payment of dividends shall be made first to the Series D
Convertible preferred stockholders before dividends or other distributions
are made on any common stock or prior preferred stock. The availability of
funds for dividend payments is dependent upon dividends or distribution of
profits from its subsidiaries, and may be subject to regulatory control and
approval by the appropriate government authorities on either a regional or
national level in the People's Republic of China.
Voting Rights
-------------
Except as otherwise required by law, the Series D Convertible
Preferred Stock shall have no voting rights. So long as any shares of
Series D Convertible Preferred Stock are outstanding, we shall not
* alter or change adversely the powers, preferences or rights given
to the Series D Convertible Preferred Stock
* alter or amend the certificate of designation
<PAGE> 26
* amend its certificate of incorporation, bylaws or other charter
documents so as to affect adversely any rights of any holders
* increase the authorized number of shares of Series D Convertible
Preferred Stock
* enter into any agreement with respect to the foregoing, without the
affirmative vote of the holders of a majority of the shares of the
Series D Convertible Preferred Stock then outstanding
Conversion
----------
The holders of Series D Convertible Preferred stock shall be entitled
to convert such stock into our common stock at any time subsequent to the
91st day after issuance of such stock or upon the effectiveness of a
registration statement for the resale of the common stock underlying the
Series D Convertible Preferred stock. The number of shares of common stock
issuable upon conversion of each share of Series D Preferred Stock shall
equal the sum of the stated value per share and, at the holder's election,
accrued and unpaid dividends on such shares. This sum will then be divided
by the conversion price. The conversion price shall be equal to the lessor
of 100% of the average of the closing bid price of our common stock for the
trading day immediately preceding the date of issuance of the shares of
Series D Preferred Stock to the holders, or 80% of the average of the three
lowest closing bid prices for the 22 trading days immediately preceding the
conversion of the Series D Preferred Stock.
Adjustments to Conversion Price
-------------------------------
The conversion price will be adjusted if we
* issue common stock pay a stock dividend or otherwise make a
distribution or distributions on shares of our junior securities
* subdivide our common stock into a larger number of shares
* combine our common stock into a smaller number of shares
* issue capital stock by reclassification of shares of common stock
Liquidation Preference
----------------------
Upon any liquidation, dissolution or winding-up of our business,
whether voluntary or involuntary, after our payment of debt and liabilities,
the holders of Series D Convertible Preferred Stock shall be entitled to
receive out of our assets an amount equal to the stated value plus all
accrued but unpaid dividends per share, whether declared or not. This
payment, will be made before any distribution or payment to the holders of
any junior securities, including the holders of common stock and preferred
stock. If the assets shall be insufficient to make this payment, then the
assets shall be distributed ratably among the holders of Series D
Convertible Preferred Stock.
Redemption
----------
We have the option of redeeming the Series D Preferred Stock starting
40 days after the effective date of the registration statement for the
resale of the common stock underlying the Series D Convertible Preferred
stock. The redemption price shall be equal to the closing bid price of the
common stock on the date notice of redemption is given to a holder,
multiplied by the number of shares of common stock that would be issued upon
conversion of the designated amount being redeemed,
<PAGE> 27
including common stock that would have been issued as dividends, at the
conversion price in effect on the redemption date. In no event may the
redemption amount be less than 120% of the stated value plus the dollar
amount of accrued dividends of the Series D Preferred Stock being redeemed.
Series E Convertible Preferred Stock Consisting of 1,500,000 Shares.
Dividends
---------
Each share of Series E Convertible preferred stock entitles the holder
to receive or accrue dividends at the rate of 6% simple interest per annum,
as a percentage of the stated value of the Series E Convertible Preferred
Stock Dividends are payable in cash or common stock quarterly at our option.
The payment of dividends shall be made first to the Series E Convertible
preferred stockholders before any dividend or other distribution on any
shares of common stock, and equally with any dividend or other distribution
on Series A Preferred Stock, Series B Preferred Stock, and Series C
Preferred Stock, but subordinate to dividends or other distributions to the
holders of Series D Preferred Stock. The availability of funds for these
payments is dependent upon dividends or distribution of profits from our
subsidiaries, and may be subject to regulatory control and approval by the
appropriate government authorities on either a regional or national level in
the People's Republic of China.
Voting Rights
-------------
Except as otherwise required by law, the Series E Convertible
Preferred Stock shall have no voting rights. So long as any shares of
Series E Convertible Preferred Stock are outstanding, we shall not
* alter or change adversely the powers, preferences or rights given
to the Series E Convertible Preferred Stock
* alter or amend the certificate of designation
* amend its certificate of incorporation, bylaws or other charter
documents so as to affect adversely any rights of any holders
* increase the authorized number of shares of Series E Convertible
Preferred Stock
* enter into any agreement with respect to the foregoing, without the
affirmative vote of the holders of a majority of the shares of the
Series E Convertible Preferred Stock then outstanding
Conversion
----------
The holders of Series E Convertible Preferred stock shall be entitled
to convert such stock into the Company's common stock at any time subsequent
to the issuance of such stock, subject to a one year "lockup" agreement
entered into by the holders of such stock. The number of shares of common
stock issuable upon conversion of each share of Series E Preferred Stock
shall equal the sum of the stated value per share plus, at the holder's
election, accrued and unpaid dividends, then divided by the conversion
price. The conversion price shall be equal to the greater of $2.00 per
share of common stock or 80% of the average of the closing bid prices for
the 5 trading days immediately preceding the conversion of the Series E
Preferred Stock. In no event shall the conversion price be greater than
$3.00 per share of common stock.
<PAGE> 28
Adjustments to Conversion Price
-------------------------------
The conversion price will be adjusted if we
* issue common stock pay a stock dividend or otherwise make a
distribution or distributions on shares of our junior securities
* subdivide our common stock into a larger number of shares
* combine our common stock into a smaller number of shares
* issue capital stock by reclassification of shares of common stock
Liquidation Preference
----------------------
Upon any liquidation, dissolution or winding-up of our business,
whether voluntary or involuntary, after the payment of debts and
liabilities, the holders of Series E Convertible Preferred Stock shall be
entitled to receive out of our assets an amount equal to the stated value
plus all accrued but unpaid dividends per share. This payment shall be made
with the same preferences applicable to the payment of dividends.
Automatic Conversion
--------------------
We have the option of calling for the conversion of Series E Preferred
Stock and dividends not previously converted into common stock at the
conversion price provided that the common stock issuable upon conversion of
the preferred stock have been registered under the Securities Act, and that
the common stock has traded at or above $9.00 per share for thirty (30)
consecutive trading days.
Series F Convertible Preferred Stock consisting of 165,000 shares.
Dividends
---------
Each share of Series F Convertible preferred stock entitles the holder
to receive or accrue dividends at the rate of 6% simple interest per annum,
as a percentage of the stated value of the Series F Convertible Preferred
Stock. Dividends are payable in cash or common stock quarterly at our
option. The payment of dividends shall be made first to the Series F
Convertible preferred stockholders before dividends or other distributions
are made on any common stock or prior preferred stock. The availability of
funds for dividend payments is dependent upon dividends or distribution of
profits from its subsidiaries, and may be subject to regulatory control and
approval by the appropriate government authorities on either a regional or
national level in the People's Republic of China.
Voting Rights
-------------
Except as otherwise required by law, the Series F Convertible
Preferred Stock shall have no voting rights. So long as any shares of
Series F Convertible Preferred Stock are outstanding, we shall not
* alter or change adversely the powers, preferences or rights given
to the Series F Convertible Preferred Stock
* alter or amend the certificate of designation
* amend its certificate of incorporation, bylaws or other charter
documents so as to affect adversely any rights of any holders
<PAGE> 29
* increase the authorized number of shares of Series F Convertible
Preferred Stock
* enter into any agreement with respect to the foregoing, without the
affirmative vote of the holders of a majority of the shares of the
Series F Convertible Preferred Stock then outstanding
Conversion
----------
The holders of Series F Convertible Preferred stock shall be entitled
to convert such stock into our common stock at any time subsequent to the
91st day after issuance of such stock or upon the effectiveness of a
registration statement for the resale of the common stock underlying the
Series F Convertible Preferred stock. The number of shares of common stock
issuable upon conversion of each share of Series F Preferred Stock shall
equal the sum of the stated value per share and, at the holder's election,
accrued and unpaid dividends on such shares. This sum will then be divided
by the conversion price. The conversion price shall be equal to the lessor
of 100% of the average of the closing bid price of our common stock for the
trading day immediately preceding the date of issuance of the shares of
Series F Preferred Stock to the holders, or 80% of the average of the three
lowest closing bid prices for the 22 trading days immediately preceding the
conversion of the Series F Preferred Stock.
Adjustments to Conversion Price
-------------------------------
The conversion price will be adjusted if we
* issue common stock pay a stock dividend or otherwise make a
distribution or distributions on shares of our junior securities
* subdivide our common stock into a larger number of shares
* combine our common stock into a smaller number of shares
* issue capital stock by reclassification of shares of common stock
Liquidation Preference
----------------------
Upon any liquidation, dissolution or winding-up of our business,
whether voluntary or involuntary, after our payment of debt and liabilities,
the holders of Series F Convertible Preferred Stock shall be entitled to
receive out of our assets an amount equal to the stated value plus all
accrued but unpaid dividends per share, whether declared or not. This
payment, will be made before any distribution or payment to the holders of
any junior securities, including the holders of common stock and preferred
stock. If the assets shall be insufficient to make this payment, then the
assets shall be distributed ratably among the holders of Series F
Convertible Preferred Stock.
Redemption
----------
We have the option of redeeming the Series F Preferred Stock starting
40 days after the effective date of the registration statement for the
resale of the common stock underlying the Series F Convertible Preferred
stock. The redemption price shall be equal to the closing bid price of the
common stock on the date notice of redemption is given to a holder,
multiplied by the number of shares of common stock that would be issued upon
conversion of the designated amount being redeemed, including common stock
that would have been issued as dividends, at the conversion price in effect
on the redemption date. In no event may the redemption amount be less than
120% of the stated value plus the dollar amount of accrued dividends of the
Series F Preferred Stock being redeemed.
<PAGE> 30
Series G Convertible Preferred Stock consisting of 200,000 shares.
Dividends
---------
Each share of Series G Convertible preferred stock entitles the holder
to receive or accrue dividends at the rate of 7% simple interest per annum,
as a percentage of the stated value of the Series G Convertible Preferred
Stock. Dividends are payable in cash or common stock quarterly at our
option. The payment of dividends shall be made first to the Series G
Convertible Preferred stockholders before dividends are made on any common
stock or prior preferred stock, except Series G Preferred. Dividends or
other distributions made on Series D Convertible Preferred shall be made
equally with Series G Convertible Preferred. The availability of funds for
dividend payments is dependent upon dividends or distribution of profits
from its subsidiaries, and may be subject to regulatory control and approval
by the appropriate government authorities on either a regional or national
level in the People's Republic of China.
Voting Rights
-------------
Except as otherwise required by law, the Series G Convertible
Preferred Stock shall have no voting rights. So long as shares of Series G
Convertible Preferred Stock are outstanding, we shall not
* alter or change adversely the powers, preferences or rights given
to the Series G Convertible Preferred Stock
* alter or amend the certificate of designation
* amend its certificate of incorporation, bylaws or other charter
documents so as to affect adversely any rights of any holders
* increase the authorized number of shares of Series G Convertible
Preferred Stock
* enter into any agreement with respect to the foregoing, without the
affirmative vote of the holders of a majority of the shares of the
Series G Convertible Preferred Stock then outstanding
Conversion
----------
The holders of Series G Convertible Preferred stock shall be entitled
to convert such stock into our common stock at any time subsequent to
issuance. The number of shares of common stock issuable upon conversion of
each share of Series G Preferred Stock shall equal the sum of the stated
value per share and, at the holder's election, accrued and unpaid dividends
on such shares. This sum will then be divided by the conversion price. The
conversion price shall be equal to the lessor of $0.85, or 80% of the
average of the three lowest closing bid prices for the 22 trading days
immediately preceding the conversion of the Series G Preferred Stock.
Adjustments to Conversion Price
-------------------------------
The conversion price will be adjusted if we
* issue common stock pay a stock dividend or otherwise make a
distribution or distributions on shares of our junior securities
* subdivide our common stock into a larger number of shares
* combine our common stock into a smaller number of shares
* issue capital stock by reclassification of shares of common stock
<PAGE> 31
Liquidation Preference
----------------------
Upon any liquidation, dissolution or winding-up of our business,
whether voluntary or involuntary, after our payment of debt and liabilities,
the holders of Series G Convertible Preferred Stock shall be entitled to
receive out of our assets an amount equal to the stated value plus all
accrued but unpaid dividends per share, whether declared or not. This
payment, will be made before any distribution or payment to the holders of
any junior securities, including the holders of common stock and preferred
stock, except Series D Convertible Preferred. If the assets shall be
insufficient to make this payment, then the assets shall be distributed
ratably among the holders of Series G Convertible Preferred Stock.
Mandatory Conversion
--------------------
We have the option of calling for the conversion of Series G Preferred
Stock and dividends not previously converted into common stock at the
conversion price, after three years from issuance of the Series G Preferred
Stock.
Redemption
----------
We have the option of redeeming the Series G Preferred Stock after the
effective date of the registration statement for the resale of the common
stock underlying the Series G Convertible Preferred stock. The redemption
price shall be equal to 135% of the stated value, plus accrued dividends,
multiplied by the number of shares of Series G Preferred Stock.
INTEREST OF NAMED EXPERTS AND COUNSEL
The financial statements for the years ended December 31, 1999 and
1998 included in this prospectus have been audited by BDO Seidman, LLP,
independent certified public accountants, to the extent and for the periods
set forth in their report. This reports is included and incorporated in
this prospectus in reliance upon such report given upon the authority of
BDO Seidman LLP as experts in auditing and accounting.
Stibel & Toulan LLP, Boston, Massachusetts, will pass upon certain
legal matters relating to the validity of the securities offered hereby for
China Premium.
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Amended and Restated Certificate of Incorporation and By-Laws
contain provisions eliminating the personal liability of a director to us
and our stockholders for certain breaches of his or her fiduciary duty
of care as a director. These provisions, however, do not eliminate or limit
the personal liability of a director
* for any breach of a director's duty of loyalty to us or our
stockholders
* for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law
* for unlawful dividends or unlawful stock repurchases or redemptions
under Delaware statutory provisions making directors personally
liable, under a negligence standard
* for any transaction from which the director derived an improper
personal benefit
<PAGE> 32
These provisions offer persons who serve on our board of directors
protection against awards of monetary damages resulting from breaches of
their duty of care, except as indicated above, including grossly negligent
business decisions made in connection with takeover proposals. As a result
of these provisions, our ability or that of our stockholders to prosecute an
action against a director for a breach of his duty of care has been limited.
These provisions, however, do not affect the availability of equitable
remedies such as an injunction or rescission based upon a director's breach
of his duty of care. The SEC has taken the position that these provisions
will have no effect on claims arising under the federal securities laws.
THE COMPANY
Background
We are a Delaware corporation, which presently owns the majority
interest in two Sino-American joint ventures in China, known as Green Food
Peregrine Children's Food Co. Ltd. and Hangzhou Meilijian Dairy Products
Co., Ltd. In addition, we wholly own a so called "free trade zone"
subsidiary in Shanghai, known as China Premium Food Corporation (Shanghai)
Co., Ltd., as well as a U.S. subsidiary, known as Bravo! Foods, Inc.
We were formed on April 26, 1996, and were formerly known as
Shakespeare Holding, Inc. In February, 1997, Shakespeare merged with Manor
Products Corp., a Delaware company established on January 26, 1996, and
changed its name to China Peregrine Food Corporation. Manor was a shell
company with 331 shareholders and no operating history. Similarly, China
Peregrine Food Corporation was a company without substantial assets or
operating activity until it purchased the assets of China Peregrine
Enterprises Limited in March, 1997.
Our March 5, 1997 purchase of the assets of China Peregrine
Enterprises Limited resulted in our becoming an operating entity. These
assets consisted of the equity position and contractual rights which China
Peregrine Enterprises had in the Green Food Peregrine Chinese joint venture.
In consideration for this purchase, we issued 45% of its outstanding common
stock to the limited partnership. Owing to our non-operating status prior to
the above-described acquisition, this transaction has been accounted for as
a "reverse" acquisition for financial reporting purposes. On February 1,
2000, we changed ours name from China Peregrine Food Corporation to China
Premium Food Corporation.
Green Food Peregrine Children's Food Co. Ltd.
---------------------------------------------
From April of 1993, through March 5, 1997, the majority equity
interest in Green Food Peregrine was owned by China Peregrine Enterprises, a
Texas limited partnership created for the purpose of controlling the
operation of the Green Food Peregrine joint venture business. The Green Food
Peregrine joint venture company was formed pursuant to a joint venture
contract and Articles of Association, dated April 13, 1993, between China
National Green Food, China Peregrine Enterprises, and Amer-China Partners
Ltd. China Peregrine Enterprises was required to invest US $3,000,000 as
its share of the joint venture's registered capital, with an initial
investment of US $720,000. On October 1, 1997, Amer-China executed an
agreement for the transfer of Amer-China's contract rights and equity
interest in Green Food Peregrine to us. We paid 120,000 shares of ours
common stock in consideration for this transfer. The Ministry of Foreign
Trade and Economic Cooperation approved this transfer and our equity
interest in Green Food Peregrine increased from 67.6% to 70%.
<PAGE> 33
The stated purpose of the joint venture contract is to strengthen
economic cooperation and exchange of technology to develop and improve the
quality of products which are competitive in the domestic and international
markets and to improve economic efficiency and ensure satisfactory economic
profits. The scope of the business of Green Food Peregrine is the
manufacture, distribution and marketing of children's fresh milk and other
children's food products, including baby foods and supplements. The
geographic scope of the joint venture was initially set in Shanghai and
Beijing, with expansion to other cities having a population exceeding 2
million upon approval by the Board of Directors. This joint venture has
never done business beyond the Shanghai metropolitan area.
No party to the joint venture contract may assign or sell any or part
of its ownership interests without a written consent from all other parties
to the joint venture contract. Similarly, any changes in the registered
capital of Green Food Peregrine must receive the unanimous approval of the
Board of Directors and be approved by the examination and approval
authority. The respective responsibilities of the parties under the joint
venture contract include China National Green Food Corporation's assistance
and compliance with all local legal, governmental and other requirements for
the operation of the business. The other parties, have the responsibility
for providing equipment and materials to operate the business and to
initiate and maintain qualified management, who have the responsibility of
operating the business of the joint venture.
The Board of directors of Green Food Peregrine consists of five
members, with China National Green Food Corporation having the right to
appoint two members. We have the right to appoint three members, plus the
appointment of one advisory director, who has no right to vote. The term of
board members is four years unless extended by the appointing party. The
Chairman of the Board is elected from the members appointed by China
National Green Food Corporation. While the Chairman is designated as the
legal representative of the joint venture, the Chairman acts at all times
subject to the direction of the Board of Directors. The joint venture
contract provides that the Board of Directors is the "highest organ of power
of the joint venture" and the Board has the sole power to revise the
Articles of Association for the joint venture company, increase or assign
the registered capital and make determinations concerning the termination,
dissolution or liquidation of the joint venture.
The management of the business of Green Food Peregrine is the
responsibility of the General Manager, who is nominated by the Company and
approved by the Board of Directors. The General Manager is responsible for
implementing all resolutions of the Board of Directors and for organizing
and exercising management of the daily administrative and production
functions of the joint venture.
The term of the joint venture contract is fifty years, and can be
extended by the Board of Directors upon the approval and examination of the
approval authority. The joint venture contract, however, may be terminated
by written notice prior to the expiration of the stated term upon certain
events including a violation of the joint venture contract by any party,
without resolution; accumulated losses in excess of the total registered
capital, without resolution; assignment of equity ownership by one party
without approval; and the violation of Chinese laws in the operation of the
joint venture. Upon a written notice of termination, the parties to the
joint venture contract are charged with making attempts to negotiate a
resolution of the circumstances which led to the notice of termination
within sixty days after the issuance of the termination notice. If the
parties cannot reach an agreement to settle the matter, the Board of
Directors is directed to submit an application to the examination and
approval authority for dissolution.
In January, 2000, we commenced the termination process under the joint
venture contract. The termination is based upon
<PAGE> 34
* the violation of the joint venture contract by our Chinese partner
for refusal to cooperate in our attempts to exercise contractual
right to change management of the joint venture
* the existence of accumulated losses in excess of the total
registered capital of the joint venture company
We are pursuing the termination process. This joint venture ceased
operations at the beginning of this year and, as of December 31, 1999, we
wrote off our investment in this company.
Hangzhou Meilijian Dairy Products Co., Ltd.
-------------------------------------------
On September 3, 1997 and June 28, 1998, respectively, we executed
agreements to acquire a 52% interest in Hangzhou Meilijian Dairy Products
Co., Ltd. from American Flavors China, Inc., a Delaware corporation.
American Flavors China is controlled by Noam and Florence Sender. Prior to
this transaction, the Senders had no affiliation with us. The remaining 48%
of Hangzhou Meilijian is owned by Hangzhou Dairy Co., a controlled entity of
the regional Chinese government. On July 31, 1998, the Board of Directors of
Hangzhou Meilijian approved the acquisition and, subsequently, the
acquisition transaction was approved by the regional government agency.
The joint venture contract between Hangzhou Dairy Complex and American
Flavors China, Inc. was executed on July 25, 1993. As a limited liability
company, the liability of each equity owner is limited to its respective
contributions of registered capital. As such, no party is liable to the
other for the liabilities of the joint venture entity. The total registered
capital for this joint venture is US $5,000,000, with American Flavors China
initially contributing 52% of that amount. The contribution of capital was
paid into the joint venture entity in cash and equipment.
The stated purpose of the joint venture contract is to strengthen
economic cooperation and exchange of technology to develop and improve the
quality of products which are competitive in the domestic and international
markets and to improve economic efficiency and ensure satisfactory economic
profits. The scope of the business is the production of dairy products,
drinks with milk content, fruit juice and the development of new products.
No party to the joint venture contract may assign or sell any or part
of its ownership interests without a written consent from all other parties
to the joint venture contract. Similarly, any changes in the registered
capital of the Hangzhou Meilijian must receive the unanimous approval of the
Board of Directors and be approved by the examination and approval
authority.
The Board of directors of Hangzhou Meilijian consists of six members,
with three members being appointed by each party. The term of board members
is four years unless extended by the appointing party. The Chairman of the
Board is elected from the members appointed by us and is designated as the
legal representative of the joint venture. The Board has the sole power to
revise the Articles of Association for the joint venture company, increase
or assign the registered capital and make determinations concerning the
merger, termination, dissolution or liquidation of the joint venture. The
management of the business of Hangzhou Meilijian is the responsibility of
the Board of Directors, with limited powers delegated to the General
Manager.
<PAGE> 35
The term of the joint venture contract is twenty years, and can be
extended by the Board of Directors upon the approval and examination of the
approval authority. The joint venture contract, however, may be terminated
prior to the expiration of the stated term upon certain events including a
violation of the joint venture contract by any party, without resolution;
accumulated losses resulting in the inability of the joint venture to
continue; and conditions of impossibility of performance.
The joint venture contract provides for the continuation of the
operation of Hangzhou Meilijian subsequent to the expiration of the twenty
year term, by unanimous agreement of the parties. If the joint venture is
not continued beyond the term of the joint venture contract, provisions are
made for the orderly liquidation of the assets of the company and any
remaining capital after payment of debts shall be divided according to the
parties' respective registered capital contributions. If any dispute is
not resolved in accordance with the terms of the contract, the dispute shall
be submitted to the American Institute of the Stockholm chamber of commerce
in Stockholm, Sweden, for the final decision in accordance with the
arbitration rules of the Institute.
On July 27, 2000, we executed a letter of intent with our Chinese
partner for the sale of our joint venture interest to our Chinese partner.
This anticipated transaction is conditioned upon the parties negotiating a
satisfactory sale price with guidance from a government sanctioned valuation
appraisal of the joint venture company. We expect completion of the
appraisal before the end of August 2000.
This buy out transaction is part of our plan to refocus our business
from the production of food products to the licencing, marketing and
distribution of food products. To support that plan, we have entered into a
supply contract with Hangzhou Meilijian for its production of Looney Tunes(TM)
branded milk products for us. We will sell, market and distribute these
branded milk products in the greater Shanghai area.
China Premium Food Corporation (Shanghai) Co., Ltd.
---------------------------------------------------
In December 1999, we obtained Chinese government approval for the
registration of a new wholly owned subsidiary in the Wai Gao Qiao "free
trade zone" in Shanghai, China. We formed this import-export company to
import, export and distribute food products on a wholesale level in China.
China Premium (Shanghai) will be our legal presence in China with respect to
contractual arrangements for the marketing and distribution of our branded
food products. The existing supply contract with Hangzhou Meilijian has
been entered into by China Premium (Shanghai) on our behalf. This
subsidiary also will in responsible for the establishment of a distribution
network, initially in the greater Shanghai area, for the distribution of our
local and imported food items.
We wholly own this company as a "WHOFIE" - a wholly owned foreign
investment enterprise in China. Senior management of our WHOFIE, including
its board of directors, is western. WHOFIE's are limited liability
companies, much like traditional corporations in the U.S. We have
capitalized our WHOFIE in the amount of approximately US$ 300,000 and we
have agreed to contribute an additional amount of US $2,000,000 over a five
year period, commencing July 1, 2000.
We will not give this additional capital directly to our subsidiary.
Instead, we will provide this additional capital in installments as needed
in the form US dollars used as collateral for loans in RMB by a Chinese bank
to our subsidiary. As the RMB loans are paid off by our subsidiary, the
collateral in US dollars will be given back to us. By this method of
financing, we will avoid the potential impact of PRC regulations governing
the conversion of Chinese currency into US dollars. A foreign exchange bank
has agreed to act as the "facility" for these loan transactions. Our
subsidiary will be able to borrow up to 90% of the US dollar collateral that
we provide at an exchange rate at one percent below the national rate.
<PAGE> 36
Bravo! Foods, Inc.
------------------
In December of 1999, we formed Bravo! Foods, Inc., a Delaware
subsidiary, which we will utilize to advance our business strategy of
promoting and distributing branded Looney Tunes(TM) products in the United
States, through strategic arrangements with local dairy processors. We have
capitalized Bravo! in an initial amount of $350,000 to provide sufficient
working capital for start up activities, including the first installment of
a guaranteed royalty payment to Warner Bros. in the amount of $250,000.
Bravo! enjoys a separate licensing agreement with Warner Bros. for the use
of Looney Tunes(TM) characters on milk products in the entire United States.
We own 100% of Bravo!'s common stock. This ownership is reflected in
the composition of the Bravo! directors, three of four of which serve on our
board. We will share office facilities with our new subsidiary
and plan to consolidate our financial reporting.
Yangling Mandarin Premium Foods Co., Ltd.
-----------------------------------------
In May 2000, we executed a definitive agreement to purchase a
controlling interest in Mandarin Fine Foods Co., a Chinese registered
limited liability company, which promotes and distributes premium food
products to four and five star hotels throughout China. In 1999, Mandarin
Fine Foods had approximately RMB 49,800,000 in sales, or US $6,000,000, with
a gross profit margin of approximately 20%. Mandarin Fine Foods is owned by
Mr. Li Zhiyun, a citizen of China.
During the course of our due diligence for this transaction, we became
aware that our acquisition of Mandarin would significantly limit the scope
of its business license under PRC regulations concerning Foreign Investment
Enterprises. We also became aware, however, of an agricultural development
program funded by the national government in the Western China Shaanxi
Province, known as the Yangling Model District for Agricultural High-tech
and New-tech Industry. Through this program, the government of Shaanxi
Province is authorized to issue business licenses which are much broader in
scope than normal to new companies in the Yangling Model District, including
foreign investment joint ventures.
Owing to the enhanced scope of the business license offered in the
Yangling District, we agreed with Mr. Li to forego the purchase of Mandarin
Fine Foods in favor of establishing a new joint venture company in Yangling.
We agreed that the parties to this joint venture would be China Premium Food
Corporation, as the foreign party, and Yangling Kechuang Agricultural
Techniques Development Co.,a new Chinese company established by Mr. Li in
the Yangling District, as the Chinese party. The new joint venture will be
named "Yangling Mandarin Premium Food Co., Ltd.". The stated purpose
of Yangling Mandarin will be
* to establish an enterprise in Yangling Model District for
Agricultural High-tech and New-tech Industry
* to produce and distribute food and beverages
* to develop domestic markets for such products
* to set up a domestic production base to strengthen its position in
the distribution market
As part of this transaction, Mr. Li has agreed to liquidate Mandarin Fine
Foods.
Initially, we will own fifty-seven percent (57%)of the equity of
Yangling Mandarin and Kechuang will own forty-three percent (43%). The
registered capital will be RMB 10,000,000, or US $1.2 million, and the term
of the new joint venture will be thirty (30) years. The registered capital
<PAGE> 37
contributed by both parties will be in cash, with 15% paid within three
months of the issuance of the business license and the balance within the
following six months. Control of Yangling Mandarin will be in our hands,
with the appointment of two of the three directors and the General Manager.
Any two directors can call for a directors' meeting and the rights reserved
to our Chinese partner do not include the ability to affect the day to day
operations or the strategic planning of the joint venture's business. Mr.
Li will become our paid consultant and will be employed by Yangling Mandarin
as its General Manager. These joint positions will allow us to utilize Mr.
Li's considerable expertise in this premium food distribution business,
while maintaining ultimate control over the affairs of this new joint
venture.
According to "Provisions on Encouraging the Development of Yangling
Model District for Agricultural High-tech and New-tech Industry" issued by
the people's government of Shaanxi Province on February 9, 1998, the Shaanxi
Province government has granted the Administrative Committee of the Yangling
District extensive and high-level powers, including economic administration
powers at the provincial level, administrative powers at the municipal level
and some of the general administrative powers at the provincial level. As a
result, most of the governmental approvals and registrations needed for the
establishment and operation of Yangling Mandarin may be obtained directly
from the Administrative Committee, except for those requiring the approvals
of the government authorities at the national level. Owing to the
relatively small number of foreign investment enterprises in the Yangling
District and the efforts of the Shaanxi Province government to implement
this program, local officials have indicated that Yangling Mandarin may be
established and approved before the end on the third quarter, 2000.
Significantly, as of June 1, 2000, the Yangling Administration on Industry
and Commerce has been authorized to issue broad business licenses to foreign
investment enterprises.
Kechuang and Yangling Mandarin will have the same scope of business:
aquatics, plantation, food storage and transportation, processing and
distribution of food and beverage, distribution of alcohol, and E-commerce
in connection with the above businesses.
Our Business
Initially, our mission was to implement a comprehensive manufacturing,
distribution and marketing strategy that would allow us to operate our
Chinese operations toward profitability and to expand the joint venture
business into new markets with dairy and non-dairy food products. This
strategy envisioned the creation of a nationwide network of state-of-the-art
manufacturing facilities that could process products and deliver the highest
quality of fresh refrigerated pasteurized milk to the local consumer. Such
facilities would have allowed us to develop a position as an effective
competitor in the dairy business in major cities in China and allow for the
expansion of our business into other dairy and non-dairy food products.
In early 1997, we purchased the majority equity interest in Green Food
Peregrine to implement this mission. To date, over $6 million dollars have
been invested in the Green Food Peregrine effort. Despite various business
strategies, product shifts and attempted management changes, Green Food
Peregrine's pasteurized milk business failed to reach economic viability,
never having penetrated more than 3% of the relevant market. The business
activities of Green Food Peregrine ceased in December of 1999. Accordingly,
we doubt that we will recover our investment in that joint venture and have
written off that investment as of December 31, 1999.
The Hangzhou Meilijian joint venture, although technologically limited
by western standards, is the dominant dairy and juice producer in Hangzhou,
a city of 6 million people, with an 80% market
<PAGE> 38
share. With new capital invested in advanced processing equipment, delivery
systems, and marketing efforts, this joint venture was close to breakeven in
1999. While we believed that new product launches in 2000, including Looney
Tunes(TM) branded items, would have result in profitability, we encountered
management difficulties with this joint venture around new product issues.
The Hangzhou Meilijian joint venture has been in business for over 40 years
and has over 420 employees. Hangzhou Meilijian produces and distributes
dairy and juice products, including baggie milk, milk powder, aseptic
packaged milk and juice products, as well as bottled drinkable yogurt.
Hangzhou is located approximately 180 miles from Shanghai.
In light of our then existing joint venture experiences, during 1999
and this year several initiatives were undertaken to differentiate our
products, marketing and, ultimately, business strategy. We were moved by
these initiatives from a capital intensive production business toward a
business which supplies value added branded rights, sales and distribution
to existing production facilities operated by others.
First - licensing agreement with Warner Bros.
---------------------------------------------
In March of 1999, we commenced a licensing agreement with Warner Bros.
Consumer Products, permitting us to produce and distribute a line of high
quality, flavored milks branded with the Warner Bros. Looney Tunes(TM) logos,
characters and names in the Shanghai and Hangzhou greater metropolitan
areas. This licensing agreement extends through March 2002.
Through taste testing and product development in the summer and fall
of 1999, a line of white and flavored milk drinks for the Chinese urban
market was created. These products each feature a different Looney Tunes(TM)
character and have particular packaging and flavor profiles for each
different cartoon character. Carrefour hypermarkets, Shanghai's largest food
retailer, introduced the first four flavored milks during their October,
1999 20th anniversary promotion in Shanghai, including Tweety orange milk,
Daffy banana milk, Taz chocolate milk and Silvester vanilla milk. Despite a
retail price premium of 40% over the major competitor's flavored milks,
these new products outsold the competitive brands by 4 to 1, with no
external advertising and minimal in-store promotion.
To obtain this license, we agreed to pay 3% royalty fee of net
invoiced price of each licensed product and a guaranteed royalty
consideration of $300,000, of which $45,000 was paid at the beginning of the
agreement. The and the balance will be paid by 10 installments of $21,250
in each quarter starting on September 30, 1999 and a balloon payment of
$42,500 on or before March 31, 2002. The licensing agreement is for a term
of 3 years, commencing March 1999.
We have signed supply agreements with Hangzhou Meilijian and Huai Nan
Dairy to produce branded Looney Tunes(TM) white and flavored milks for us,
which we will sell in Shanghai, through 21 hyperstores and 600 convenience
type stores. We also will sell these products in 10 hyperstores outside of
Shanghai in Hangzhou, Ningbo, Nanjing, Fuzhou, Wuxi and Suzhou. We have
scheduled these sales to commence in September, 2000.
Hangzhou Meilijian will produce white whole and low fat milk, as well
as lactase milk in 500 milliliter aseptic Tetra-Pak "pillow pouches". These
"fresh" milk products have an unrefrigerated shelf life of 30 days. Huai
Nan Dairy will produce flavored milk in 250 milliliter aseptic pillow
pouches. Both dairy processors will utilize Tetra-Pak aseptic packaging
using the latest Tetra-Pak machines. Ingredients for the flavored milks are
formulated to our specifications and supplied on an exclusive
basis by Givaudan Roure. Based upon the China Premium (Shanghai) supply
contracts with these dairy processors, we anticipate the following monthly
gross profit
<PAGE> 39
<TABLE>
<CAPTION>
Type Production Retail Price Gross Profit
---- ---------- ------------ ------------
<S> <C> <C> <C>
white milk 12.50 metric tons RMB 3.95/500ml RMB 14,000/US $1,687
lactase 6.25 metric tons RMB 4.19/500ml RMB 2,250/US $271
flavored 9.5 metric tons RMB 2.95/250ml RMB 28,500/UC $3,434
</TABLE>
We do not have reliable information on the volume of product sold by
potential competitors. While there is no direct competition - no one sells
branded white or flavored milk products, Parmalat sells white milk in 500ml
pouches for RMB 2.75 - 2.90 and 250ml pouches for RMB 1.60 - 1.70. Nestle
sells Chocolate and Strawberry in 250ml aseptic boxes for RMB 1.70. Local
dairy processors in Shanghai - Bright, Quan Jia and Jun Yao - sell 950ml
white in non aseptic packaging for RMB 6.8 (Bright) and 4.95 (Quan Jia and
Jun Yao). Bright sells chocolate in 250ml non aseptic packaging for RMB
2.10. Our flavors have been specifically formulated for Chinese tastes,
determined by several blind taste tests at local schools in Shanghai. We
believe that our flavors are unique and superior to the potential
competition and that, combined with our Looney Tunes(TM) packaging, will
command premium pricing of our products. Demographic statistics confirm that
urban consumers have the financial capability to pay a premium price for
premium value at the consumer products level. See, Chinese State Statistical
Bureau Reports for 1997 and China The Consumer Revolution, Conhua Li,
Deloitte & Touche Consulting Group, John Wiley & Sons, Publishers, 1998.
We will distribute these branded milk products to the 21 hyperstores
located in Shanghai in two rented .6 metric ton trucks. These trucks, which
are supplied with drivers, each cost approximately US $1,000 per month. The
outlying hyperstores are serviced by delivery to specified distributors in
the Shanghai area, utilizing the same trucks. The timing of the
distribution of our Looney Tunes(TM) milk products is non critical owing to
the 30 day non refrigerated shelf life of the milk in the Tetra-Pak aseptic
packaging. Distribution to these hyperstores represents approximately 70% of
the outlets of this type to which we could sell our aseptic flavored milk.
Distribution to the 600 convenience type stores will be based upon one of
the following methods
* three China Premium (Shanghai) rented trucks at a total cost of
approximately US $3,000 per month
* through local logistics companies at a cost of between 7% to 10% of
wholesale price
* pick up by buyer store at a cost of between 7% to 12% added to
store gross margin
These costs included in the gross profit presentation at an estimated
distribution/sales cost of 24% of wholesale pricing.
Administration of supply, distribution, marketing and sales of the
Looney Tunes(TM) branded milk products in China will be the responsibility
of China Premium (Shanghai).
Second - elimination of production joint ventures.
--------------------------------------------------
Beginning in the third quarter of 1999, we recognized that Green Food
Peregrine would require considerable additional resources to make any
appreciable progress toward profitability. In addition, in order to take
advantage of the new Looney Tunes(TM) products, planned advertising and
promotional support in Shanghai, we realized that much greater distribution
and reach than possible with Green Food Peregrine was essential for a
successful product launch. This analysis led to a strategic decision to
exit the production business in Shanghai and to establish strategic
arrangements throughout China with large producers of dairy and healthy
beverages for Looney Tunes(TM) product production. We
<PAGE> 40
contemplated our contribution to be our Looney Tunes(TM) production rights,
including advertising and marketing support, with production handled by
existing, well established dairies in China.
Similarly, in the second quarter of 2000, we engaged in discussions
and negotiations with our Chinese partner in Hangzhou Meilijian in an effort
to determine whether our presence in that joint venture would best serve our
refocused goals. Specifically, our concern over the commitment of our
partner to embrace fully our plans for Looney Tunes(TM) branded milk
products led us to the execution of a letter of intent for our exit from the
joint venture on a buy out basis.
As with our termination of the Green Food Peregrine joint venture,
this move will enable us to better utilize our capital resources for a
direct return on our promotion, marketing, distribution and sales efforts,
without the heavy financial burdens of maintaining production facilities. In
addition, our direct promotion and distribution experience will enable us to
broaden our imported product base in China through the attraction of U.S.
companies who wish to avail themselves of Chinese consumer markets.
Third - establishment of China Premium (Shanghai) import/export company.
------------------------------------------------------------------------
In December 1999, we moved further away from production by positioning
ourselves in the business of food distribution in China. We obtained
government approval for the registration of China Premium Food Corporation
(Shanghai) Co., Ltd., our wholly owned subsidiary in the Wai Gao Qiao Free
Trade Zone in Shanghai, China. This subsidiary offers foreign companies all
the infrastructure necessary to facilitate import/export transactions in or
with China, including tax and legal compliance, customs and foreign currency
exchange. Pursuant to Wai Gao Qiao rules, this subsidiary can distribute
products that it imports into China, while maintaining reasonable
price/profit margins owing to its status as a direct importer.
In April of 1999, we announced a definitive, exclusive, private label
agreement with Lance, Inc. to export snack foods to China. Lance will serve
as our exclusive supplier of cookies, cakes, crackers, meat snacks, nuts and
chips for the Chinese market. We have imported our first shipment of Lance
crackers and will distribute them in China through China Premium (Shanghai).
These Lance products are and will continue to be marketed as branded Looney
Tunes(TM) products. Based upon our contacts with Lance and Warner Bros., we
anticipate the following monthly gross profit
<TABLE>
<CAPTION>
Supermarket Distribution Gross Direct Distribution Gross
Distribution Cost Profit Distribution Cost Profit
<S> <C> <C> <C> <C> <C>
165,000 17% RMB 39.600 165,000 27% RMB 6,600
sleeves US $4,771 Sleeves US $795
</TABLE>
Initially, we will use local "jobbers" for distribution of the Lance
products to small stores on a direct distribution basis, which means an
individual delivery to every store. In addition, China Premium (Shanghai)
has reached an agreement with Jian Shang, a local high end retail chain
having 150 outlets.
Snack crackers and cookies in Shanghai retail from RMB 1,70 to 2.30
per 100 to 125 gram package. The major competitors are imported goods from
Keebler and Danone. Snack crackers from local companies are at the lower
end of the price scale. Our Lance/Looney Tunes crackers will retail at
approximately RMB 2.95 for a 39 gram package. We believe that Lance's
premium quality, unique flavors - no competitor has a peanut butter cracker
in its line- and branded packaging will support the
<PAGE> 41
premium price. Our informal tests with point purchase displays in selected
locations in the Pu Dong business district of Shanghai, confirms our price
acceptance and sales expectations.
We are in the process of establishing a new joint venture in the
Yangling District of Shaanxi Province. This joint venture will service the
premium food needs of four and five star hotels throughout China, both
directly and through a business to business e-commerce portal. This internet
portal, which will be available to U.S. companies from the supply side, has
been launched in a demo version and shortly will be beta tested. Imported
products will comprise a significant portion of the food products offered.
China Premium (Shanghai) will assume the responsibility for the importation
of these products, as well as the maintenance of the e-commence site.
Fourth - Bravo! Foods, Inc.
---------------------------
In December of 1999, we formed a wholly owned subsidiary, Bravo! Foods,
Inc., which will be utilized to advance our business strategy of promoting
and distributing branded products in the United States. On July 27, 2000,
Bravo! executed licensing agreement with Warner Bros. to use Looney Tunes(TM)
characters and names on milk products in the entire United States.
This licensing agreement grants Bravo! the right to use the cartoon
characters Bugs Bunny, Tweety, Tasmanian Devil, Road Runner, Wilie B.
Coyote, Lola Bunny, Marvin the Martian, Sylvester and Daffy Duck on milk
products for sale in specified retail outlets in the fifty United States,
Puerto Rico and the United States Virgin Islands. The initial term of the
agreement is for 3 years, from January 1, 2000 through December 31, 2002.
The licensing agreement recognizes that Bravo! will use third party
production agreements for the processing of white and flavored milk
products, and that the milk products will be produced and sold directly by
those processors. Bravo!'s responsibilities are to design and provide
Warner Bros. approved packaging artwork, to help determine the best tasting
flavors for the particular market, and to assist in the administration,
promotion and expansion of the Looney Tunes(TM) branded milk program.
Ingredients for the flavored milks are formulated to our specifications and
supplied on an exclusive basis by Givaudan Roure. Bravo! will not be
responsible for the handling of any of the flavor ingredients nor will it
participate in sales or distribution.
We have agreed to a royalty rate of 5% on the amount invoiced to the
producer dairies for the right to use the Looney Tunes(TM) characters,
flavor ingredients and for administrative and promotional assistance. The
processor dairies targeted for this program are members of the Quality Chekd
cooperative, which has over 40 member dairies. Bravo! and Quality Chekd
have entered into a promotion agreement which governs the administration,
promotion and marketing of this member dairy program. We have scheduled a
back to school Looney Tunes(TM) launch with Turner Dairy and Sinton Dairy in
early September 2000, for fresh flavored milks. These dairies do not
believe that the Looney Tunes(TM) flavored milk line will diminish their
existing sales of traditional milk. Rather, they believe that these
products will develop their own market as an adjunct to existing sales.
Participating dairies expect to sell the equivalent of 2,000,000 pints of
Looney Tunes(TM) flavored milk per year.
Based upon a revenue and cost analysis of Bravo! obligations under the
licensing agreement, we expect Bravo! to realize a post royalty gross profit
of $0.0572 for each pint of chocolate flavored milk processed and $0.0566
for all other flavors. We anticipate an expansion to four participating
Quality Chekd dairies before the end of 2000. Costs of sales and overhead
run approximately $450,000 per year. With a modest ramp up to four
participating dairies, we expect Bravo! to break even financially. With ten
participating dairies, we believe that Bravo! will report annualized net
profits of $650,000.00.
<PAGE> 42
Fifth - formation of Yangling Mandarin Premium Food Co.,Ltd.
------------------------------------------------------------
On August 2, 2000, we executed an agreement with Mr. Li to form
Yangling Mandarin, a new joint venture in the Shaanxi Province in Western
China. We decided to form a new joint venture with Mr. Li rather than
acquire Mandarin Fine Foods from him. This decision was mandated by the
limitations that would have been placed upon the scope of Mandarin's
existing business license with the equity involvement of a foreign
investment enterprise. Yangling Mandarin is being formed pursuant to a
national Chinese demonstration program, which allows the issuance of a broad
business license to food related companies, irrespective of foreign
investment involvement. With the formation of Yangling Mandarin, Mr, Li
will liquidate and dissolve Mandarin fine Foods with no asset or equity
exchange with or purchase by us.
While we will lose the ability to report a portion of Mandarin's
assets and sales on our financial statements, our primary goal in agreeing
to acquire Mandarin was to enter into a solid and cooperative business
relationship with Mr. Li. In addition to Mr. Li's demonstrated
entrepreneurial skills, he has developed an extensive network of business
contacts throughout China, which we find invaluable to our plans for a broad
based premium food distribution enterprise in China. Mr. Li shares our
vision in that regard.
With Mr. Li's help we believe that we can become the dominant
distributor of premium food products to four and five star hotels throughout
China. While at Mandarin, Mr. Li's customers included most of the finest
hotels in China and many top restaurants in Beijing and Shanghai, China's
two largest and most advanced cities. The bulk of Mr. Li's efforts in
building a US $6 to $8 million dollar sales volume with a 20% net profit
margin centered on eight product categories, most of which are imported from
outside China. Under Mr. Li's guidance, Mandarin was the largest importer of
prime, aged, U.S. beef to China, representing approximately 60% of all
premium U.S. beef exported to China. Additional products included dairy and
cheese, Italian food dry goods, caviar, smoked salmon, oysters, various
other meat products and seafood, and several pastry and dessert foods. Food
items purchased from Yangling Mandarin will be delivered through a
distribution system utilizing strategically placed warehouses in five major
cities in Eastern China.
Our China Premium (Shanghai) import/export wholly owned subsidiary
will be utilized to import these core products and an expanded product line
to China for Yangling Mandarin. As a further tool for our new joint
venture, we have developed a business to business food distribution portal
(website), which will allow hotel and other buyers to order all their food
requirements on line through customized customer web pages at our site.
These custom web pages not only will allow a user a friendly ordering
scheme, they will provide up to date information on specials, as well as
provide the ability to track the physical progress of a shipped order of
imported goods. Our business to business e-commerce portal is a two way
communication system, which allows vendors to log on to obtain information
concerning becoming suppliers in our ordering/distribution system.
We have launched our website as a demo and are preparing the final
database loading of food items to conduct a beta test at the St. Regis
(formerly the Beijing International Club Hotel), a five star establishment
in Beijing.
Principal products and markets for milk in China
------------------------------------------------
Historically and at present, the predominant milk product available to
consumers in major cities in the People's Republic of China has been non-
refrigerated "baggie milk," prepared for retail
<PAGE> 43
consumption on a daily basis. The processing of baggie milk customarily has
involved either a type of pasteurization that has not met western bacteria
count standards, or the utilization of an ultra high temperature (UHT)
process. Hangzhou Meilijian utilizes the UHT process for the production of
its milk products. The distribution of milk in China has been through a
methodology known as the "reserve system" which was put in place more than a
decade ago as a way to deliver state-produced milk directly to milk stations
and public housing units. Since refrigeration is not part of this
distribution system, the trend in recent years has been to utilize UHT
processed milk products in an attempt to meet bacteria count standards.
Our past attempts to produce and sell western quality fresh,
pasteurized, refrigerated milk in gable topped cartons were not successful.
"Gable topped" cartons are traditional Western style treated paper box like
containers with triangular "gable" tops. The insurmountable problem for us
was the lack of sufficient capital to develop an appropriately scaled
efficient distribution system for fresh, refrigerated milk. With less
trucks than ideal, deliveries often were made after the normal peak buying
hours for milk. This resulted in our milk sitting on the shelf for more
time than our competitors. Since the lack of adequate home refrigeration
has created a date conscious consumer public, our milk often was by passed
in favor of more recent product.
Besides moving away from production, two events in China have changed
the way we can run our milk business. First, the introduction and
acceptance of aseptic Tetra-Pak pillow pouches and boxes has resulted in
milk product that has an unrefrigerated 30 day shelf life. This extended
life places us on a more level playing field with our competitors. Second,
the advent of hyperstores in major Chinese cities has made selling and
delivering milk products significantly more efficient and less costly.
Hyperstores also are changing the dominance of the "reserve system" market
to a more traditional western consumer model, with its own resultant
efficiencies. We believe that we have positioned our milk business in China
to eliminate our past problems and take advantage of the new, more efficient
paradigm presented to us.
The final piece in our China milk strategy is to differentiate our
product from that of our competitors. We believe that our Looney Tunes(TM)
branded milk program will be more and more successful at this
differentiation as Looney Tunes(TM) characters become more widely known in
China. This differentiation, together with the superior taste of our
flavored milks, we believe will lead to a greater acceptance of our premium
pricing and our resultant profitability.
Marketing and Advertising
-------------------------
In China, the viewing rate for television is over 80% for those who
have watched television as recently as the previous day. This figure rises
to 86% for urban population. Nationwide, 54% of households own black and
white televisions and another 40% have color televisions. In Beijing and
Shanghai, 94% of households own color televisions. At this time, there
virtually is no advertising for milk or ready-to-feed infant formula in
Shanghai. There is TV and print advertising for other carbonated and non-
carbonated beverages, and multi-national company branded, aseptic and
powdered products. We believe 0that all beverage advertising for branded
quality products will increase overall awareness and consumption for these
categories. After our September 2000, launch of our Looney Tunes(TM) branded
products and expanded distribution, we intend to begin print and television
advertising.
We hope to coordinate ours advertising efforts with national awareness
campaigns by Warner Bros. in China for Looney Tunes(TM) characters.
<PAGE> 44
Employees
We have five full time employees located at its North Palm Beach
corporate offices. Hangzhou Meilijian currently employs approximately 400
workers with 25 assigned management duties and the balance split between
production and distribution. China Premium (Shanghai) has ten employees in
management with two clerical staff. Bravo! will have one full time
employee, with two other management positions shared with our staff.
Yangling Mandarin will employ 8 in management positions and approximately 22
in sales, distribution and office.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2, of which this prospectus is a part,
under the Securities Act with respect to the shares of common stock offered.
This prospectus does not contain all of the information included in the
registration statement. Statements in this prospectus concerning the
provisions of any document are not necessarily complete. You should refer
to the copies of these documents filed as exhibits to the registration
statement or otherwise filed by us with the SEC for a more complete
understanding of the matter involved.
We are subject to the informational requirements of the Exchange Act
and file reports, proxy statements and other information with the SEC. The
SEC maintains a website that contains reports, proxy statements and other
information regarding us. The address of the SEC website is
http://www.sec.gov. Copies of our reports, proxy statements and other
information also may be inspected and copied at the public reference
facilities maintained by the SEC at:
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, NY 10048
Washington, D.C. 20549 Chicago, IL 60661
Copies of these materials can also be obtained by mail at prescribed
rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330.
MANAGEMENT DISCUSSION
AND ANALYSIS OF OPERATIONS
Basis of Reporting
Prior to the year ending December 31, 1999, we reported ours financial
affairs and those of our Chinese subsidiaries on a consolidated basis. In
connection with prior filings with the Securities and Exchange Commission,
we received comments from the Commission's reviewing staff that these
financial matters should be reported on an equity method basis rather than a
consolidated basis.
In initially determining that consolidation was appropriate, we
considered the facts and circumstances of each of these investments in light
of the guidance provided by SFAS No. 94 and EITF No. 96-16. Paragraph 13 of
SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries", states that
the "usual condition for a controlling financial interest is ownership of a
majority voting interest....
<PAGE> 45
A majority-owned subsidiary shall not be consolidated if control is
likely to be temporary or if it does not rest with the majority owner (as,
for instance, if the subsidiary... operates under foreign exchange
restrictions, controls, or other governmentally imposed uncertainties so
severe that they cast significant doubt on the parent's ability to control
the subsidiary)."
In EITF No. 96-16, the Task Force addressed the question of what
rights held by a minority shareholder would be considered so restrictive as
to call into question whether control rests with the majority owner. The
Task Force reached a consensus that "participating" rights granted to a
minority interest would overcome the presumption in SFAS No. 94 that the
majority investor should consolidate the investee. "Participating" rights
were contrasted by the Task Force to "protective" rights in that
"participating" rights "provide the minority shareholder with the right to
effectively participate in significant decisions that would be expected to
be related to the investee's ordinary course of business...". The existence
of "protective" rights, which the Task Force felt described all minority
rights, would not be sufficient to preclude consolidation.
Based on this framework, we believed that GAAP would hold that a
majority shareholder should consolidate its investment in an investee unless
there exists a preponderance of evidence that would rebut the presumption
that control rests with the majority shareholder. In this analysis, we did
not perceive the existence of evidence sufficient to overcome this
presumption. As a result, we reported our financial affairs, and those of
our subsidiaries, on a consolidated basis.
In reviewing our prior filings, the Commission's reviewing staff
analyzed SFAS No. 94 and EITF No. 96-16 considerations and reached a
different conclusion on the consolidation issue. We have been advised by
the Commission's staff reviewer to report ours financial affairs utilizing
the equity method. In order to expedite the process of the review of the
filings in question, we have made the strategic decision not to seek a
further review of the Commission's staff reviewer's conclusions.
Accordingly, we have restated our prior financial statements and
presented financial reports for the year ending December 31, 1999 on the
equity method basis rather than on a consolidated basis.
Financial Condition And Results of Operations -
------------------------------------------------
For Periods Ended December 31, 1998 and December 31, 1999
---------------------------------------------------------
Financial Condition for year ended December 31, 1999
For the year ended December 31, 1999, we had an accumulated deficit
of US $12,360,537. As of December 31, 1999, we had cash on hand of US
$16,854 and reported total shareholders' equity of US $840,057.
On July 31, 1998, we purchased certain assets of American Flavors
China, Inc., consisting of that company's 52%equity interest in and to a
Sino-American joint venture in Hangzhou, People's Republic of China, known
as Hangzhou Meilijian Dairy Products Co., Ltd. For financial reporting
purposes, Hangzhou Meilijian is considered our subsidiary of the Company as
of that date. As of July 31, 1998, Hangzhou Meilijian had total assets of
$6,512,950, with total current assets of $1,928,336. Total liabilities
amounted to $3,544,961, with total current liabilities of $2,870,890.
In addition, the joint venture company had total equity of $2,967,989,
with total revenues of $2,831,255.As of December 31, 1999, Hangzhou
Meilijian had total assets of $5,483,490, with total
<PAGE> 46
current assets of $931,443. Total liabilities amounted to $3,175,406, with
total current liabilities of $2,265,023. In addition, the joint venture
company had total equity of $2,308,084, with total revenues of $5,664,661.
Results of operations
Year Ended December 31, 1999
----------------------------
Owing to the change in financial reporting to the equity method, we
have not reported any of the revenue of our subsidiaries and, accordingly,
have not reported any sales revenue, cost of goods sold or selling expenses
for the fiscal year ending December 31, 1999. After general and
administrative expenses of $2,622,788 and other net expenses of $1,394,546,
including interest expenses of $15,539, loss on investments in Green Food
Peregrine of $1,034,606 and in Meilijian of $334,401, we had a net loss
before income taxes of $4,017,334. This loss, combined with accrued
dividends on preferred stock of $958,177, resulted in a basic loss per share
of $0.67.
Ours losses on its investments in its Chinese subsidiaries in 1999
result from the high level of expenses associated with the continuing
attempts to penetrate the market in Shanghai and the introduction of new
products in Hangzhou. In addition, we experienced significant general and
administrative expenses in connection with raising capital in 1999 in excess
of $937,000 and expenses associated with the filing requirements of a fully
reporting company under the Securities Exchange act of 1934.
Year Ended December 31, 1999 Compared to
----------------------------------------
Year Ended December 31, 1998
----------------------------
General and administrative expenses increased approximately 108% to
$2,622,788 in 1999 from $1,260,588 in 1998. This increase reflects three
1999 fund raising exercises, the consummation of licensing agreements with
Warner Bros. with guaranteed royalty payments in 1999 of $87,500, and the
preparation and filing of SEC reporting documents.
Interest expense increased from a net positive income number in 1998
to expenses of $15,539 in 1999. The increase in interest expense largely
was a result of the debt associated with the Green Food Peregrine and
Hangzhou Meilijian operations and 10.5% interest on an installment note
having a face value of $282,637, arising out of the acquisition of our
interest in Hangzhou Meilijian in 1998.
Losses on investments in our subsidiaries increased approximately
13.4% to $1,379,007 in 1999 from $1,215,793 in 1998. The increase largely
was the result of the write off of the entire balance of our investment in
Green Food Peregrine in 1999, when that joint venture ceased operations and
we decided to terminate the joint venture.
Consequently, our net loss increased approximately 63.2% to $4,017,334
in 1999 from $2,461,829 in 1998. We reported a loss per share of $0.41 in
1998 and $0.67 in 1999. The increase in the loss per share was due to the
change to the equity method of reporting and the write off of our investment
in Green Food Peregrine.
As of December 31, 1998, there were 7,717,957 shares of common stock
outstanding while as of December 31, 1999 there were 10,278,129 shares of
common stock outstanding. Due to the timing of issuance of new shares,
however, the weighted average number of shares of common stock outstanding
in 1999 was 7,422,965. The loss per share in 1999 increased by
approximately 63.4%compared with 1998.
<PAGE> 47
Hangzhou Meilijian Year Ended December 31, 1999
-----------------------------------------------
For the fiscal year ending December 31, 1999, Meilijian had net sales
of $5,664,661 and had a gross profit of $768,517. In addition to the
$4,896,144 cost of goods sold, Meilijian had selling expenses of $629,564,
and general and administrative expenses of $664,921. After net interest
expenses of $129,810 and other net expenses of $6,532, Meilijian had a net
loss before income tax of $662,310. General and administrative expenses are
approximately 12% of revenues for 1999. We anticipate that as Meilijian's
revenue will increase through marketing, general and administrative expenses
will increase in total but decrease as a percentage of revenue.
Meilijian's loss from operations for 1999 are the result of efforts
associated with the introduction of new products in 1999.
Hangzhou Meilijian Year Ended December 31, 1999 Compared to
-----------------------------------------------------------
Year Ended December 31, 1998
----------------------------
Meilijian's revenues increased almost 16.2% to $5,664,661 in 1999 from
$4,873,748 in 1998. The increase was due to the continuing marketing
efforts to increase in sales volume of baggie milk, and the development of
an aseptic milk packaged product for sale in the Hangzhou and other
surrounding markets.
Cost of goods sold increased approximately 15.4% to $4,896,144 in 1999
from $4,241,471 in 1998. This increase was due mainly to a higher level of
revenue that required a corresponding increase in cost of goods sold.
However, cost of goods sold accounting for a percentage of revenue decreased
to 86% in 1999 from 87% in 1998. Consequently, the gross profit ratio
increased to 13.5% in 1999 from 13% in 1998.
Selling expenses increased approximately 41.3% to $629,564 in 1999
from 445,662 in 1998. As a percentage of revenues, selling expense
increased to 11% in 1999 from 9% in 1998. These increases were due mainly to
the continuing efforts to increase sales volume and the introduction of new
products in the Meilijian market area.
Meilijian's general and administrative expenses increased
approximately 59% to $664,921 in 1999 from $415,991 in 1998. This increase
reflects the effects of increased sales and the introduction of new products
in 1999. As a percentage of the total revenue, the general and
administrative expenses increased to 11.7% in 1999 from 8.5% in 1999.
Interest expense decreased approximately 25.9% to $129,810 in 1999
from $175,205 in 1998. The decrease in interest expense largely was a
result of the debt repayment. Meilijian's net loss increased approximately
59% to $662,310 in 1999 from $415,178 in 1998.
Liquidity and capital resources
-------------------------------
As of December 31, 1998, we reported that net cash used in operating
activities was $981,129, net cash used in investing activities was $769,868,
and net cash provided by financial activities was $1,775,710 with a positive
foreign currency translation adjustment of $28,414.
As of December 31, 1999, we reported that net cash used in operating
activities was $1,911,100, net cash used in investing activities was
$946,585, and net cash provided by financing activities was $2,569,392 with
a negative foreign currency translation adjustment of $86.
<PAGE> 48
Net cash used in operating activities increased approximately 100% to
$1,911,186 in 1999 from $952,715 of net cash used by operating activities in
1998. The increase in negative cash flow in operating activities reflects
the increased costs in 1999 in supporting Green Food Peregrine.
Net cash used in investing activities increased approximately 23% to
$946,585 in 1999 from $769,868 in 1998. The increase mainly was due to
advances to Green Food Peregrine.
Net cash provided by financing activities increased 44.7% to
$2,569,392 in 1999 from $1,775,710 in 1998. The necessity for increased fund
raising activities resulted from increased general and administrative
expenses as well as the continuing support of the operations of Green Food
Peregrine and the implementation of the Warner Bros. licensing agreements.
Going forward, our primary requirements for cash consist of
* the capital contribution required for the Yangling Mandarin new
joint venture
* expenses related to the development of the distribution business
infrastructure for Yangling Mandarin
* expenses related to the development of the e- commerce business
infrastructure for Yangling Mandarin
* additional working capital for the day to day operation of China
Premium (Shanghai)
* product development, marketing and advertising for the marketing
and sales of our Looney Tunes(TM) milk products in China
* expenses related to the development of the distribution
infrastructure for China Premium (Shanghai) for Looney Tunes(TM)
flavored milks and snack crackers
* payments of guaranteed royalty payments to Warner Bros. under
existing licensing agreements
* additional working capital for our day to day operation in the
United States, including Bravo!
We estimate that approximately US $2,000,000 will be needed to fund
these activities through the end of 2000. We anticipate the sale of
additional equity under commitments built into the Series D and Series G
Convertible Preferred transactions. In addition, we have commenced
discussions with representatives of the Series D, F and G investors
concerning the establishment of an equity line of credit with a present bank
investor for future funding.
Financial Condition And Results of Operations -
For Periods Ended March 31, 2000 and June 30, 2000
Financial condition for the period ended June 30, 2000
As of June 30, 2000, we had an accumulated deficit of $15,344,972.
As of June 30, 2000, we had cash on hand of $1,161,327 and reported total
shareholders' equity of $2,515,362.
<PAGE> 49
For this same period of time, general and administrative expenses were
$1,493,997. The continued increase in these expenses from prior periods is a
result of intensified activities in establishing a refocused business base
in China. After interest expenses of $8,334 and the loss on our investment
in its Hangzhou Meilijian subsidiary of $86,550, we had a net loss of
$1,588,881.
Results of operations
Six Months Ended June 30, 2000, Compared to
-------------------------------------------
Six Months Ended June 30, 1999
------------------------------
Our net loss decreased approximately 18% to $1,588,881 in 2000 from
$1,874,102 in 1999. We reported a loss per share of $0.32 in 1999 and $0.27
in 2000. The decrease in the loss per share was due to
* the write off of the our investment in Green Food Peregrine as of
December 31, 1999 - the investment loss was $607,604 for the six
months ended June 30, 1999
* increase in number of shares of common stock outstanding as of June
30, 2000.
Accrued and paid dividends increased approximately 94% to $1,395,554
in 2000 from $720,207 in 1999. This increase was the result of deemed
dividends associated with the conversion features of two additional classes
of convertible preferred stock issued in the quarter ended June 30, 2000. We
realized net proceeds of $2,155,000 from the sale of these two series of
convertible preferred stock.
As of June 30, 2000 there were 12,915,242 shares of common stock
outstanding compared with 10,278,129 shares of common stock outstanding as
of June 30, 1999. Due to the timing of issuance of new shares, however, the
weighted average number of shares of common stock outstanding in 2000 was
11,011,151. The loss per share in 2000 decreased by approximately 19%
compared with 1999.
General and administrative expenses increased by approximately 26% to
$1,493,997 in 2000 from $1,183,039 in 1999. This increase reflects the
costs associated with the establishment and funding of the day to day
operations new businesses in China including
* an import/export company in Shanghai's Free Trade Zone
* the development of software and graphic design associated with a
business to business e-commerce food distribution portal
* the development of logistics capabilities for the launch of Looney
Tunes(TM) branded milk products and snack crackers in Shanghai and
surrounding areas
In addition, general and administrative expenses increased as a result
of legal and accounting expenses associated with the restatement of our
financial statements on the equity basis, fund raising exercises activities,
and the preparation and our filing of SEC reporting documents.
<PAGE> 50
Three Months Ended June 30, 2000 Compared to
--------------------------------------------
Three Months Ended June 30, 1999
--------------------------------
Our net loss decreased approximately 7% to $851,457 in 2000 from
$912,533 in 1999. We reported a loss per share of $0.19 in 1999 and $0.16 in
2000. The decrease in the loss per share was due to
* the write off of our investment in Green Food Peregrine as of
December 31, 1999 - the investment loss was $204,100 for the six
months ended June 30, 1999
* increase in number of shares of common stock outstanding as of June
30, 2000
Accrued and paid dividends increased approximately 50% to $1,025,790
in 2000 from $684,362 in 1999. This increase was the result of deemed
dividends associated with the conversion features of two additional classes
of convertible preferred stock issued in the quarter ended June 30, 2000. We
realized net proceeds of $2,155,000 from the sale of these two series of
convertible preferred stock.
General and administrative expenses increased by approximately 21% to
$808,814 in 2000 from $670,387 in 1999. This increase reflects the costs
associated with the establishment and funding of the day to day operations
new businesses in China including
* an import/export company in Shanghai's Free Trade Zone
* the development of software and graphic design associated with a
business to business e-commerce food distribution portal
* the development of logistics capabilities for the launch of Looney
Tunes(TM) branded milk products and snack crackers in Shanghai and
surrounding areas
In addition, general and administrative expenses increased as a result
of legal and accounting expenses associated with the restatement of our
financial statements on the equity basis, fund raising exercises activities,
and the preparation and our filing of SEC reporting documents.
Losses on our investment in Hangzhou Meilijian increased approximately
11% to $86,550 in 2000 from $78,235 in 1999. The increase reflected the
result of high level of selling and general and administrative expenses
associated with the continuing attempts to penetrate the market and the
introduction of new products in Hangzhou. Gross profit for the this period
was $650,860 with revenues of $2,976,488. As a percentage of sales, the cost
of sales was 78% for this period.
Liquidity and capital resources
-------------------------------
As of June 30, 1999, we Company reported that net cash used in
operating activities was $801,843, net cash used in investing activities was
$625,925, and net cash provided by financial activities was $1,247,311.
As of June 30, 2000, net cash used in operating activities was
$1,366,492, net cash used in investing activities was $314,468, and net cash
provided by financing activities was $2,825,433.
<PAGE> 51
Net cash used in operating activities increased approximately 70% to
$1,366,492 in 2000 from $801,843 of net cash used by operating activities in
1999. The increase in negative cash flow in operating activities reflects
the increased costs experienced during this period associated with the
establishment and funding of the day to day operations new businesses in
China and supporting our U.S. operations.
Net cash used in investing activities decreased approximately 99% to
$314,468 in 2000 from $625,925 in 1999. The increase mainly was due to
advances made to China Premium Food Corporation (Shanghai) Co., Inc., our
wholly owned import/export Chinese company and to purchase inventory for
Mandarin Fine Food.
Net cash provided by financing activities increased 126% to $2,825,433
in 2000 from $1,247,311 in 1999. The increased necessity for fund raising
activities resulted from the establishment and funding of the day to day
operations of new businesses in China and the United States, and supporting
our U.S. management operations.
During the first and second quarters of 2000, ending June 30, 2000, we
continued to shift our business focus and strategy from the production of
milk products to a company involved in the marketing and distribution of a
broad range of food products in China and the United States, including
premium branded items. In China, these efforts are through China Premium
Food (Shanghai) Co., Inc., our wholly owned import/export/distribution
subsidiary. China Premium (Shanghai) will import and distribute Looney
Tunes(TM) snack crackers and distribute Looney Tunes(TM) milk products in
the greater Shanghai area. In the United States, Bravo! Food, Inc., a
subsidiary, will promote and market Looney Tunes(TM) milk products.
In February of 2000, we announced an agreement in principle to acquire
the majority equity interest in and control of the operations of Mandarin
Fine Foods Company of Beijing and Shanghai. Mandarin is the dominant
distributor of premium food products to four and five star hotels throughout
China. Mandarin's customers include most of the finest hotels in China and
many top restaurants in Beijing and Shanghai, the two largest and most
advanced cities in China. The bulk of Mandarin's $8 million dollar sales
volume is derived from eight product categories, most of which are imported
from outside China. Mandarin is the largest importer of prime, aged, U.S.
beef to China and represents approximately 60% of all premium U.S. beef
exported to China. Additional products include dairy and cheese, Italian
food dry goods, caviar, smoked salmon, oysters, various other meat products
and seafood, and several pastry and dessert foods. Currently, Mandarin
processes its caviar in China, utilizing local Sturgeon, and produces its
own "fresh" pasta in China. On May 11, 2000, the Company executed a
definitive agreement for the acquisition of Mandarin.
During the course of the due diligence for the Mandarin transaction,
we became aware that our acquisition of Mandarin would significantly limit
the scope of its business license under PRC regulations concerning Foreign
Investment Enterprises. We also became aware, however, of an agricultural
development program funded by the national government in the Western China
Shaanxi Province, known as the Yangling Model District for Agricultural
High-tech and New-tech Industry. Through this program, the government of
Shaanxi Province is authorized to issue business licenses which are much
broader in scope than normal to new companies in the Yangling Model
District, including foreign investment joint ventures.
Owing to the greatly enhanced scope of the business license offered in
the Yangling District, we agreed with Mr. Li Zhi Yun, the sole owner of
Mandarin Fine Foods, to forego the purchase of Mandarin Fine Foods in favor
of establishing a new joint venture company in Yangling. We agreed that the
parties to this joint venture would be China Premium Food Corporation, as
the foreign party,
<PAGE> 52
and Yangling Kechuang Agricultural Techniques Development Co., a new Chinese
company established by Mr. Li in the Yangling District, as the Chinese
party. The new joint venture will be named Yangling Mandarin Premium Food
Company., Ltd.". The stated purpose of Yangling Mandarin will be to
establish an enterprise in Yangling Model District for Agricultural High-
tech and New-tech Industry, to produce and distribute food and beverages, to
develop domestic markets for such products, to set up a domestic production
base to strengthen its position in the distribution market. As part of this
transaction, Mr. Li has agreed to liquidate Mandarin Fine Foods.
Going forward, our primary requirements for cash consist of
* the capital contribution required for the Yangling Mandarin new
joint venture
* expenses related to the development of the distribution business
infrastructure for Yangling Mandarin
* expenses related to the development of the e- commerce business
infrastructure for Yangling Mandarin
* additional working capital for the day to day operation of China
Premium (Shanghai)
* product development, marketing and advertising for the marketing
and sales of our Looney Tunes(TM) milk products in China
* expenses related to the development of the distribution
infrastructure for China Premium (Shanghai) for Looney Tunes(TM)
flavored milks and snack crackers
* payments of guaranteed royalty payments to Warner Bros. under
existing licensing agreements
* additional working capital for our day to day operation of our U.S.
subsidiary Bravo! Foods
We estimate that approximately US $2,000,000 will be needed to fund
these activities through the end of 2000. We anticipate the sale of
additional equity under commitments built into the Series D and Series G
Convertible Preferred transactions. In addition, we have commenced
discussions with representatives of the Series D, F and G investors
concerning the establishment of an equity line of credit with a present bank
investor for future funding.
In addition to these anticipated expenses, we currently have monthly
working capital needs of $140,000. This represents a significant reduction
resulting from the commencement of joint venture termination procedures and
the elimination of the funding of Green Food Peregrine. We anticipate
contributions to overhead to begin by the end of the third quarter of this
year due to product launches involving the Looney Tunes(TM) brand in China.
On April 7, 2000, we received gross proceeds approximating $1,500,000
to fund working capital and investment capital needs, through the issuance
of Series F Convertible Preferred Stock. These funds represent the first of
a series of investments that are planned and structured in the form of
3,000,000 stock warrants and 1,600,000 stock warrants at $1.00 and $0.84
exercise prices, respectively. These warrants are callable when our shares
trade at $1.60 and $2.40, respectively, thereby enabling the Company to
force the exercise and resultant additional investment of $4,344,000 at an
average exercise price of $.94.
<PAGE> 53
In addition, on June 19, 2000, we received gross proceeds of $750,000
to fund working capital and investment capital needs, through the issuance
of Series G Convertible Preferred Stock. The Series G subscription agreement
provides for the mandatory investment of an additional $750,000 upon the
effectiveness of an amended SB-2 registration statement filed with the SEC
covering this preferred, associated warrants and the underlying common
stock.
Debt structure
During the process of acquiring from American Flavor China, Inc. the
52% of equity interest in and to Hangzhou Meilijian, we issued a promissory
note to assume the American Flavor's debt owed to a supplier. The face value
of that note was $282,637.53 at interest rate of 10.5% per annum without any
collateral attached. The note has a monthly installment payment of $7,250
with 23 payments and a balloon payment of $159,862.38 when the note will be
due on July 15, 2000. The minimum cash payments are $87,000 in 1999 and
approximately $203,362 in 2000. The note has a late charge of 3% of overdue
principal and interest installment if the note holder does not receive the
payment within 15 days of due dates. This note currently is being
renegotiated to extend the time for payment.
Effects of inflation
We believe that inflation has not had material effect on its net sales
and results of operations.
Effect of fluctuation in foreign exchange rates
Our operating subsidiary, Green Food Peregrine, is located in China.
It buys and sells products in China using Chinese renminbi as functional
currency. Based on Chinese government regulation, all foreign currencies
under the category of current account are allowed to freely exchange with
hard currencies. During the past two years of operation, there were no
significant changes in exchange rates. However, there is no assurance that
there will be no significant change in exchange rates in the near future.
New accounting standards not adopted yet
Statement of Financial Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) requires companies to
recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or
the earnings effect of the hedged forecasted transaction. For a derivative
not designated as a hedging instrument, the gain or loss is recognized in
income in the period of change. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000.
Historically, we have not entered into derivative contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to affect its financial
statements.
<PAGE> 54
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the
meaning of various provisions of the Securities Act of 1933 and the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included in this prospectus that address
future activities, events or developments, including such things as future
revenues, product development, market acceptance, responses from
competitors, capital expenditures (including the amount and nature thereof),
business strategy and measures to implement strategy, competitive strengths,
goals, expansion and growth of our business and operations, plans,
references to future success and other such matters, are forward-looking
statements. These statements are based on certain assumptions and analyses
made by us in light of its experience and its assessment of historical
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances. Whether actual
results will conform to our expectations and predictions, however, is
subject to a number of risks and uncertainties that may cause actual results
to differ materially, including the risks and uncertainties discussed in
this prospectus; general economic, market or business conditions; the
opportunities (or lack thereof) that may be presented to and pursued by us;
competitive actions by other companies; changes in laws or regulations; and
other factors, many of which are beyond our control. Consequently, all of
the forward-looking statements made in this prospectus are qualified by
these cautionary statements and there can be no assurance that the actual
results anticipated by us will be realized or, even if substantially
realized, that they will have the expected consequences to or effects on us
or our business or operations.
DESCRIPTION OF PROPERTY
Neither we nor our subsidiaries currently own any real property. As of
February 1, 1999, we moved its corporate offices from West Palm Beach to
11300 US Highway 1, Suite 202, North, Palm Beach, Florida, pursuant to a
lease with HCF Realty, Inc., having a term of five years. Our initial
aggregate monthly rent amounts to approximately $4,900, which will increase
(assuming an estimated annual increase of 2%) to approximately $6,100 per
month by the fifth year.
Hangzhou Meilijian currently leases its plant and land from the City
of Hangzhou, under operating leases which expire December 31, 2013, at the
rate of approximately US $7,900 per month for 1999, US $6,400 per month
through 2003 and an aggregate of US $1,164,730 thereafter.
China Premium (Shanghai) leases office space at 333 Jiu Jiang Road,
Room 705, 7th Floor, Finance Square, Shanghai 200001, China, at the rate of
US $1,500 per month.
We lease the residence occupied by Mr. Langley and family located at
102 Greenwich Drive 983 Hua Mu Road Pudong, Shanghai 201204, PRC, at the
rental rate of US $4,100 per month.
We do not have a policy to acquire property for possible capital gains
or income generation. In addition, we do not invest in securities of real
estate entities or developed or underdeveloped properties.
<PAGE> 55
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loans/Fees
In February, 1997 we issued 25,000 shares of common stock in exchange
for 100% of equity interest of Manor Products Corp. Manor was a Delaware
company established on January 10, 1996. In early 1996, 80% of equity
interest of Manor was bought by the principal of the initial founding entity
of the Company. Accordingly, this acquisition was regarded as a related
party transaction.
In January, 1997, the major limited partner of China Peregrine
Enterprises loaned US $200,000 to that limited partnership in order for
China Peregrine Enterprises to meet interim registered capital requirements
of the Green Food Peregrine Articles of Association and Joint Venture
Contract. In March, 1997, three of our shareholders together provided a loan
of US $1,315,000 to pay China Peregrine Enterprises' final registered
capital requirement to Green Food Peregrine. This last capital contribution
was set by the Board of Directors of Green Food Peregrine as a condition
precedent to the approval of the Company's acquisition of the interest of
China Peregrine Enterprises in and to the Green Food Peregrine joint
venture. These two loans were paid off during May and June, 1997, utilizing
the proceeds from a Rule 504 regulation D offering.
In March, 1997, a holder of the majority of the partnership interests
in China Peregrine Enterprises, together with two other investors of ours,
assumed a US $1,260,000 outstanding line of credit owed by the limited
partnership to a Tennessee-based financial institution. On March 15, 1997,
we issued 1,260,000 shares of its Series B preferred stock to these
shareholders in consideration for this assumption. The line of credit was
paid in full in October, 1997.
In the course of setting up the Hangzhou Meilijian joint venture,
Meilijian contributed fixed assets with a value in excess of its required
capital contribution amount. Based on an agreement signed by the Chinese and
American investors, the excess portion was treated as a fixed asset loan
from Meilijian at an interest rate of 8% per annum. The balance of this loan
at December 31, 1998 was $560,080.
On January 1, 1994, Meilijian provided us with the use of its
trademark, which was valued at RMB500,000 -approximately US $60,245. We
recorded this trademark value as a part of deferred assets and a shareholder
loan. We recorded amortization of RMB50,000 -approximately US $6,025- per
year for trademark and paid cash of RMB50,000 to Meilijian per year against
the shareholder loan. The balance of this loan at December 31, 1998 was
$36,238. Accumulated interest on these loans amounted to $81,265.
Relationships
Mr. Paul Downes has investment power with respect to the affairs of
Tamarind Management, Ltd. Accordingly, ours securities held by Mr. Downes
and Tamarind have been combined in this document for reporting purposes. The
Downes/Tamarind ownership of issued and underlying shares of common stock,
Series B Preferred Stock and Options represents 8.93% of all issued and
outstanding common stock and shares of common stock underlying the preferred
stock plus unexercised options and warrants.
We purchased the assets of China Peregrine Enterprises, Limited in
March of 1997, in exchange for 1,040,000 shares of our common stock. At the
time of this asset purchase, Mr. Dale Reese was the major equity holder in
the China Peregrine Enterprises limited partnership and Mr. Charles Beech
controlled the activities of China Peregrine Enterprises by virtue of his
control of China
<PAGE> 56
Peregrine International, Inc., the General Partner of China Peregrine
Enterprises. At the time of the asset purchase, Messrs. Reese and Beech were
two of our three directors. As noted above, through the assumption of a loan
in excess of one million dollars owed by China Peregrine Enterprises to a
Tennessee bank, and by virtue of his position as one of our founders, and
through stock purchases, Mr. Reese presently holds 10.4% of our equity. Mr.
Beech, directly and through Peregrine Enterprises, Inc., presently holds
less than 1% of our equity.
MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Common stock market price
Of the 12,915,242 shares of our common stock issued and outstanding as
of August 18, 2000, approximately 5,529,477 shares are able to be traded on
the over-the-counter trading on the OTC Electronic Bulletin Board, which
trading commenced October 24, 1997. Of this amount, 4,749,477 shares have
been held for in excess of two years and 780,000 have been held for one
year. The following quarterly quotations for our common stock transactions
on the OTC Bulletin Board reflect inter-dealer prices, without retail mark-
up, mark-down or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
QUARTER HIGH BID PRICE LOW BID PRICE
<S> <C> <C> <C>
1997 Q4 (10/1 - 12/31) $6.87 $3.00
1998 Q1 (1/3 - 3/31) $4.10 $2.10
Q2 (4/1 - 6/30) $2.60 $0.60
Q3 (7/1 - 9/30) $2.50 $0.33
Q4 (10/1 - 12/31) $2.25 $1.00
1999 Q1 (1/3 - 3/31) $2.87 $0.87
Q2 (4/1 - 6/23) $2.87 $1.31
Q3 (7/1 - 9/30) $1.92 $1.12
Q4 (10/1 - 12/31) $1.25 $0.81
2000 Q1 (1/3 - 3/31) $1.10 $0.62
Q2 (4/1 - 6/23) $1.12 $0.70
</TABLE>
<PAGE> 57
Non-market equity subject to options, warrants and conversion
Stock Warrants and Options
--------------------------
We have outstanding the following warrants and options:
* 292,000 warrants exercisable purchase an aggregate of 292,00 shares
of common stock at an exercise price of $1.00 per share, having an
expiration date of June 30, 2003;
* Series D Warrants exercisable to purchase an aggregate of 125,000
shares of common stock at an exercise of $2.96 per share, having an
expiration dates in March and April 2002.
* Series D Warrants exercisable to purchase an aggregate of 1,300,000
shares of common stock at an exercise of $0.625 per share, having
an expiration date of January 31, 2003.
* Series E Warrants exercisable to purchase an aggregate of 165,000
shares of common stock at an exercise of $3.00 per share, having an
expiration dates in 2001;
* Series E Warrants exercisable to purchase an aggregate of 33,000
shares of common stock comprising part of the Placement Agent
Warrants at an exercise price of $2.75 per share, having an
expiration dates in 2001;
* Series E Warrants exercisable to purchase an aggregate of 33,000
shares of common stock comprising part of the Placement Agent
Warrants at an exercise price of $5.00 per share, having an
expiration dates in 2001;
* Series F Warrants exercisable to purchase an aggregate of 3,000,000
shares of common stock at an exercise of $1.00 per share, having an
expiration date of April 5, 2003.
* Series F Warrants exercisable to purchase an aggregate of 1,600,000
shares of common stock at an exercise of $0.84 per share, having an
expiration date of April 5, 2003.
* Series G Warrants exercisable to purchase an aggregate of 334,330
shares of common stock at an exercise of $0.9625 per share, having
an expiration date of June 18, 2003.
* Options to purchase 3,100,533 shares of common stock pursuant to
1997 and 1999 stock option plans at a purchase price of $1.00 per
share, having expiration dates in 2002 (as to 3,045,533 shares) and
2004 (as to 55,000 shares), respectively. In 1999, we issued
1,016,000 additional options to consultants of which 250,000 remain
at 80.75 per share, having an expiration date of October 17, 2000.
In 2000, we issued 75,000 options to two executive officers at $1.10
per share, having an expiration date of September 1, 2004.
Convertible preferred
Please refer to page 22 of this prospectus for the number of
convertible preferred shares issued and outstanding.
Common stock subject to sale under rule 144
Of the 12,915,242 shares of our common stock presently issued and
outstanding, approximately 2,764,036 shares have been held by non-affiliates
for in excess of one year; an additional 2,765,411 shares have been held by
affiliates for in excess of one year. These shares may be sold pursuant to
Rule 144,
<PAGE> 58
subject to the volume and other limitations set forth under Rule 144. In
general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned restricted shares of the
Company for at least one year is entitled to sell, within any three-month
period and in accordance with an approved manner of sale, an amount of
shares that does not exceed the greater of (i) the average weekly trading
volume in our common stock during the four calendar weeks preceding such
sale, or (ii) 1% of the shares then outstanding. A person who is not deemed
to be an "affiliate" and who has held restricted shares for at least two
years would be entitled to sell such shares without regard to the resale
limitations of Rule 144.
Equity holders at August 23, 2000
<TABLE>
<S> <C> <C>
Common stock 12,915,242 shares 1,200 holders (approximate)
Series B preferred stock 242,559 shares 2 holders
Series D preferred stock 105,000 shares 3 holders
Series F preferred stock 150,000 shares 3 holders
Series G preferred stock 75,000 shares 4 holders
</TABLE>
Dividends
We have not paid dividends on its common stock and do not anticipate
paying dividends. We intend to retain future earnings, if any, to finance
working capital, to expand its operations, and to pursue its acquisition
strategy.
The holders of common stock are entitled to receive, pro rata, such
dividends and other distributions as and when declared by our board of
directors out of the assets and funds legally available therefor. The
availability of funds is dependent upon dividends or distribution of profits
from our subsidiaries, and may be subject to regulatory control and approval
by the appropriate government authorities on either a regional or national
level in the People's Republic of China.
We have accrued dividends for our convertible preferred stock for 1999
in the amount of $958,117 and accrues and paid $1,395,354 for the period
ended June 30, 2000.
EXECUTIVE COMPENSATION
Summary compensation table
The following table sets forth the compensation paid by us during the last
three fiscal years to our Chief Executive Officer, and the four other most
highly compensated executive officers whose total 1999 salary and bonus
exceeded $100,000:
<TABLE>
<CAPTION>
Annual Compensation- -Long-Term Compensation-
Name & Position Year Salary Bonus Other Restricted Stock
Awards
<S> <C> <C> <C> <C> <C>
Roy G. Warren 1997 $120,000 410,914
President 1998 $120,000
1999
Chief Executive Officer 1999 $120,000
<PAGE> 59
Steven Langley 1999 $ 75,000 $30,000 $70,000(2) 200,000(3)
Chief Operating
Officer (China)
Nancy Yuan 1999 $ 40,000 $ 5,000 25,000(4)
Chief Financial
Officer (China)
Charles Beech 1997 510,914
Chairman 1998
1999
Chief Executive Officer 1997 $120,000(5)
1998
1999
Paul Downes (6) 1997 1,383,705
Chairman 1998
<FN>
<F1> Unless otherwise noted, the Options listed above were authorized by a
directors' resolution on April 20, 1997. At that time, a market did
not exist for our unrestricted shares, which had a par value of
$0.001.
<F2> Includes $48,000 annual allowance for housing in Shanghai, PRC for Mr.
Langley and his family and $22,000 educational expense for family
members.
<F3> Pursuant to October 1, 1999 agreement for five year options (from
vesting) at market as of September 1, 1999, subject to the following
vesting schedule: 50,000 at 9-1-99; 50,000 at 9-1-00; 50,000 at
9-1-01; 50,000 at 9-1-02.
<F4> Pursuant to October 1, 1999 agreement for five year options at $1.00
per share.
<F5> Salary deemed paid to Mr. Beech for expense accounting purposes only.
<F6> These options were granted to Tamarind Management, Ltd., an affiliate
of Mr. Downes.
</FN>
</TABLE>
Option Grant Table 1999
<TABLE>
<CAPTION>
Securities
Underlying Percentage Per Share Expiration
Name & Position Options of Total Exercise $ Date
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen Langley 200,000 88.88% market at 5 years from
Chief Operating 12-1-99($1.10) vesting
Officer (China)
Nancy Yuan 25,000 11.12% market at 9-12-04
Chief Financial 12-1-99 ($1.10)
Officer (China)
</TABLE>
Aggregated Option Exercises in Fiscal 1998 and 1999
None of the named executive officers exercised any stock options during
fiscal 1998 or 1999. The following table provides information on the value
of such officers' unexercised options at December 31, 1998 and 1999.
<PAGE> 60
Aggregated 1999 Fiscal Year End Option Value Table
<TABLE>
<CAPTION>
Securities Underlying Value of "In The Money"
Name & Position Unexercised Options Unexercised Options (1)
--------------- --------------------- -----------------------
<S> <C> <C>
Roy G. Warren 410,914 $-0-
Stephen Langley 50,000 (150,000 unexercisable) $-0-
Nancy Yuan 25,000 $-0-
Charles Beech 510,914 $-0-
Paul Downes (2) 1,383,705 $-0-
<FN>
<F1> On December 31, 1999, the Company's unrestricted common stock was
quoted on the NASD Over The Counter Electronic Bulletin Board at a
closing price of $0.81; the reported dollar values represent the "in-
the money" value of the options listed as of each year end.
<F2> These options were granted to Tamarind Management, Ltd., an affiliate
of Mr. Downes.
</FN>
</TABLE>
Compensation of Directors
Directors were compensated for their travel expenses to and from board
of directors' meetings in 1998 and 1999. There were 4 in person meetings and
11 telephonic meetings of the board in 1998 and 2 in person meetings and 11
telephonic meetings of the board in 1999.
Employment contracts
There are employment contracts with Stephen Langley, the Chief
Operating Officer for our Chinese operations, and Nancy Yuan, the Chief
Financial Officer for our Chinese operations. These contracts are dated
December 1, 1999 and reflect effective dates of September 1, 1999 and
September 13, 1999, respectively. Both Mr. Langley and Ms. Yuan reside in
the Shanghai PRC metropolitan area.
Mr. Langley has a five year contract at a base annual salary of
$75,000, with a quarterly bonus of $7,500 in the first year. In subsequent
years, Mr. Langley's bonus is performance based. In addition, Mr. Langley
receives a $48,000 annual housing allowance and a $22,000 education
allowance for his family. Mr. Langley's employment agreement calls for his
receipt of five year stock options for 200,000 shares at an exercise price
of $1.12 per share. These options are in four equal traunches of 50,000 with
vesting over a three year period.
Ms. Yuan has a five year contract at a base annual salary of $40,000,
with an annual bonus of $5,000 in the first year. Ms. Yuan's employment
agreement calls for her receipt of one time five year stock options for
25,000 shares at an exercise price of $1.12 per share.
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
We have not had any changes in or disagreements with its independent
accountants.
<PAGE> 61
CHINA PEREGRINE FOOD CORPORATION
____________________________
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
____________________________
<PAGE> F-1
China Peregrine Food Corporation
Index to Financial Statements
Report of Independent Certified Public Accountants F-3
Financial Statements
Balance Sheets F-4
Statements of Operations and Comprehensive Loss F-6
Statement of Shareholders' Equity F-7
Statements of Cash Flows F-9
Summary of Accounting Policies F-13
Notes to Financial Statements F-17
<PAGE> F-2
Report of Independent Certified Public Accountants
To the Board of Directors
China Peregrine Food Corporation
We have audited the accompanying balance sheets of China Peregrine Food
Corporation (a Delaware corporation) as of December 31, 1998 and 1999, and
the related statements of operations and comprehensive loss, shareholders'
equity and cash flows for each of the two years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of China Peregrine Food
Corporation as of December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles
in the United States.
As discussed in the summary of accounting policies, the financial statements
for the year ended December 31, 1998 have been restated to reflect the
accounting for the Company's investment in its foreign subsidiaries using
the equity method of accounting.
BDO Seidman, LLP
Los Angeles, California
February 25, 2000
<PAGE> F-3
CHINA PEREGRINE FOOD CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
------------------------
(restated)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 305,233 $ 16,854
Subscription receivable 235,000 -
Prepaid expenses 37,532 18,196
------------------------
Total current assets 557,765 35,050
Furniture and equipment, net 89,198 131,264
Investment in and advance to GFP (Note 1) 164,017 -
Investment in and advance to Meilijian (Note 2) 1,582,578 1,246,422
Goodwill 293,096 229,148
License rights (Note 3) - 214,286
Deposits 5,000 10,000
------------------------
Total assets $2,711,654 $1,866,170
========================
<PAGE> F-4
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of note payable (Note 3) $ 58,104 $ 277,741
Accrued liabilities 245,151 250,833
------------------------
Total current liabilities 303,255 528,574
Dividends payable 200,667 370,039
Note payable, less current portion (Note 3) 192,741 127,500
------------------------
Total liabilities 696,663 1,026,113
------------------------
Commitments and contingencies (Note 6)
Shareholders' Equity (Notes 7 and 8 ):
Series A convertible preferred stock, par value $0.001 per share,
500,000 shares authorized, 500,000 shares issued and outstanding 500 500
Series B convertible, 9% cumulative, and redeemable preferred
stock, stated value $1.00 per share, 1,260,000 shares authorized,
1,260,000 shares issued and outstanding, redeemable at $1,260,000 1,260,000 1,260,000
Series C convertible, 8% cumulative and redeemable preferred stock,
stated value $3.00 per share, 83,334 and 14,904 shares issued and
outstanding 250,000 44,713
Series D convertible, 6% cumulative and redeemable preferred stock,
stated value $10.00 per share, 80,250 shares issued and
outstanding at December 31, 1999 - 762,500
Series E convertible, 6% cumulative and redeemable preferred stock,
stated value $2.50 per share, 330,000 shares issued and converted
into common stock, 0 shares outstanding at December 31, 1999 - -
Preferred stock - Series C subscribed 135,000 -
Common stock, par value $0.001 per share, 20,000,000 shares
authorized, 7,717,957 and 10,278,129 shares issued and outstanding 7,718 10,278
Common stock subscribed 100,000 -
Additional paid-in capital 7,781,062 11,256,952
Accumulated deficit (7,385,026) (12,360,537)
Accumulated other comprehensive loss - translation adjustment (134,263) (134,349)
------------------------
Total shareholders' equity 2,014,991 840,057
------------------------
Total liabilities and shareholders' equity $2,711,654 $1,866,170
========================
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
<PAGE> F-5
CHINA PEREGRINE FOOD CORPORATION
STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1998 1999
--------------------------
(restated)
<S> <C> <C>
Revenue $ - $ -
Cost of sales - -
--------------------------
Gross margin - -
General and administrative expense 1,260,588 2,622,788
--------------------------
Loss from operations (1,260,588) (2,622,788)
Other (income) expense:
Interest (income) expense, net (14,552) 15,539
Loss on investment in GFP 972,062 1,034,606
Loss on investment in Meilijian 149,198 344,401
Loss attributed to acquiring 2.4% equity interest in GFP 94,533 -
--------------------------
Operating loss (2,461,829) (4,017,334)
Income taxes (Note 5) - -
--------------------------
Net loss (2,461,829) (4,017,334)
Dividends accrued for Series B preferred stock 113,400 113,400
Dividends accrued for Series C preferred stock 85,551 13,775
Dividends accrued for Series D preferred stock - 714,863
Dividends accrued for Series E preferred stock - 116,139
--------------------------
Net loss applicable to common shares $(2,660,780) $(4,975,511)
==========================
Loss per share $ (0.41) $ (0.67)
==========================
Weighted average number of common shares outstanding 6,430,337 7,422,965
==========================
Comprehensive loss and its components consist of the following:
Net loss $(2,660,780) $(4,975,511)
Foreign currency translation adjustment 28,414 (86)
--------------------------
Comprehensive loss $(2,632,366) $(4,975,597)
==========================
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
<PAGE> F-6
CHINA PEREGRINE FOOD CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Other
--------------------- ------------------- Additional Accumulated Stock Comprehensive
Shares Amount Shares Amount Capital Deficit Subscribed Loss Total
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1998 (restated) 1,760,000 $1,260,500 5,289,000 $ 5,289 $ 4,429,110 $ (4,724,246) $ - $(162,677) $ 807,976
Issuance of stock in
exchange for stock
promotion service 50,000 50 49,950 50,000
Issuance of stock to
acquire 2.4% interest
in GFP 120,000 120 119,880 120,000
Issuance of stock in
exchange for furniture
purchases 5,272 5 11,857 11,862
Rule 506 Regulation D
issuance 557,000 557 1,391,943 1,392,500
Issuance of stock to
acquire 52% interest
in Meilijian 1,531,685 1,532 1,530,153 1,531,685
Issuance of stock for
warrants exercised 165,000 165 164,835 100,000 265,000
Issuance of Series C
preferred to Utah
Resource International,
Inc. 83,334 250,000 250,000
Deemed dividends for
Series C preferred
stock 83,334 (83,334) -
Stock subscribed 135,000 135,000
Series B preferred stock
dividends (113,400) (113,400)
Series C preferred stock
dividends (2,217) (2,217)
Net loss (2,461,829) (2,461,829)
Translation adjustments 28,414 28,414
---------------------------------------------------------------------------------------------------------
Balance, December 31,
1998 1,843,334 1,510,500 7,717,957 7,718 7,781,062 (7,385,026) 235,000 (134,263) 2,014,991
Conversion from Series C
to Common (2,393) (7,179) 7,957 8 7,171 - - - -
Conversion from Series C
to Common (1,592) (4,780) 6,002 6 4,774 - - - -
Conversion from Series C
to Common (4,320) (12,960) 20,000 20 12,940 - - - -
Conversion from Series C
to Common (4,320) (12,960) 20,000 20 12,940 - - - -
Section 4(2) private
offering 50,000 135,000 100,000 100 99,900 - (235,000) - -
Conversion from Series C
to Common (50,000) (135,000) 150,000 150 134,850 - - - -
Conversion from Series C
to Common (15,313) (45,939) 40,000 40 45,899 - - - -
Section 4(2) private
offering - - 25,000 25 24,975 - - - 25,000
Section 4(2) private
offering - - 290,000 290 289,710 - - - 290,000
Issuance of Preferred
Stock Series D,
Rule 506 50,000 470,000 - - - - - - 470,000
Issuance of Preferred
Stock Series D
for finder fees 3,500 35,000 - - (35,000) - - - -
Issuance of stock for
warrants exercised - - 30,000 30 29,970 - - - 30,000
Deemed dividends
recognized for Series D - - - - 123,462 (123,462) - - -
Cancellation of common
stock S 4(2) offering - - (105,000) (105) (104,895) - - - (105,000)
Issuance of Preferred
Stock Series D,
Rule 506 25,000 240,000 - - - - - - 240,000
Issuance of Series D
for issuance cost 1,750 17,500 - - (17,500) - - - -
Issuance of stock for
warrants exercised - - 53,334 53 53,281 - - - 53,334
Section 4(2) private
offering - - 145,000 145 144,855 - - - 145,000
Deemed dividends
recognized for
Series D, Tranche - - - - 411,538 (411,538) - - -
Compensation cost for
issuance of stock
options - - - - 48,563 - - - 48,563
<PAGE> F-7
Section 4(2) private
offering - - 117,200 117 117,083 - - - 117,200
Issuance of stock for
consulting services - - 1,999 2 1,998 - - - 2,000
Deemed dividends
recognized for
Series D 2nd Tranche - - - - 106,485 (106,485) - - -
Issuance of stock for
consulting services - - 4,084 4 5,996 - - - 6,000
Conversion from Series C
to Common (7,673) (23,019) 20,000 20 22,999 - - - -
Issuance of Preferred
stock Series E,
Rule 506 100,000 215,746 - - - - - - 215,746
Deemed dividends
recognized for
Series E, 1st Tranche - - - - 62,552 (62,552) - - -
Deemed dividends
recognized for
Series D, 2nd Tranche - - - - 36,017 (36,017) - - -
Conversion from Series E
to Common (60,000) (129,448) 104,896 105 129,343 - - - -
Issuance of stock for
consulting services - - 1,082 1 1,999 - - - 2,000
Conversion from Series E
to Common (40,000) (86,298) 69,444 69 86,229 - - - -
Section 4(2) private
offering - - 65,000 65 64,935 - - - 65,000
Issuance of Preferred
stock Series E,
Rule 506 30,000 64,724 - - - - - - 64,724
Deemed dividends
recognized for
Series E, 2nd Tranche - - - - 26,250 (26,250) - - -
Issuance of stock for
consulting services - - 1,274 2 1,998 - - - 2,000
Conversion from Series E
to Common (10,000) (21,575) 20,000 20 21,555 - - - -
Issuance of Preferred
stock Series E,
Rule 506 60,000 129,448 - - - - - - 129,448
Deemed dividends
recognized for
Series E, 3rd Tranche - - - - 22,500 (22,500) - - -
Issuance of Preferred
stock Series E,
Rule 506 40,000 86,298 - - - - - - 86,298
Issuance of Preferred
stock Series E,
Rule 506 100,000 215,746 - - - - - - 215,746
Issuance of stock for
consulting services - - 1,163 1 1,999 - - - 2,000
Conversion from Series C
to Common (6,961) (20,883) 30,000 30 20,853 - - - -
Conversion from Series E
to Common (180,000) (388,340) 360,000 360 387,980 - - - -
Conversion from Series E
to Common (40,000) (86,294) 80,000 80 86,214 - - - -
Issuance of stock for
exercise of S-8 options - - 250,000 250 124,750 - - - 125,000
Issuance of stock for
exercise of S-8 options - - 250,000 250 124,750 - - - 125,000
Issuance of stock for
exercise of S-8 options - - 266,000 266 187,234 - - - 187,500
Conversion from Series C
to Common 25,858 (77,574) 134,000 134 77,440 - - - -
Issuance of stock for
consulting services - - 1,737 2 1,998 - - - 2,000
Accrued dividends for
Series B - - - - - (113,400) - - (113,400)
Accrued dividends for
Series C - - - - - (13,775) - - (13,775)
Accrued dividends for
Series D - - - - - (37,361) - - (37,361)
Accrued dividends for
Series E - - - - - (4,837) - - (4,837)
Compensation related to
issuance of stock
options and warrants - - - - 467,300 - - - 467,300
Net loss - - - - - (4,017,334) - - (4,017,334)
Translation adjustment - - - - - - - (86) (86)
---------------------------------------------------------------------------------------------------------
Balance, December 31,
1999 1,855,154 $2,067,713 10,278,129 $10,278 $11,256,952 $(12,360,537) $ - $(134,349) $ 840,057
========================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
<PAGE> F-8
CHINA PEREGRINE FOOD CORPORATION
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1998 1999
-----------------------------
(restated)
<S> <S> <S>
Cash flows from operating activities:
Net loss $(2,461,829) $(4,017,334)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 46,709 175,261
Issuance of common stock for issuance cost - 6,000
Compensation for stock option - 515,863
Stock issuance in exchange for services 50,000 10,000
Investment loss in GFP 1,038,397 1,034,606
Investment loss in Meilijian 148,984 344,487
Increase (decrease) in cash from changes in:
Prepaid expenses 65,452 19,336
Accounts payable (1,768) (5,000)
Accrued liabilities 132,928 5,681
----------------------------
Net cash used in operating activities (981,129) (1,911,100)
----------------------------
Cash flows from investing activities
Purchase of equipment and machinery (5,109) (67,666)
Advances to GFP (527,779) (870.589)
Advance to Meilijian - (8,330)
Acquisition of investment in Advances to Meilijian (236,980) -
----------------------------
Net cash used in investing activities: (769,868) (946,585)
----------------------------
Cash flows from financing activities:
Repayment of note payable (31,790) (145,604)
Proceeds of Series C preferred stock 250,000 -
Proceeds of Series D preferred stock - 710,000
Proceeds of Series E preferred stock - 711,962
Proceeds from issuance of common stock 1,392,500 537,200
Proceeds from stock subscription - 235,000
Proceeds from warrants and options exercised 165,000 520,834
----------------------------
Net cash provided by financing activities 1,775,710 2,569,392
----------------------------
Net increase in cash and cash equivalents 24,713 (288,293)
Effect of changes in exchange rate on cash 28,414 (86)
Cash and cash equivalents, beginning of year 252,106 305,233
----------------------------
Cash and cash equivalents, end of year $ 305,233 $ 16,854
============================
Cash paid during the year:
Interest $ 11,707 $ 21,646
===========================
</TABLE>
<PAGE> F-9
Supplemental Disclosure of Non-Cash Activities:
In January 1998, the Company issued 50,000 shares of common stock at $1.00
per share in exchange for stock promotion services provided by a capital
service company.
On February 2, 1998, the Company issued 5,272 shares of common stock at
$2.25 per share to an individual in exchange for his services in connection
with the furnishing of the Company's corporate office.
On February 19, 1998 the Company issued 120,000 shares of common stock at
$1.00 per share to Amer-China Partners, Limited (ACPL) pursuant to a signed
agreement dated October 1, 1997 to acquire all of ACPL's interest and
rights (2.4%) in and to the Green Food Peregrine Children's Food Co. Ltd.
On May 2, 1998 as part of a Rule 506 Regulation D offering, the Company
issued 2,000 shares of common stock at $2.50 per share in exchange for
accounting services provided by two existing shareholders.
On August 8, 1998 the Company issued 1,531,685 shares of common stock at
$1.00 per share as consideration for 52% of American Flavor China's all
interest in and rights to Hangzhou Meilijian Dairy Products Co. Ltd.
On December 29, 1998, the Company sold 50,000 shares of Series C preferred
stock to an institutional investor at $3.00 per share with 450,000 warrants
attached at an exercise price of $1.00 per shares expiring at April 30,
1999. Accordingly, the Company recorded a stock subscription of $135,000,
net of expense of $15,000 as of December 31, 1998. The Company received
the proceeds of $135,000 on January 4, 1999.
In October 1998, the Board of Directors of the Company decided to reduce
the exercise price of warrants issued during the Rule 504, Regulation D
offering in 1997 from $5.00 to $1.00. Subsequently, certain holders of
265,000 warrants exercised their warrants at $1.00 per share. The Company
issued 165,000 shares of common stock in December and recorded $100,000 of
stock subscribed as of December 31, 1998, which has been fully collected in
February 1999.
An institutional holder of Preferred Stock Series C converted 27,938 shares
into 93,959 shares of common stock from January 4, 1999 through to February
23, 1999.
An institutional holder of Preferred Stock Series C converted a total of
50,000 shares of Preferred Stock Series C into 150,000 shares of common
stock on February 18, 1999 and February 19, 1999, respectively, (25,000
shares per each conversion)
During March 1999 the Company issued 3,500 shares of Preferred Stock Series
D at $10 per share to pay the relevant finder's fee for the first tranche
of 50,000 shares of Preferred Stock Series D.
During April 1999, the Company issued 1,750 shares of Preferred Stock
Series D at $10 per share to pay the relevant finder's fee for the second
tranche of 25,000 shares of Preferred Stock Series D.
<PAGE> F-10
During June 1999, the Company issued 1,999 shares of common stock at $1 per
share in exchange for $2,000 of consulting fees and 4,084 shares of common
stock at approximately $1.47 of market price in exchange for $6,000 of
consulting fees with the same consulting service provider.
During June 1999, the Company signed stock option agreements with five non-
employees, who had provided bookkeeping, research and organization services
to the Company, for a total of 55,000 restrictive shares of common stock.
These option agreements contain an exercise price of $1 per share and
expire in five years. Accordingly, the Company recognized non-employee
compensation cost of $48,563.
During July 1999, an institutional holder of Preferred Stock Series C
converted 7,673 shares into 20,000 shares of common stock.
During July 1999, four holders of Preferred Stock Series E converted 60,000
shares into 104,896 shares of common stock.
During August 1999, the Company issued 1,082 shares of common stock at a
market price of $1.85 per share in exchange for $2,000 of consulting fees
and 1,274 shares of common stock at a market price of $1.57 per share in
exchange for a further $2,000 of consulting fees with the same service
provider.
Four accredited and sophisticated investors converted a total of 50,000
shares of Preferred Stock Series E into 89,444 shares of common stock on
August 3, 1999 (40,000 shares), and August 23, 1999 (10,000 shares),
respectively.
During October 1999, an institutional holder of Preferred Stock Series C
converted 6,961 shares into 30,000 shares of common stock.
During October 1999, four holders of Preferred Stock Series E converted
220,000 shares into 440,000 shares of common stock.
During November 1999, an institutional holder of Preferred Stock Series C
converted 25,858 shares into 134,000 shares of common stock.
See accompanying summary of accounting policies and notes to
financial statements.
<PAGE> F-11
CHINA PEREGRINE FOOD CORPORATION
SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation and Restatement
China Peregrine Food Corporation (formerly Shakespeare Holding, Inc.) (the
Company) was incorporated under the laws of the State of Delaware on April
26, 1996. Shakespeare Holdings, Inc. was a shell company without any
substantial assets and operating activities until it merged with China
Peregrine Enterprises, Ltd. in March, 1997 and the Company changed to its
current name.
In February, 1997, the Company issued 25,000 shares of common stock to
acquire a 100% equity interest in Manor Products Corp. (Manor), a Delaware
company, established on January 26, 1996. Manor was a shell company with
331 shareholders.
On March 5, 1997, the Company issued 1,040,000 shares of its common stock
in exchange for a 100% equity interest in China Peregrine Enterprise,
Limited (CPEL). CPEL was a Texas limited partnership, which was created
for the sole purpose of controlling the operation of a joint venture in
Shanghai, China known as Green Food Peregrine Children's Food Co. Ltd.
Green Food Peregrine Children's Food Co. Ltd. (GFP) is a foreign investment
equity joint venture with registered capital of US$5 million and
established under the law of People's Republic of China on July 3, 1993.
The Company accounted for 67.6%, China National Green Food Corporation
accounted for 30%, and Amer-China, an Illinois limited partnership,
accounted for 2.4% of the GFP's equity interest as of December 31, 1997.
In February 1998, the company acquired the 2.4% of equity interest owned by
Amer-China in GFP in exchange for 120,000 shares of the Company's common
stock at $1.00 per share. On May 2, 1998, the Company approved and ratified
an agreement with the China National Green Food Corporation to satisfy the
need for additional capital for GFP by the contribution of $1,500,000 by
the Company over the next 18 months. This contribution will constitute an
increase in the registered capital in GFP attributed to the Company and a
commensurate increase in the equity holding of the Company in GFP from 70%
(after the approval of the Company's acquisition of ACPL's equity interest)
to 76.92%.
On June 18, 1998, the Company entered into a definitive agreement with
American Flavor China, Inc. a U.S. based entity to acquire its 52% equity
interest in Hangzhou Meilijian Dairy Products, Co. Ltd. (HMDP). The
acquisition transaction was effective on August 1, 1998. The terms of this
acquisition are as follows: 1) to assume $285,637 of debt of American
Flavor China, Inc., 2) to pay cash of $210,000, and 3) to issue 1,531,685
shares of the Company's common stock at $1 per share. As a result of this
acquisition transaction, the Company recognized goodwill of $319,741, which
will be amortized over a period of five years on a straight-line basis.
The Company's financial statements for the year ended December 31, 1998
have been restated. Prior financial statements were prepared on a
consolidation basis whereby the Company consolidated GFP and Meilijian.
Subsequent to issuing the 1998 financial statements the Company agreed with
the SEC's position that, despite its ownership of more than 50% equity
interest in each of these entities, the Company did not control these
entities due to the influence of the Chinese government owned minority
shareholders. As such, the Company agreed that the equity method should be
used to account for the Company's investment in these foreign subsidiaries.
The restatement did not have an impact on the previously reported net loss
for 1998 and shareholders' equity at December 31, 1998. The financial
statements for the year ended December 31, 1999 were prepared based on the
equity method. On January 3, 2000, the Company commenced to terminate its
interest in GFP. Accordingly, the Company wrote off its investment in and
advance to GFP as of December 31, 1999.
<PAGE> F-12
As shown in the accompanying financial statements, the Company has suffered
operating losses since inception and has an accumulated deficit of $7,385,026
and negative working capital at December 31, 1999. Management plans to
improve gross profit margins in its Chinese joint venture and obtain
additional financing. While there is no assurance that funding will be
available or that the Company will be able to improve its margins, the
Company is continuing to actively seek equity and/or debt financing. No
assurances can be given that the Company will be successful in carrying out
its plans. See Subsequent Events for fund raising details at Note 9.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Furniture and Fixtures
Furniture and fixtures are stated at cost. Depreciation is computed
primarily utilizing the straight-line method over a period of five years.
Maintenance, repairs and minor renewals are charged directly to expenses as
incurred. Additions and betterment to property and equipment are
capitalized. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the accounts and any resulting gain
or loss is included in the statement of income.
Goodwill
Goodwill represents the excess of acquisition cost over the net assets
acquired in business combinations in 1998. Goodwill is amortized on a
straight line basis over five years.
Periodically, the Company reviews the recoverability of goodwill as
required by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." The measurement of
possible impairment is based primarily on the undiscounted future operating
cash flows without interest charges of the acquired entity over the
remaining amortization period. Based upon its most recent analysis, the
Company believes that no material impairment exists at December 31, 1998.
The assessed recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved. The amortization expense of
$26,645 and $63,948 was incurred for the years ended December 31, 1998 and
1999, respectively.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenue and expenses during the
reporting period. Among the more significant estimates included in these
financial statements are the estimated allowance for doubtful accounts
receivable and the deferred income tax asset allowance. Actual results
could differ from those estimates.
<PAGE> F-13
Fair Value of Financial Instruments
The carrying amount of cash, accrued liabilities and notes payable are
reasonable estimates of their fair value because of the short maturity of
these items. The carrying amounts of the Company's notes payable
approximate fair value because the interest rates on these instruments are
similar to the debt with the same maturity.
Income Taxes
The Company accounts for income taxes using the liability method, which
requires an entity to recognize deferred tax liabilities and assets.
Deferred income taxes are recognized based on the differences between the
tax bases of assets and liabilities and their reported amounts in the
financial statements which will result in taxable or deductible amounts in
future years. Further, the effects of enacted tax laws or rate changes are
included as part of deferred tax expenses or benefits in the period that
covers the enactment date. A valuation allowance is recognized if it is
more likely than not that some portion, or all of, a deferred tax asset
will not be realized.
Accounting for the Impairment of Long Lived Assets and of the long-lived
Assets to Be Disposed of
Statement of the Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for the Long-Lived Assets to be
Disposed Of" (SFAS 121) establishes new guidelines regarding when
impairment losses on long-lived assets, which include plant and equipment,
and certain identifiable intangible assets, should be recognized and how
impairment losses should be measured. The Company has adopted this
accounting standard and its effects on the financial position and the
results of operations were immaterial.
Earnings (Loss) Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). The
statement replaces the calculation of primary and fully diluted earnings
(loss) per share with basic and diluted earnings (loss) per share. Basic
earnings (loss) per share includes no dilution and is computed by dividing
income (loss) available to common shareholders by the weighted average
number of shares outstanding during the period. Diluted earnings (loss)
per share reflects the potential dilution of securities that could share in
the earnings of an entity, similar to fully diluted earnings (loss) per
share.
For the years ended December 31, 1998 and 1999, total stock options and
stock warrants of 4,945,867 and 4,263,533 were not included in the
computation of diluted earnings per share because their effect was
antidilutive.
Stock-based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation" (SFAS No. 123). The Company
adopts the intrinsic value method of accounting for employee stock options
and disclose the pro forma impact on net income and earnings per share as
if the fair value based method had been applied. For equity instruments,
including stock options issued to non-employee, including directors, the
fair value of the equity instruments or the fair value of the consideration
received, whichever is more readily determinable, is used to determine the
value of services or goods received and the corresponding charge to
operations.
<PAGE> F-14
Comprehensive Income (Loss)
During the year ended January 1, 1997 the Company adopted Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income,"
("SFAS 130") issued by the FASB is effective for financial statements with
fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and presentation of comprehensive income (loss) and
its components in a full set of general-purpose financial statements. The
Company has chosen to report comprehensive income (loss) in the statements
of operations. Comprehensive income (loss) is comprised of net income and
all changes to stockholders' equity except those due to investments by
owners and distributions to owners. Adoption of SFAS 130 did not have a
material impact on the Company's financial position or results of
operations.
New Accounting Standards Not Yet Adopted
Statement of Financial Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) requires companies to
recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative
not designated as a hedging instrument, the gain or loss is recognized in
income in the period of change. SFAS No. 133 was originally to be
effective for fiscal years beginning after June 15, 1999. SFAS No. 137 has
deferred the effective date of SFAS 133 to all fiscal quarters of fiscal
years beginning after June 15, 2000. Historically, the Company has not
entered into derivatives contracts either to hedge existing risks or for
speculative purposes. Accordingly, the Company does not expect adoption of
the new standard to affect its financial statements.
Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the 1998 presentation.
<PAGE> F-15
CHINA PEREGRINE FOOD CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1. Investment in and Advance to GFP
Investment in and advance to GFP consists of:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
--------------------------
<S> <C> <C>
Investment in GFP $ 3,500,000 $ 3,500,000
Advance to GFP 527,779 1,398,368
Equity interest in GFP's accumulated deficit (3,863,762) (4,898,368)
--------------------------
Investment in and advance to GFP $ 164,017 $ -
==========================
</TABLE>
From the inception of GFP, the Company recognized the corresponding GFP's
comprehensive loss on its own book. The Company advanced to GFP
approximately $527,779 in 1998 and approximately $870,529 in 1999,
respectively. The Company picked up 70% of total loss in GFP in 1998,
which was $972,062. The Company also wrote off the goodwill of $94,533,
which resulted from the acquisition of 2.4% of equity interest in GFP in
1998. In later 1999, GFP substantially stopped its operation and the
Company decided to terminate this joint venture. Accordingly, the Company
wrote off the entire balance of investment in and advance to GFP as of
December 31, 1999.
Note 2. Investment in and Advance to Meilijian
Investment in and advance to Meilijian consists of:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
--------------------------
<S> <C> <C>
Investment in Meilijian $ 2,731,831 $ 2,731,831
Advance to Meilijian 188,207 196,537
Equity interest in Meilijian's accumulated
deficit and comprehensive loss (1,337,460) (1,681,946)
--------------------------
Investment in and advance to Meilijian $ 1,582,578 $ 1,246,422
==========================
</TABLE>
The Company acquired the relevant assets, on August 1, 1998, through the
acquisition transaction with America Flavor China, Inc. as follows:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Investment in Meilijian $2,652,000
Appropriated earnings 79,831
Accumulated deficit (807,853)
Translation adjustment (380,624)
Advance to Meilijian 188,207
</TABLE>
The Company exchanged the relevant consideration with America Flavor China,
Inc. See the details in Basis of Presentation. The Company also paid
$26,980 for due diligence service, which consisted of a part of total
consideration given for this acquisition transaction. In the period of
five-month ended December 31, 1998, the Company recognized a loss in
investment in Meilijian of $149,198, which were the 52% of loss for the
five months in 1998. Accordingly, for the year ended December 31, 1999,
the Company picked up a loss in investment in Meilijian of $344,401.
<PAGE> F-16
Note 3. Note Payable
During the process of acquiring from American Flavor China, Inc. the 52% of
equity interest in and to Meilijian, the Company issued a promissory note
to assume the American Flavor's debt owed to a supplier. The face value of
that unsecured note was $282,637 at an interest rate of 10.5% per annum.
The note has a monthly installment payment of $7,250 with 23 payments and a
balloon payment of $159,862 on July 15, 2000. The note has a late charge
article that the Company will be charged 3% of overdue principal and
interest if the note holder does not receive the payment within 15 days of
the monthly payment due date. As of December 31, 1999, the remaining
balance is $192,741.
On January 1, 1999, the Company entered into a license agreement (the
Agreement) with a third party for the right to print cartoon characters, as
defined in the Agreement, on its products. The Company agreed to pay 3%
royalty fee of net invoiced price of each licensed article and a guaranteed
consideration of $300,000 of which $45,000 was paid at inception of the
Agreement, and the balance will be paid by 10 installments of $21,250 each
quarter starting on September 30, 1999 and a balloon payment of $42,500 on
or before March 31, 2002. The Company recorded license right of $300,000,
amortized over a period of three years.
The Company recorded the $300,000 as note payable and the remaining balance
as of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Total Long-Term Note Payable $212,500
Less Current Portion 85,000
--------
Long-Term Note Payable $127,500
========
</TABLE>
Note 4. Related Party Transactions
The Company advanced $527,779 in 1998 and $870,529 in 1999 to GFP,
respectively, in accordance with the decision made in 1998 to increase
$1,500,000 in the registered capital in GFP. However, the increase in
registered capital was not approved by Chinese government agency as of
December 31, 1999.
The Company advanced $8,330 to Meilijian in 1999.
Note 5. Income Taxes
The Company is subject to Federal income tax. As the Company experienced
operating losses for the years of 1998 and 1999, no income tax provision
was provided for 1998 and 1999, respectively.
The Company has gross deferred tax assets of approximately $702,000 and
$1,439,000 at December 31, 1998 and 1999, respectively, relating
principally to tax effects of net operating loss carryforwards. In
assessing the recoverability of deferred tax assets, management considers
whether it is more likely than not that the assets will be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers projected
future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable loss and
projections for future taxable income over the periods in which the
deferred tax items are recognizable for tax reporting purposes, it is more
likely than not the Company will not realize the benefits of these differences
at December 31, 1998 and 1999. As such, management has recorded a
valuation allowance for the full amount of deferred tax assets at December
31, 1998 and 1999.
<PAGE> F-17
At December 31, 1999, the Company has available net operating losses of
approximately $4,233,000 for federal income tax purpose, to offset future
taxable income, if any, and expire at various dates through the year 2014
for federal income tax. However, the utilization of net operating losses
may be subject to certain limitations as prescribed by Section 382 of the
Internal Revenue Code.
Note 6. Commitments and Contingencies
Commitments
The Company leases office space at its corporate office in Florida under
operating leases expiring in February, 2004.
Future minimum rental payments required under operating leases as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Years ending December 31, Amount
------------------------- ------
<S> <C>
2000 $ 43,042
2001 45,194
2002 47,453
2003 49,826
--------
$185,515
========
</TABLE>
Rental expense for the years ended December 31, 1998 and 1999 was
approximately $66,724 and $42,000, respectively.
In January 1999, Hangzhon United Dairy Company contributed $289,073 worth of
plant and equipment to Meilijian which was recorded in Meilijian's book as
paid in capital. The Company has agreed to contribute approximately
additional $300,000 capital in cash. As of February 25, 2000 the Company has
not paid the $300,000.
Note 7. Shareholders' Equity
1998
On January 15, 1998, the Company issued 50,000 shares of common stock at
$1.00 per share in exchange for stock promotion services provided by a
capital service company.
On February 2, 1998, the Company issued 5,272 shares of common stock at
$2.25 per share to an individual in exchange for his services in connection
with the furnishing of the Company's corporate office.
On May 2, 1998, the Company issued 557,000 units (each unit composed of one
share of common stock and one warrant to purchase one share of common
stock) at a price of $2.50 per unit, pursuant to a private offering in
accordance with the exemption provided in Rule 506, Regulation D. The net
proceeds of this offering were $1,387,500. Among the 557,000 shares
issued, 2,000 shares valued at $5,000 were issued in exchange for
accounting service. The holders of such warrants are entitled to purchase,
from time to time, up to 557,000 shares of common stock, par value $0.001
per share, at an exercise price of $1.00 per share, at any time after June
30, 1998 and through and including June 30, 2003.
<PAGE> F-18
On February 19, 1998, the Company issued 120,000 shares of common stock at
a price of $1.00 per share to Amer-China Partners, Limited (ACPL) pursuant
to a signed agreement dated October 1, 1997 to acquire ACPL's entire
interest and right (2.4%) in and to the Green Food Peregrine Children's
Food Co. Ltd.
On July 31, 1998, the Company issued 1,531,685 shares of common stock to
American Flavor China, Inc. to acquire its 52% of equity interest in and to
Hangzhou Meilijian Dairy Products Co. Ltd. at $1.00 per share.
In October, 1998, the Board of Directors of the Company decided to reduce
the exercise price of warrants issued during the Rule 504, Regulation D
offering in 1997 from $5.00 to $1.00. Subsequently, certain holders of
265,000 warrants exercised their warrants at $1.00 per share. The Company
issued 165,000 shares of common stock in December and recorded $100,000 of
stock subscribed as of December 31, 1998, which was fully collected in
February 1999.
In November 19, 1998 the Company conducted a Rule 504 Regulation D offering
to sell Series C preferred stock to two institutional investors in order
for the Company to raise funds to increase its equity capital position in
GFP in 1999. One institutional investor purchased on November 19, 1998
83,334 shares of Series C preferred stock at $3.00 per share with 83,334
warrants attached at an exercise price of $1.00 per share. The other
institutional investor purchased on December 29, 1998 another 50,000 shares
of Series C preferred stock at $3.00 per share with 450,000 warrants
attached at an exercise price of $1.00 per share and the relevant proceeds
were received on January 4, 1999. The total net proceeds of the Rule 504
offering was $385,000, net of offering expense of approximately $15,000.
Each share of Series C preferred stock has the following features: 1)
stated value of $3 per share, 2) dividend accrued at 8% per annum and
payable in cash of common stock at the Company's option and upon
conversion, at the option of the holder, or redemption, 3) no voting right,
4) convertible into common stock, and 5) redeemable at a price up to 110%
of the stated value at the Company's option.
The conversion feature is specified in the offering memorandum as follows:
the number of shares of common stock issuable upon conversion of each share
of Series C preferred stock shall equal (i) the sum of (A) the stated value
per share and (B) at the holder's election accrued and unpaid dividends on
such share, divided by (ii) the conversion price. The conversion price for
each share of Series C convertible preferred stock in effect on any
conversion date shall be the lesser of (a) 75% of the average per share
market price of 10 trading days immediately before the date of the
applicable holder conversion notice or (b) $3.00 per share, provided that,
during the period from November 1, 1998 through February 29, 1999, the
conversion price shall not be less than $1.00 for each share of underlying
common stock (the price floor), which price floor shall be applicable to
the aggregate number of issued and outstanding Series C preferred stock
held by any one holder, as follows: 100% during November 1998; 75% during
December 1998; 50% during January 1999; 25% during February 1999; and no
applicable price floor thereafter.
On November 19, 1998, the Company recognized a deemed dividend $83,334
because of the built-in beneficial conversion feature which allows each
share of preferred stock to be converted into each share of common stock at
75% of market price at issuing date. As a result of implementing the
accrued dividend policy for the Series C preferred stock, the Company
recognized $2,217 of dividends payable to the 83,334 shares of Series C
preferred stock.
<PAGE> F-19
Three institutional investors purchased 16,250 shares, 16,250 shares, and
17,500 shares of Series D preferred stock at $10.00 per unit.
Each share of Series D preferred stock entitles the holder to receive or
accrue dividends at the rate of 6% simple interest per annum, which is
payable in cash or common stock quarterly at the Company's option and to
convert into common stock. The payment of dividends shall be made first to
the Series D Convertible preferred stockholders before dividends or other
distributions are made on any common stock, Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock. The Series D
Preferred Stock has no voting rights and is redeemable, at the Company's
option, at a price equal to the greater of (a) 120% of the stated value
plus accrued dividends or (b) the closing bid price of common stock on the
date the notice of redemption is given by the Company.
The number of shares of common stock issuable upon conversion of each share
of Series D Preferred Stock shall equal (i) the sum of (A) the Stated Value
per share and (B) at the holder's election accrued and unpaid dividends on
such share, divided by (ii) the conversion price. The conversion price
shall be equal to the lessor of: (i) 100% of the average of the closing bid
price of the Company's common stock for the trading day immediately
preceding the date of issuance of the shares of Series D Preferred Stock to
the holders, or (ii) 80% of the average of the three lowest closing bid
prices for the 22 trading days immediately preceding the conversion of the
respective shares of Series D Preferred Stock.
The aggregate gross proceeds from selling these 50,000 units was $500,000,
which the Company received on March 10, 1999, net of expense of $30,000.
In addition, the three institutional investors have committed to invest
additional $500,000, which will occur upon the completion of certain 1933
Act registration events as spelled out in the Subscription Agreement. The
finder fees for this fund raising exercise were paid in the form of 3,500
shares of Series D Convertible preferred stock and 50,000 warrants to
purchase the Company's common stock at an exercise price of $2.96 expiring
at March 9, 2002.
1999
An institutional holder of Preferred Stock Series C converted 27,938 shares
into 93,959 shares of common stock from January 4, 1999 through to February
23, 1999.
In January 1999 the Company collected net proceeds of $135,000, net of
issuance expenses of $15,000 and issued 50,000 shares of Preferred stock
Series C accordingly.
An institutional holder of Preferred Stock Series C converted a total of
50,000 shares of Preferred Stock Series C into 150,000 shares of common
stock on February 18, 1999 and February 19, 1999, respectively, (25,000
shares per each conversion).
In March 1999 the Company collected proceeds of $30,000 which represented
30,000 warrants exercised at a price of $1.00 per share and issued 30,000
shares of common stock accordingly. These warrants were issued in November
1998, as part of the Company's Rule 504 offering of its Series C
Convertible Preferred Stock.
From January 1 to March 31, 1999 the Company conducted a private sale of
its common stock and received total proceeds of $415,000 through issuing
415,000 share of common stock. Among $415,000 received, $105,000 were paid
back to investors per their request for cancellation in April, 1999.
Accordingly, 105,000 shares of common stock were cancelled.
<PAGE> F-20
In March 1999, the Company conducted a Rule 506, Regulation D offering to
issue 100,000 shares of its Series D Convertible Preferred Stock, with
possible total gross proceeds of $1,000,000. The Company also issued 3,500
shares of the Series D Preferred Stock at a price of $10.00 per share to
pay a finder's fee to a financial institution. On March 9, 1999, the
Company issued 50,000 shares of the Series D Preferred Stock. The net
proceeds of these 50,000 shares of Preferred Stock Series D was $470,000,
net of $15,000 placement fee and $15,000 of legal expense. In line with the
conversion feature embedded in Series D Preferred Stock, the Company
recognized a total of $677,502 of deemed dividends for the period from the
date of issuance to the first date that conversion could occur.
In April 1999, the Company issued 25,000 shares of Preferred Stock Series D
at $10 per share. The net proceeds of this issuance were $240,000, net of
$7,500 of placement fee and $2,500 legal expense. The Company also issued
1,750 shares of Series D Preferred Stock in exchange for a finder's fee at
$10 per share. In line with the conversion feature embedded in Series D
Preferred Stock, the Company recognized $106,485 of deemed dividends for
the second tranche of 26,750 shares of Series D in the second quarter.
During April, the Company issued 53,334 shares of common stock at $1 per
share as the result of exercising 53,334 warrants related to the previous
83,334 shares of Series C Preferred Stock.
During May and June, the Company conducted a private sale of its common
stock and received total proceeds of $262,200 and issued 262,200 shares of
common stock.
During June 1999, the Company issued 1,999 shares of its common stock at a
market price of approximately $1 per share in exchange of $2,000 consulting
fee and 4,084 shares of common stock at a market price of approximate $1.47
per share in exchange for $6,000 of consulting fee with the same consulting
service provider.
During June 1999, the Company signed stock option agreements with five non-
employee people, who had provided bookkeeping, research and organization
services to the Company, for a total of 55,000 restrictive shares of common
stock. These option agreements contain an exercise price of $1 per share
and expire in five years. Accordingly, the Company recognized non-employee
compensation cost of $48,563.
During July 1999, an institutional holder of Preferred Stock Series C
converted 7,672 shares into 20,000 shares of common stock.
During July, August and September 1999, the Company conducted a private
sale of its convertible Preferred Stock Series E and issued 330,000 shares
in five tranches to investors at $2.50 per share. The net proceeds of this
issuance were $711,962 net of $113,038 of finder's fee, legal and printing
expenses. In line with the conversion feature embedded in Series E
Preferred Stock, the Company recognized $62,552 of deemed dividends for the
first tranche, $26,250 and $22,500 of deemed dividends for the second and
third tranche respectively. The deemed dividends were not applicable for
the fourth and fifth tranche respectively because the floor price of $1.25
was higher than the market price on the date of issuance for each tranche.
<PAGE> F-21
The Series E Preferred Stock has the following features: The holders of
Series E Convertible Preferred stock shall be entitled to convert such
stock into the Company's common stock at any time subsequent to the
issuance of such stock, subject to a one year "lockup" agreement entered
into by the holders of such stock. The number of shares of common stock
issuable upon conversion of each share of Series E Preferred Stock shall
equal (i) the sum of (A) the Stated Value per share and (B) at the holder's
election accrued and unpaid dividends on such share, divided by (ii) the
conversion price. The conversion price shall be equal to the greater of:
(i) $1.25 per share of common stock or (ii) 80% of the average of the
closing bid prices for the 5 trading days immediately preceding the
conversion of the respective shares of Series E Preferred Stock, but in no
event shall the conversion price be greater than $2.50 per share of common
stock.
During July 1999, four accredited and sophisticated holders of Preferred
Stock Series E converted 60,000 shares into 104,896 shares of common stock.
During August 1999, the Company issued 1,082 shares of common stock at a
market price of $1.85 per share in exchange for $2,000 of consulting fees
and 1,274 shares of common stock at a market price of approximately $1.57
in exchange for a further $2,000 of consulting fees with the same service
provider.
Four accredited and sophisticated investors converted a total of 50,000
shares of Preferred Stock Series E into 89,444 shares of common stock on
August 3, 1999 (40,000 shares), and August 23, 1999 (10,000 shares),
respectively.
During August the Company conducted a private sale of its common stock and
received total proceeds of $65,000 and issued 65,000 shares of common
stock.
During September 1999, the Company issued 1,163 shares of common stock, at
a market price of $1.72 per share, in exchange for $2,000 of consulting fee
to a service provider.
During October 1999, sixteen investors holding Convertible Preferred Stock
Series E, converted a total of 220,000 shares of Preferred Stock Series E
into 440,000 shares of common stock.
An institutional holder of Preferred Stock Series C converted a total of
6,961 shares of Preferred Stock Series C into 30,000 shares of common stock
on October 20, 1999.
Sixteen shareholder of Preferred Stock Series E converted a total 220,000
shares of Preferred Stock Series E into 440,000 shares of common stock on
October 29, 1999 (180,000 shares ) and on November 24, 1999 (40,000
shares).
During October 1999, the Company signed stock option agreements with three
non-employees who are to provide advisory and consulting services to the
Company, for a total of 1,016,000 restrictive shares of common stock.
These option agreements contain an exercise price of $0.50 per share for
516,000 options and an exercise price of $0.75 per share for 500,000
options. Accordingly, the Company has recognized a non-employee
compensation cost of $467,300. 250,000 options were exercised at $0.50 per
option on November 11, 1999, a further 250,000 were exercised on November
18, 1999 at $0.50 per option and 266,000 were exercised on November 23,
1999 at $0.75 per option of which 16,000 shares were in exchange for
$12,000 of legal fee.
On November 26, 1999 an institutional holder of Preferred Stock Series C
converted a total of 25,858 shares of Preferred Stock Series C into 134,000
shares of common stock.
During November 1999, the Company issued 1,713 shares of common stock, at a
market price of $1.15 per share, in exchange for $2,000 of consulting fee
to a service provider.
<PAGE> F-22
Note 8. Stock Warrants and Options
In 1997, the Company issued warrants for 975,000 shares of common stock, at
an exercise price of $5.00 per share, as part of the units sold in the Rule
504, Regulation D limited public offering. These warrants may be exercised
at any time after May 31, 1998, and from time to time thereafter through
and including March 31, 1999. The Company also changed the exercise price
for the 975,000 warrants issued in 1997 from $5.00 to $1.00. 165,000
warrants were exercised at $1.00 per share in December 1998. The remaining
810,000 warrants expired on March 31, 1999.
During 1998 557,000 warrants for shares of common stock relating to a Rule
506 Regulation D offering were issued at an exercise price of $1.00 per
share. These warrants had not been exercised as of December 31, 1999 and
expire on June 30, 2003.
During 1998, 553,334 warrants relating to series C Preferred Stock were
issued. 83,334 warrants for shares of common stock were exercised on March
12, 1999 (30,000) and May 19, 1999 (53,334) respectively at an exercise
price $1.00 per share. The remaining 450,000 warrants expired on April 30,
1999.
During 1999 125,000 warrants relating to series D Preferred Stock were
issued at an exercise price of $2.96 per share. These warrants expire
during 2002, and had not been exercised as of December 31, 1999.
During 1999 231,000 warrants relating to series E Preferred Stock were
issued. 33,000 of these warrants were issued at an exercise price of $2.75
per share, 165,000 were issued at an exercise price of $3.00 per share and
33,000 were issued at an exercise price of $5.00 per share. These options
have expiration dates ranging from July 2001 through September 2004. None
of these options had been exercised as of December 31, 1999.
During June 1999, the Company signed stock option agreements with five non-
employees, who had provided bookkeeping, research and organization services
to the Company, for a total of 55,000 restrictive shares of common stock
pursuant to Section 4(2) of the 1933 Act. These option agreements contain
an exercise price of $1 per share and expire in five years. None of these
options had been exercised by December 31, 1999. Using the Black Scholes
option pricing model the Company determined that the fair value of each
option granted was approximately $0.88. Accordingly, pursuant to SFAS No.
123 the Company recognized non-employee compensation cost of $48,563.
The assumption used in the Black Scholes option pricing model in 1999 were
as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1999
-----------------
<S> <C>
Discount rate - bond yield rate 6.00%
Volatility 42.65%
Expected life 2 years
Expected dividend yield -
</TABLE>
During October 1999, the Company signed stock option agreements with three
non-employees who are to provide advisory and consulting services to the
Company, for a total of 1,016,000 restrictive shares of common stock
pursuant to Section 4(2) of the 1933 Act. These option agreements contain
an exercise price of $0.50 per share for 516,000 options and an exercise
price of $0.75 per share for 500,000 options. These option agreements
expire on October 17, 2000. In November 1999 766,000 options were
exercised.
<PAGE> F-23
A further 100,000 options were exercised in January 2000. Using the Black
Scholes option pricing model the Company determined that the fair value of
each option granted was approximately $0.46. Accordingly, pursuant to SFAS
123 the Company recognized a non-employee compensation cost of $467,300.
The assumption used in the Black Scholes option pricing model in 1999 were
as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1999
-----------------
<S> <C>
Discount rate - bond yield rate 5.45%
Volatility 59%
Expected life 1 year
Expected dividend yield -
</TABLE>
These warrants and stock option agreements are summarized as follows:
<TABLE>
<CAPTION>
Warrants/
Grant Options Exercise Vesting Expiration
Date Granted Price Period Date
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Warrants issued in Rule 504 Regulation D offering 5/31/97 975,000 $1.00 12 months 3/31/99
Warrants exercised 12/15/98 (165,000) 1.00 None
Warrants expired 3/31/99 (810,000) 1.00
Warrants issued in Rule 506, Regulation D offering 6/02/98 557,000 1.00 None 6/30/03
Warrants issued with Series C Preferred Stock 11/19/98 83,334 1.00 None 5/31/99
Warrants exercised 3/12/99 (30,000) 1.00 None
Warrants exercised 5/19/99 (53,334) 1.00
Warrants issued with Series C Preferred Stock 12/29/98 450,000 1.00 None 4/30/99
Warrants expired 4/30/99 (450,000) 1.00
Warrants issued with Series D Preferred Stock 3/09/99 100,000 2.96 None 3/08/02
Warrants issued with Series D Preferred Stock 4/23/99 25,000 2.96 None 4/22/02
Warrants issued with Series E Preferred Stock 7/23/99 50,000 3.00 None 7/22/01
Warrants issued with Series E Preferred Stock 7/23/99 10,000 2.75 None 7/22/04
Warrants issued with Series E Preferred Stock 7/23/99 10,000 5.00 None 7/22/02
Warrants issued with Series E Preferred Stock 8/16/99 15,000 3.00 None 8/15/01
Warrants issued with Series E Preferred Stock 8/16/99 3,000 2.75 None 8/15/04
Warrants issued with Series E Preferred Stock 8/16/99 3,000 5.00 None 8/15/02
Warrants issued with Series E Preferred Stock 9/01/99 30,000 3.00 None 8/31/01
Warrants issued with Series E Preferred Stock 9/01/99 6,000 2.75 None 8/31/04
Warrants issued with Series E Preferred Stock 9/01/99 6,000 5.00 None 8/31/02
Warrants issued with Series E Preferred Stock 9/14/99 20,000 3.00 None 9/13/01
Warrants issued with Series E Preferred Stock 9/14/99 4,000 2.75 None 9/13/04
Warrants issued with Series E Preferred Stock 9/14/99 4,000 5.00 None 9/13/02
Warrants issued with Series E Preferred Stock 9/27/99 50,000 3.00 None 9/26/01
Warrants issued with Series E Preferred Stock 9/27/99 10,000 2.75 None 9/26/04
Warrants issued with Series E Preferred Stock 9/27/99 10,000 5.00 None 9/26/02
---------
Total outstanding warrants 913,000
=========
<PAGE> F-24
Agreement One 4/29/97 1,005,533 $1.00 None 4/28/02
Agreement Two 4/30/97 2,000,000 1.00 None 4/29/02
Agreement Three 10/01/97 25,000 1.00 None 9/30/02
Agreement Four 10/01/97 15,000 1.00 None 9/30/02
Agreement Five 6/15/99 20,000 1.00 None 6/14/01
Agreement Six 6/15/99 20,000 1.00 None 6/14/01
Agreement Seven 6/15/99 5,000 1.00 None 6/14/01
Agreement Eight 6/15/99 5,000 1.00 None 6/14/01
Agreement Nine 6/15/99 5,000 1.00 None 6/14/01
Stock options pursuant to S-8 registration 10/06/99 500,000 0.50 None 10/17/00
Stock options pursuant to S-8 registration 10/06/99 516,000 0.75 None 10/17/00
Options exercised 11/16/99 (250,000) 0.50
Options exercised 11/18/99 (250,000) 0.50
Options exercised 11/23/99 (266,000) 0.75
---------
Total options outstanding at December 31, 1999 3,350,533
=========
</TABLE>
A summary of the status of the Company's stock options and warrants as of
December 31, 1998 and 1999 with changes during the years then ended are
presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
----------------------
<S> <C> <C>
Total warrants and options outstanding and exercisable
at January 1, 1998 4,020,533 $ 1.00
Warrants/options granted (165,000) $ 1.00
Warrants/options exercised 1,090,334 $ 1.00
---------------------
Total warrants and options outstanding and exercisable at
December 31, 1998 4,945,867 $ 1.00
Warrants/options granted 1,427,000 $ 1.27
Warrants/options exercised (849,334) $(0.63)
Warrants/options expired (1,260,000) $(1.00)
---------------------
Total warrants and options outstanding and exercisable at
December 31, 1999 4,263,533 $ 1.16
=====================
Weighted average fair value of options and warrants
granted during 1999 4,263,533 $ 1.16
=====================
</TABLE>
<PAGE> F-25
The following table summarizes information about stock options and warrants
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Warrants/Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.75 250,000 0.80 yrs. $0.75 250,000 $0.75
$1.00 3,100,533 2.32 yrs. $1.00 3,100,533 $1.00
$1.00 557,000 3.50 yrs. $1.00 557,000 $1.00
$2.75 33,000 4.66 yrs. $2.75 33,000 $2.75
$2.96 125,000 2.21 yrs. $2.96 125,000 $2.96
$3.00 165,000 1.66 yrs. $3.00 165,000 $3.00
$5.00 33,000 2.66 yrs. $5.00 33,000 $5.00
--------- ---------
4,263,533 2.38 yrs. $1.16 4,263,533 $1.16
========= =========
</TABLE>
Note 9. Subsequent Events
On February 1, 2000, the Company amended its Rule 506 offering with respect
to the Series D Preferred Stock originally offered on March 9, 1999 and
April 23, 1999, respectively. Pursuant to this amended offering, the
Company issued additional 50,000 shares of the Series D Preferred and
warrants for 1,300,000 shares of common stock to the existing holders of
the Company's Series D Preferred Stock. This amended offering resulted in
net proceeds of $490,000, net of $10,000 of legal and issuance expenses.
The Series D Preferred has a Stated Value of $10.00 per share and the same
conversion feature disclosed before. The warrants for 1,300,000 shares of
common stock have an exercise price of $0.625 per share and an expiration
date of January 31, 2003. In connection with this sale, the Company issued
175,000 shares of its common stock to such holders to compensate them for
the delay in registering the resale of the common stock underlying the
Series D Preferred and the warrants. These shares are valued at $0.75 per
share in terms of the market value on February 1, 2000 for the Company's
common stock.
On February 7, 2000, the Company signed agreements with two non-employees
in exchange for the graphic design and legal services provided by these two
professionals to the Company, to issue a total of 131,314 shares of common
stock pursuant to a 1933 Act Form S-8 registration statement which will be
filed by the Company. The shares to be issued for these agreements are
valued at $0.75 per share, which was the market value of the Company's
common stock on February 7, 2000, the execution date of the agreements.
The Company anticipates the filing of a Form S-8 with respect to these
shares prior to May 1, 2000.
<PAGE> F-26
On April 7, 2000, the Company closed a Rule 506, Regulation D exempt
offering for 150,000 shares of Series F Convertible Preferred Stock, having
a per share Stated Value of $10.00, and Warrants which entitle the holders
of the Series F Preferred to purchase an aggregate of 3,000,000 shares of
common stock. This offering resulted in net proceeds of $1,480,000, net of
$20,000 of legal and issuance expenses. Each Preferred share is
convertible to the common stock of the Company at a conversion price of
$0.50 per common share, based upon the Stated Value divided by conversion
price times the number of shares to be converted. The Series F Preferred
have no voting rights or redemption features and no dividends rights beyond
those attributable to the Company's common stock. The Warrants for
3,000,000 shares of common stock have an exercise price of $1.00 per share
and are exercisable immediately for a period of three years. The Company
can call 50% of Warrants if its common stock trades at 200% of the closing
price of $0.75 per share on April 7, 2000 for 10 consecutive trading days
and 100% of the Warrants if its common stock trades at 300% of the closing
price of $0.75 per share on April 7, 2000 for 10 consecutive trading days.
In addition, the Company issued a Warrant to a consultant in connection
with this transaction, which entitles the holder to purchase an aggregate
of 1,600,000 shares of common stock at an exercise price of $0.84 per
share. The Warrant is exercisable immediately for a period of three years
and has the same "call" provisions as the investor Warrants described
above. This entire transaction provides for total potential proceeds of
$5,844,000, based upon the issuance of a maximum of 7,600,000 shares of
common stock underlying the Series F Preferred and the Warrants, at an
average price per share of $0.77. The holders of the Preferred and the
Warrants have certain registration rights for the resale of the Company's
common stock underlying the Series F Convertible Preferred and the
warrants.
<PAGE> F-27
CHINA PREMIUM FOOD CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION - June 30, 2000
Item 1. Financial statements F-1
Condensed balance sheets as of F-1
June 30, 2000 (unaudited) and December 31, 1999
Condensed statements of operations F-2
(unaudited) for the period ended June 30, 2000 and 1999
Condensed statements of cash flows F-3
(unaudited) for the period ended June 30, 2000 and 1999
Notes to condensed financial statements (unaudited) F-4
<PAGE> F-i
CHINA PREMIUM FOOD CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(Audited) (Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,854 $ 1,161,327
Note Receivable - 253,631
Prepaid expenses and other current assets 18,196 82,292
--------------------------
Total current assets 35,050 1,497,250
Property, plant and equipment, net 131,264 126,793
Investment in and advances to Meilijian 1,264,422 1,159,969
Goodwill 229,148 197,174
Licensing agreement, net 214,286 221,429
Deposit 10,000 10,000
--------------------------
Total assets $ 1,866,170 $3,212,615
==========================
<PAGE> F-1
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of note payable 277,741 158,621
Accounts payable and accrued liabilities 250,833 106,892
Subscriptions in advance - 4,000
--------------------------
Total current liabilities 528,574 269,513
Dividend payable 370,039 236,490
Note payable, less current portion 127,500 191,250
--------------------------
Total liabilities 1,026,113 697,253
Shareholders' Equity:
Series A convertible preferred stock; par value
$0.001 per share, 500,000 shares authorized, 500,000
and 0 shares issued and outstanding at December 31,
1999 and June 30, 2000, respectively 500 -
Series B convertible, 9% cumulative, and redeemable
preferred stock; stated value $1.00 per share,
1,260,000 shares authorized, 1,260,000 and 242,559
shares issued and outstanding at December 31, 1999
and June 30, 2000, respectively 1,260,000 242,559
Series C convertible,8% cumulative and redeemable
preferred stock, stated value $3.00 per share , 14,904
and 0 shares issued and outstanding at December 31,
1999 and June 30, 2000, respectively 44,713 -
Series D convertible, 6% cumulative and redeemable
preferred Stock, stated value $10.00 per share,
76,250 and 105,000 shares issued and outstanding
at December 31, 1999 and June 30, 2000, respectively 762,500 1,040,000
Series F convertible, 6% cumulative and redeemable
preferred Stock, stated value $10.00 per share, 0
and 150,000 shares issued and outstanding at
December 31, 1999 and June 30, 2000, respectively - 1,480,000
Series G convertible, 7% cumulative and redeemable
preferred Stock, stated value $10.00 per share, 0
and 75,000 shares issued and outstanding at
December 31, 1999 and June 30, 2000, respectively - 675,000
Common stock; par value $0.001 per share, 20,000,000
shares authorized, 10,278,129 and 12,915,242 shares
issued and outstanding at December 31, 1999 and
June 30, 2000, respectively 10,278 12,915
Additional paid-in capital 11,256,952 14,544,111
Accumulated deficit (12,360,537) (15,344,972)
Accumulated other comprehensive loss - translation
adjustments (134,349) (134,251)
--------------------------
Total shareholders' equity 840,057 2,515,362
--------------------------
Total liabilities and shareholders' equity $ 1,866,170 $ 3,212,615
==========================
</TABLE>
See accompanying notes to financial statements.
<PAGE> F-2
CHINA PREMIUM FOOD CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 2000 1999 2000
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ - $ - $ - $ -
Cost of goods sold - - - -
-----------------------------------------------------------
Gross margin (loss) - - - -
General and administrative expense 670,387 808,814 1,183,039 1,493,997
-----------------------------------------------------------
Loss from operations (670,387) (808,814) (1,183,039) (1,493,997)
Other expense:
Interest expense, net (1,409) (3,425) (5,224) (8,334)
Loss on investment in GFP (204,100) - (607,604) -
Loss on investment in Meilijian (36,637) (39,218) (78,235) (86,550)
-----------------------------------------------------------
Loss before income taxes (912,533) (851,457) (1,874,102) (1,588,881)
Income taxes - -
-----------------------------------------------------------
Net loss (912,533) (851,457) (1,874,102) (1,588,881)
Dividends accrued for Series B preferred stock (28,350) (5,458) (56,700) (33,808)
Dividends accrued for Series C preferred stock (3,559) - (9,003) (883)
Dividends paid and accrued for Series D preferred stock (652,453) (191,574) (654,504) (532,105)
Dividends paid and accrued for Series F preferred stock - (663,431) - (663,431)
Dividends paid and accrued for Series G preferred stock - (165,327) - (165,327)
-----------------------------------------------------------
Net loss applicable to common shareholders $(1,596,895) $(1,877,247) $(2,594,309) $(2,984,435)
===========================================================
Weighted average number of common shares outstanding 8,408,301 11,475,848 8,206,039 11,011,151
===========================================================
Loss per share $ (0.19) $ (0.16) $ (0.32) $ (0.27)
===========================================================
Comprehensive loss and its components
consist of the following:
Net loss applicable to common stock $(1,596,895) $(1,877,247) $(2,594,309) $(2,984,435)
Foreign currency translation adjustment (4,268) 751 (5,635) 98
-----------------------------------------------------------
Comprehensive loss $(1,601,163) $(1,876,496) $(2,599,944) $(2,984,338)
===========================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> F-3
CHINA PREMIUM FOOD CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1999 2000
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,874,102) $(1,588,881)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 86,260 (87,640)
Issuance of stock for issuance cost 6,000 -
Compensation cost for stock option issued 48,563 -
Issuance of stock for consulting services 2,000 64,000
Issuance of stock for penalty expenses on Series D
preferred stock - 93,750
Loss on investment in GFP 607,604 -
Loss on investment in Meilijian 78,235 86,550
Increase (decrease) in cash from changes in:
Stock subscription receivable 235,000 -
Prepaid expenses (54,233) (64,096)
Deposits (5,000) -
Accounts payable and accrued liabilities 67,830 (45,455)
---------------------------
Net cash used in operating activities (801,843) (1,366,492)
---------------------------
Cash flows from investing activities
Advances to GFP (585,037) -
Advances to Meilijian (8,330) -
Notes receivable - (623,359)
Purchase of licensing agreement - (50,000)
Purchase of property and equipment (32,558) (10,837)
---------------------------
Net cash used in investing activities (625,925) (314,468)
---------------------------
Cash flows from financing activities
Proceeds of Series D Preferred stock 762,500 490,000
Proceeds of Section 4(2) private offering 472,199
Proceeds from stock warrants exercised 83,334
Repayment of note payable (70,722) (55,370)
Payment of finders' fees - (12,500)
Proceeds of Series F Preferred stock - 1,480,000
Proceeds of Series G Preferred stock - 675,000
Proceeds from exercise of stock options - 75,000
Proceeds from exercise of participation rights on Series E
preferred stock - 169,303
Proceeds from stock subscription - 4,000
---------------------------
Net cash provided by financing activities 1,247,311 2,825,433
---------------------------
Net increase (decrease) in cash and cash equivalents (180,457) 1,144,473
Cash and cash equivalents, beginning of period 305,233 16,854
---------------------------
Cash and cash equivalents, end of period $ 124,776 $ 1,161,327
===========================
Cash paid during the period:
Interest $ 10,528 $ 9,380
===========================
<PAGE> F-4
Supplemental disclosure of non-cash activities
Issuance of Series C preferred stock subscribed 135,000 -
Issuance of common stock subscribed 641,486 -
Licensing right acquired through assumption of note payable 300,000 -
Conversion of accrued services fees to common stock - 173,486
Accrued dividend 78,721 98,486
Conversion of Series A preferred stock to common stock - 500
Conversion of Series B preferred stock to common stock - 1,017,441
Conversion of Series C preferred stock to common stock 218,814 44,713
Conversion of Series D preferred stock to common stock - 212,500
Deemed dividend on Series D preferred stock - 500,000
Deemed dividend on Series F preferred stock - 642,181
Deemed dividend on Series G preferred stock - 164,015
Reversal of accrued dividends on preferred stock upon
conversion into common stock - 222,907
Effect of changes of exchange rate on investment in and
advances to GFP and Meilijian $ (5,632) $ 98
===========================
</TABLE>
See accompanying notes to financial statements.
<PAGE> F-5
CHINA PREMIUM FOOD CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000, respectively, is unaudited)
1. Presentation of Interim Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310
of regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. The accompanying unaudited financial
statements reflect all adjustments that, in the opinion of the management,
are considered necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. The
results of operations for such periods are not necessarily indicative of
the results expected for the full fiscal year or for any future period. The
accompanying financial statements should be read in conjunction with the
audited financial statements of the Company included in the Company's
Form 10-KSB for the year ended December 31, 1999.
China Peregrine Food Corporation (formerly Shakespeare Holding, Inc.) (the
Company) was incorporated under the laws of the State of Delaware on
April 26, 1996. Shakespeare Holdings, Inc. was a shell company without any
substantial assets and operating activities until it merged with China
Peregrine Enterprises, Ltd. in March, 1997 and the Company changed to China
Peregrine Food Corporation. On February 1, 2000, the Company changed its
name to China Premium Food Corporation.
The Company owns equity interests in two joint ventures in China, 70% in
Green Food Peregrine Children's Food Co. Ltd. (GFP) and 52% in Hangzhou
Meilijian Dairy Products, Co. Ltd.(Meilijian). On January 3, 2000, the
Company commenced procedures to terminate GFP in accordance with the GFP
Joint Venture contract and Articles of Association. Accordingly, the
Company wrote off its investment in and advance to GFP as of December 31,
1999.
The Company's financial statements for the quarter ended June 30, 1999 have
been restated based on equity method. Prior financial statements were
prepared on a consolidation basis whereby the Company consolidated GFP and
Meilijian. Subsequent to issuing the 1998 financial statements, the Company
agreed with SEC's position that, despite its ownership of more than 50%
equity interest in each of these entities, the Company did not control
these entities due to the influence of the Chinese government owned
minority shareholders. As such, the Company agreed that the equity method
should be used to account for the Company's investment in these foreign
subsidiaries. The restatement did not have an impact on the previously
reported net loss for the quarter ended June 30, 1999.
<PAGE> F-6
2. Equity Transactions
On January 27, 2000, the Company received $75,000 in cash for issuance of
100,000 shares of its common stock pursuant to the exercise of options
granted in October 1999 to three non-employees, who are to provide advisory
and consulting services to the Company. These option agreements provide for
the issuance of a total of 1,016,000 shares of common stock pursuant to an
S-8 registration statement, filed October 9, 1999. These options expire on
October 17, 2000. Prior to January 27, 2000, 766,000 options were
exercised.
On February 1, 2000, the Company amended its Rule 506 offering with respect
to the Series D Preferred Stock originally offered on March 9, 1999 and
April 23, 1999, respectively. Pursuant to this amended offering, the
Company issued additional 50,000 shares of the Series D Preferred Stock and
received $490,000 in cash, net of $10,000 of legal and issuance expenses.
The Series D Preferred Stock has a Stated Value of $10.00 per share and the
same conversion feature disclosed before. The Company also issued warrants
for 1,300,000 shares of common stock to the existing holders of the
Company's Series D Preferred Stock. The warrants for 1,300,000 shares of
common stock have an exercise price of $0.625 per share and an expiration
date of January 31, 2003.
In connection with this sale, the Company issued 125,000 shares of its
common stock to such holders to compensate them for the delay in
registering the resale of the common stock underlying the Series D
Preferred and the warrants, and 50,000 shares of common stock to a finder.
These shares of common stock were valued at $0.75 per share, which was the
market value on February 1, 2000 for the Company's common stock.
In addition, Series D preferred stock entitles the holder to convert the
Series D preferred stock into the Company's common stock. The number of
shares of common stock issuable upon conversion of each share of Series D
Preferred Stock shall equal (i) the sum of (A) the Stated Value per share
and (B) at the holder's election accrued and unpaid dividends on such
share, divided by (ii) the conversion price. The conversion price shall be
equal to the lessor of: (i) 100% of the average of the closing bid price of
the Company's common stock for the trading day immediately preceding the
date of issuance of the shares of Series D Preferred Stock to the holders,
or (ii) 80% of the average of the three lowest closing bid prices for the
22 trading days immediately preceding the conversion of the respective
shares of Series D Preferred Stock. The shares of Series D Preferred Stock
and dividends not previously converted into shares of Common Stock shall be
converted into shares of Common Stock without further action of the Holder
on the date that is two years from the date of issuance thereof ("Mandatory
Conversion Date"), at the Conversion Price and on the conversion terms
specified in subscription agreement, Article 5. In accordance with the
Provisions of EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Commission
Ratios", the issuance of these units resulted in the Company being required
to record deemed dividends of $500,000 over the period from the date of
issuance to the date the preferred stock first becomes convertible. The
Company recognized $324,176 deemed dividend in the first quarter ended
March 31, 2000 and recognized the remaining $175,824 in the second quarter
ended June 30, 2000.
<PAGE> F-7
On February 7, 2000, the Company signed agreements with two non-employees
in exchange for the graphic design and legal services provided by these two
professionals to the Company, to issue a total of 131,314 shares of common
stock pursuant to a 1933 Act Form S-8 registration statement which will be
filed by the Company. The shares issued for these agreements are valued at
$0.75 per share, which was the market value of the Company's common stock
on February 7, 2000, the execution date of the agreements.
On April 6, 2000, the Company issued 6,374 share of its common stock at
$0.9413 per share to compensate the consulting service of $6000 provided by
The Omega Company pursuant to the terms of a written consulting agreement.
The principal of The Omega Company is Mr. Arthur Blanding, who has been a
member of the Company's Board of Directors since November of 1999. These
shares were issued pursuant to registration provided by Section 4(2) of
1933 Act.
On April 6, 2000, the Company issued 150,000 of its Series F Convertible
Preferred Stock and warrants for 4,600,000 shares of its common stock to
three sophisticated and accredited investors and one finder. In addition,
the Company agreed to issue 75,000 shares of common stock upon the exercise
of the warrants by the respective holders. The Series F Convertible
Preferred Stock and the warrants were priced at $10.00 per unit and
resulted in proceeds of $1,480,000, net of $20,000 of legal and issuance
expenses. The Series F Convertible Preferred Stock has a stated value of
$10.00 per share and a conversion feature equal to $0.50 per share.
Pursuant to the subscription agreement, the holders of Series F Preferred
Stock are subject to a maximum conversion feature that prohibits the
holders from converting their preferred stock into more than 9.99% of
outstanding common shares on the conversion date based upon the formula
specified in the subscription agreement, Article 9.3. Warrants for
3,000,000 shares of common stock were issued to the investors with an
exercise price of $1.00 per share and an expiration date of April 5, 2003.
Warrants for 1,600,000 shares of common stock were issued to a finder with
an exercise price of $0.84 per share and have an expiration date of April
5, 2003. The Series F Convertible Preferred Stock, the warrants and the
common stock underlying the Preferred and the warrants have been and will
be issued pursuant to an exemption to registration provided by Regulation
D, Rule 506 and Section 4(2) of the 1933 Act. The proceeds of this offering
are for working capital. In accordance with the Provisions of EITF 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Commission Ratios", the issuance of these units
resulted in the Company being required to record deemed dividends of
$642,181 for the quarter ended June 30, 2000.
On April 25, 2000, the Company issued 66,785 shares of its common stock to
Utah Resources, Inc. pursuant to the conversion of the Company's remaining
Series C Convertible Preferred Stock issued to Utah Resources in December
of 1998. The Series C Convertible Preferred Stock and the common stock
underlying the preferred stock were issued to Utah Resources pursuant to an
exemption to registration provided by Regulation D, Rule 504 and Section
4(2) of the 1933 Act.. Utah Resources, Inc. is an accredited and
sophisticated investor. No cash was received by the Company for these
shares.
<PAGE> F-8
On May 11, 2000, the Company issued 10,260 share of its common stock at
$0.7797 per share to compensate the consulting service of $8,000 provided
by The Omega Company pursuant to the terms of a written consulting
agreement. The principal of The Omega Company is Mr. Arthur Blanding, who
has been a member of the Company's Board of Directors since November of
1999. These shares were issued pursuant to registration provided by Section
4(2) of 1933 Act.
On May 22, 2000, the Company issued 184,638 shares of its common stock to
two holders of Series D Convertible Preferred Stock pursuant to the
conversion of 10,000 shares of the preferred. The Series D Convertible
Preferred and the common stock underlying the preferred were issued to
these sophisticated and accredited investors pursuant to an exemption from
registration provided by Regulation D, Rule 506 and Section 4(2) of the
1933 Act. No cash was received by the Company for these shares.
On May 23, 2000, the Company issued 1,517,441 shares of its common stock to
one holder, pursuant to the conversion of 500,000 shares of Series A
Convertible Preferred Stock and 1,017,441 shares of Series B Convertible
Preferred Stock. The Series A and Series B Convertible Preferred Stock
converted was issued by the Company in early 1997 to one of the original
"founders" of the Company pursuant to an exemption to registration provided
by Section 4(2) of the Act. The conversion of the Series A Convertible
Preferred Stock represents all of the Series A Convertible Preferred Stock
issued by the Company. No cash was received by the Company for these
shares.
On May 25, 2000, the Company issued 131,314 shares of its common stock to
two non-employees pursuant to written agreements with the Company, dated
February 7, 2000. The issuance of the stock was in exchange for a graphic
design and legal services provided by these two professionals to the
Company. Shares issued under these agreements are valued at $0.75 per
share, which was the market value of the Company's common stock on the date
of the execution of the agreements. These shares were issued pursuant to a
1933 Act Form S-8 registration statement. No cash was received by the
Company for these shares.
On June 8, 2000, the Company issued 219,566 shares of its common stock to
two holders of Series D Convertible Preferred Stock pursuant to the
conversion of 10,000 shares of the preferred. The Series D Convertible
Preferred and the common stock underlying the preferred were issued to
these sophisticated and accredited investors pursuant to an exemption from
registration provided by Regulation D, Rule 506 and Section 4(2) of the
1933 Act. No cash was received by the Company for these shares.
On June 19, 2000, the Company issued 75,000 shares of it's Series G
Convertible Preferred Stock and warrants for 344,330 shares at $0.9625 per
share to three investors and two finders. The recipients of the preferred
stock and the warrants are all sophisticated and accredited investors.
<PAGE> F-9
The Series G convertible Preferred Stock, the warrants and the common stock
underlying both the preferred and the warrants were issued pursuant to an
exemption to registration provided by Regulation D, Rule 506 and Section
4(2) of the 1933 Act. The Series G Convertible Preferred Stock and the
warrants were priced at $10.00 per unit and resulted in proceeds of
$675,000 in cash, net of $60,000 in finder's fees and $15,000 of legal and
issuance expenses. The Series G Convertible Preferred Stock has a stated
value of $10.00 per share and a conversion feature equal to the lesser of
$0.85 per share or 80% of the average of the three lowest closing bid
prices of the 22 days immediately preceding the conversion of the
preferred. The shares of Series G Preferred Stock and dividends not
previously converted into shares of Common Stock shall be converted into
shares of Common Stock without further action of the Holder on the date
that is two years from the date of issuance thereof ("Mandatory Conversion
Date"), at the Conversion Price and on the conversion terms specified in
subscription agreement, Article 5. The warrants for 334,330 shares of
common stock have an exercise price of $0.9625 per share and an expiration
date of June 18, 2003. The proceeds of this offering are for working
capital. In accordance with the Provisions of EITF 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Commission Ratios", the issuance of these units resulted in the
Company being required to record deemed dividends of $164,015 for the
quarter ended June 30, 2000.
3. Subsequent Events
On July 14, 2000, the Company issued 225,735 shares of its common stock to
former holders of the Company's Series E Convertible Preferred Stock. This
common stock was issued pursuant to the exercise of certain participation
rights in favor of such holders at a price determined by the market value
of such common stock on the day of exercise. The Company received
$169,302.50 in cash from the issuance of this common stock. The Common
Stock was issued by the Company pursuant to an exemption to registration
provided for the original Convertible Preferred transaction, and all shares
underlying that transaction, pursuant to Regulation D, Rule 506 and Section
4(2) of the 1933 Act. This stock was issued to fourteen accredited and
sophisticated investors, who were provided with updated financial and
corporate information through the Company's public filings.
In December 1999, the Shanghai government approved the registration of a
new wholly owned subsidiary in the Wai Gao Qiao "free trade zone" in
Shanghai, China. This import-export company was formed to import, export
and distribute food products on a wholesale level in China. In July of
2000, the Company capitalized this subsidiary in the amount of
approximately US$ 300,000. In addition, the Company has agreed to
contribute an additional amount of US $2,000,000 over a five year period,
commencing July 1, 2000. The Company will provide this additional capital
in tranches as collateral for loans in RMB by a Chinese bank to our
subsidiary. As the RMB loans are paid by the Company's subsidiary, the
collateral in US dollars will be released to the Company. By this method of
financing, the Company and its
<PAGE> F-10
subsidiary will avoid the impact of regulations governing the conversion of
Chinese currency into US dollars applicable in China. A foreign exchange bank
has agreed to act as the "facility" for these loan transactions. The
Company's subsidiary will be able to borrow up to 90% of the US dollar
collateral at an exchange rate at one point below the national rate.
<PAGE> F-11
============================================================================
12,000,000 SHARES OF COMMON STOCK
[COMPANY LOGO]
PROSPECTUS
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, and only under circumstances
and in jurisdictions where it is lawful to do so. The information contained
in this prospectus is current only as of its date.
August ,2000
============================================================================
<PAGE> back page
Part II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Other Expenses of Issuance and Distribution
The Company will bear no expenses in connection with any sale or
other distribution by the selling stockholders of the shares being
registered other than the expenses of preparation and distribution of this
registration statement and the prospectus included in this registration
statement. Such expenses are set forth in the following table. All of the
amounts shown are estimates except the Securities and Exchange Commission
registration fee.
Amount To Be Paid
<TABLE>
<S> <C>
SEC registration fee $ 3,336
Legal fees and expenses $15,000
Accounting fees and expenses $10,000
EDGAR Services $ 3,000
-------
Total $31,336
</TABLE>
Item 25. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "Delaware
Law") authorizes a court to award, or a corporation's board of directors to
grant, indemnity to directors and officers in terms sufficiently broad to
permit such indemnification under certain circumstances for liabilities
(including reimbursement for expenses incurred) arising under the
Securities Act of 1933. Our Certificate of Incorporation and Bylaws
provide for indemnification of our directors, officers, employees and other
agents to the maximum extent permitted by Delaware Law.
Insofar as indemnification by us for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the provisions referenced above or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by one of our directors, officers, or controlling
persons in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered hereunder, we will, unless in the opinion of
our counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Item 26 Recent Sales of Unregistered Securities
Fiscal year 1997
Prior to February 1997, the Company (then known as Shakespeare
Holding, Inc.) was owned by Tamarind Management, Ltd., which held 472,000
shares of Shakespeare's common stock as the
<PAGE> Part II Page 1
original "founder." Shakespeare did no business and was not an operating
entity. In February 1997, however, the Company underwent a "reorganization"
by increasing the members of its founding group to include two of the major
participants in the China Peregrine Enterprises, Limited (CPEL), the
corporate General Partner of the CPEL limited partnership, and a financial
consultant. As a result, the total founders increased from one entity to
three individuals and two entities. Consequently, 788,000 shares of common
stock and 500,000 shares of preferred stock at par value of $0.001 per share
were issued to the newly joined founders, pursuant to the exemption from
Section 5 registration provided by Section 4(2) of the Securities Act of
1933 (the Act). The purpose of this "reorganization" was to create an
appropriate vehicle for investment in the opportunity presented by a more
open Chinese regulatory and business infrastructure. Included in this
purpose was the raising of sufficient capital to fund such an investment.
This plan resulted in the utilization of the Company to purchase the assets
of CPEL, and operating entity with business interests in the People's
Republic of China.
On February 28, 1997, the Company issued 25,000 shares of common stock
in exchange for 100% of equity interest in Manor Products Corp., pursuant to
the safe harbor provisions of Regulation D, Rule 504. Manor was a Delaware
company established on January 10, 1996 without any operating activities or
substantial assets. In early 1996, 80% of equity interest of Manor was
bought by Mr. Paul Downes, a principal of Tamarind Management, Ltd., the
initial founding entity of the Company. Manor had 331 shareholders and
20,000,000 shares of common stock authorized. As of February 9, 1997, Manor
had 4,090,448 shares outstanding. Pursuant to a merger agreement, each one
thousand shares of Manor were exchanged for one share of common stock of the
Company, with fractional share rounded up to the nearest full share. The
remaining shares of the 25,000 shares of common stock issued by the Company
at that time were issued to this principal individually.
On March 5, 1997, the Company issued 1,040,000 shares of common stock
in exchange for the assets of China Peregrine Enterprises, Limited, pursuant
to Section 4(2) of the Act. China Peregrine Enterprises is a Texas limited
partnership, set up to manage its interest in China operation conducted by a
Chinese joint venture known as Green Food Peregrine Children's Food Co. Ltd.
By this transaction, the Company assumed all of the rights and obligations
of China Peregrine Enterprises in and to this Chinese joint venture. With
the completion of the transaction, the Company became an operating entity.
As a condition to the Company's purchase of China Peregrine
Enterprises' assets, the Company required that all obligations China
Peregrine Enterprises not incurred under the joint venture contract to be
removed from China Peregrine Enterprises' books. Accordingly, three
shareholders of the Company agreed to assume such non joint venture debt,
which consisted of a line of credit obligation existing at the First
Tennessee Bank. On March 15, 1997, the Company issued 1,260,000 shares of
Series B preferred stock, pursuant to Section 4(2) of the Act, at stated
value of $1.00 per share to three shareholders in consideration of their
assumption of the obligation to pay off approximately $1,260,000 of an
outstanding line of credit owed by China Peregrine Enterprises to the
Tennessee-based financial institution. The outstanding line of credit was
incurred by China Peregrine Enterprises during 1995 and 1996 and paid off in
1997. Two of the three shareholders to whom the Series B shares were issued
were part of the reorganized "founders" group, and the third was a limited
partner in China Peregrine Enterprises.
In the Spring of 1997, the payment of the last installment to satisfy
the capital contribution requirements of the Green Food Peregrine joint
venture contract and Articles of Association for that
<PAGE> Part II Page 2
joint venture company became due. Payment of this last installment was
necessary to secure the continued involvement of the Company in the joint
venture. Accordingly, by late March, 1997, certain shareholders of the
Company loaned sufficient funds to pay the capital contribution installment
then due. On May 1,1997, the Company closed a Rule 504, Regulation D,
limited public offering of 975,000 units, each unit consisting of one share
of common stock and a warrant for one share of common stock, at $1.00 per
unit to raise money to repay these loans, the proceeds of which had been
utilized to pay the required capital contribution. The net proceeds of this
offering amounted to $975,000. All of the proceeds of this limited public
offering were earmarked for and utilized to repay the shareholders loans.
This 504 offering was combined with the issuance of 25,000 shares by the
Company in the above discussed merger transaction with Manor Corp. for
reporting and integration purposes. The common stock underlying the
warrants were not part of this 504 offering, having an exercise date
deferred for one year. This offering closed May 1, 1997.
Subsequent to Rule 504, Regulation D offering, the Company conducted a
separate private placement to issue 1,520,000 shares of its common stock at
$1.00 per share, commencing May 2, 1997, to raise funds for general working
capital. The total proceeds from this Section 4(2) private placement, which
closed May 31, 1997, amounted to $1,520,000. All subscribers were required
to execute subscription agreements and a questionnaire, which qualified them
as "accredited" investors. These purchasers were existing shareholders,
having participated in the 504 offering, or were associates of such 504
investors.
During 1997, the Company incurred consulting, legal and accounting
expenses relating to these fund raising activities, and other directors'
fees and travel expenses. The Company issued a total of 469,000 shares of
common stock at $1.00 per share for these expenses, pursuant to Section
4(2). Each recipient of these shares had worked closely with management of
the Company and had access to detailed corporate information.
<TABLE>
<CAPTION>
Description Date Shares Identity
----------- ---- ------ --------
<S> <C> <C> <C>
Assumption of CPEL's accrued legal fees 03/15/97 200,000 Peregrine Enterprises, Inc.
Issuance of stock for legal fees relating
to fund raising 03/30/97 15,000 Roy D. Toulan, Jr.
Issuance of stock for stock promotion service 04/15/97 100,000 Continental Capital & Equity
Corporation
Issuance of stock for promotion services 05/01/97 35,000 Robert Mazzei (10,000);
Settondown Capital Int'l (10,000);
John Bannon (10,000);
Carol Bowes (5,000)
Issuance of stock for financial consultation
services 06/01/97 10,000 Manchester Asset Management, Ltd.
Issuance of stock for consulting service 07/01/97 24,000 Susan Lurvey (12,000);
Dennison Chapman (12,000)
Issuance of stock for accounting service 10/01/97 15,000 Seymour Borislow (10,000)
Jeffrey Factor (5,000)
<PAGE> Part II Page 3
Issuance of stock for consulting service 10/15/97 25,000 David Dreyer
Issuance of stock for a directors' fee 11/01/97/9 25,000 Philip Pearce
Issuance of stock for travel expense 11/17/97 20,000 Tamarind Management Ltd.(15,000)
Dale Reese (5,000)
</TABLE>
During 1997, the Company signed a total of four stock options agreements
with certain shareholders and non-employee directors for restricted shares
pursuant to Section 4(2) of the Act. These four stock option agreements are
summarized as follows:
<TABLE>
<CAPTION>
Granting Options Exercise Vesting Expiration
Date Granted Price Period Date
-------- ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Agreement One 4/29/97 1,005,533 $1.00 None 4/28/2002
Agreement Two 4/30/97 2,000,000 $1.00 None 4/29/2002
Agreement Three 10/1/97 25,000 $1.00 None 9/30/2002
Agreement Four 10/1/97 15,000 $1.00 None 9/30/2002
---------------------------------------------------------------------------------
Total options granted in 1997 3,045,533 -none exercised
---------
</TABLE>
Fiscal year 1998
On January 15, 1998, the Company issued 50,000 shares of common stock
at $1.00 per share to Settondown International, Ltd. (Settondown) in
exchange for services by that capital service company, pursuant to Section
4(2) of the Act. Settondown has consulted with the Company and its
reorganization "founders" from early 1997. Settondown's business involves
consultation and finder services for corporate financing on a private and
limited basis.
On February 2, 1998, the Company issued 5,272 shares of common stock
at $2.25 per share to Kenneth G. Hanson in exchange for his services in
connection with the furnishing of the Company's corporate office, pursuant
to Section 4(2) of the Act. Mr. Hanson was an existing shareholder of the
Company and gained detailed knowledge of the business and operations of the
Company through his access to top level management at the Company's
corporate offices.
On February 19, 1998, the Company issued 120,000 shares of common
stock at a price of $1.00 per share to Amer-China Partners, Limited (ACPL)
pursuant to a signed agreement dated October 1, 1997, to acquire ACPL's
entire interest and right (2.4%) in and to the Green Food Peregrine
Children's Food Co. Ltd., pursuant to Section 4(2) of the Act.
On May 2, 1998, the Company issued 557,000 units (each unit composed
of one share of common stock and one warrant to purchase one share of common
stock) at a price of $2.50 per unit, pursuant to a private offering in
accordance with the exemption provided in Regulation D, Rule 506. The net
proceeds of this offering were $1,531,685. Among the 557,000 shares issued,
2,000 shares were issued in exchange for accounting services. The holders
of such warrants are entitled to purchase, from time to time, up to 557,000
shares of common stock, per value $0.001 per share, at an
<PAGE> Part II Page 4
exercise price of $1.00 per share, at any time after June 30, 1998 and
through and including June 30, 2003. The 557,000 shares were sold to 33
purchasers who, with one exception, all qualified as "accredited"
investors. The "non accredited" investor was the personal business assistant
to one of the Company's directors and was provided with the March 1997
offering memorandum plus the then most recent financial information of the
Company.
On June 19, 1998, the Company entered into a definitive agreement with
American Flavors China, Inc., a U.S.-based entity, to acquire its 52% equity
interest in Hangzhou Meilijian Dairy Products Co. Ltd. (Hangzhou Meilijian).
The Boards of Directors of both companies and of the joint venture have
approved the acquisition. Hangzhou Dairy Co. Ltd., a state-owned enterprise
in Zhejian Province of China, controls the remaining 48% of equity interest
in Hangzhou Meilijian. The aforesaid acquisition is subject to approval by
the local government authorities, which presently is pending. The terms of
the acquisition agreement, in part, resulted in the issue of 1,513,685
shares of the Company's common stock to American Flavors China, Inc.,
pursuant to Section 4(2) of the Act. The negotiations for this purchase
covered a time period at approximately one year. During that time, the
principals at American Flavors China, Inc. were given appropriate corporate
information concerning the business and operations of the Company.
Between December 17, 1998 and February 18, 1999, the Company issued
265,000 shares of its Common Stock to 15 holders of Warrants, issued May 1,
1997, as a result of the exercise of those Warrants. All investors
receiving these shares were shareholders of the Company and are "accredited"
investors. The proceeds from this exercise aggregated $265,000.
On May 2, 1998, the Company approved and ratified an agreement between
the Company and China National Green Food for the increase of the Company's
equity interest in Green Food Peregrine from 70% (assuming the approval of
the Amer-China transfer) to 76.92%. This change in the ownership ratio will
take place upon the payment of an additional US $1,500,000 in registered
capital by the Company over an eighteen month period. Since Chinese
government regulations require approval of this change of the investment
ratio by the Ministry of Foreign Trade and Economic Cooperation, the Company
has agreed to an interim loan of US $500,000 to Green Food Peregrine, with
the conversion of that loan to registered capital upon obtaining the
required governmental approval.
To fund this equity increase, commencing on October 21, 1998, the
Company initiated a limited public offering of its Series C Convertible
Preferred Stock, pursuant to Rule 504 of Regulation D. On November 19,
1998, the Company issued 83,334 shares of its Series C Convertible Preferred
Stock, plus a like number of Warrants, at a price of $3.00 per share
(including the Warrants) to Utah Resources International, Inc., a
sophisticated investor, resulting in proceeds of $250,000. On December 29,
1998, an additional 50,000 shares of Series C Convertible Preferred Stock,
plus nine Warrants per share, at a price of $3.00 per share (including
Warrants) were issued to Explorer Fund Management, Inc., a sophisticated
investor, resulting in proceeds of $150,000. The Series C Certificate of
Designation was not amended; only the terms of the transaction concerning
the number of warrants issued with each unit was changed to accommodate the
second investor this offering.
The aggregate proceeds received from this initial and amended Rule 504
limited public offering, which closed January 4, 1999, amounted to $400,000.
In addition, the exercise of all
<PAGE> Part II Page 5
Warrants at the exercise price would result in an additional $533,334 in
proceeds applied toward the Company's purchase of additional registered
capital in Green Food Peregrine.
The Company offered these convertible securities to these
sophisticated investors in reliance upon their written representations that
their purchase of these securities was for investment purposes only and not
with a view to or for distributing or reselling such securities. In
addition, the availability of the Rule 504 exemption for this transaction
was expressly premised upon the accuracy of the purchasers' representations
in that regard.
Fiscal year 1999
Securities issued in reliance upon Section 4(2)
During the period February 2, 1999 through February 18, 1999, the
Company issued 100,000 shares of its common stock to four accredited and/or
sophisticated investors, resulting from the exercise of common stock
warrants issued to these investors in 1997 as part of a Section 4(2)/ Rule
506 offering.
From March 4, 1999 through April 21, 1999, the Company issued 315,000
shares of its common stock to twelve accredited and/or sophisticated
investors, who were known to the Company or existing shareholders of the
Company.
On May 28, 1999, the Company issued 145,000 shares of common stock to
seven accredited/sophisticated investors; on June 25, 1999, the Company
issued 117,200 shares of common stock to four accredited/sophisticated
investors; and on September 16, 1999, the Company issued 65,000 shares of
common stock to three accredited/sophisticated investors.
Each above described issuance of the Company's common stock was
pursuant to Section 4(2) of the Securities Act of 1933 and was made pursuant
to and based upon the qualification of each investor, including
representations as to the investment purpose of each such purchase.
Series C Preferred - Conversions
On January 5, 1999 and January 7, 1999, respectively, the Company
issued 13,959 shares of its common stock to Utah Resources International,
Inc., pursuant to its conversion of the Company's Series C Convertible
Preferred Stock. On February 5, 1999 and March 3, 1999, the Company issued
the aggregate of 80,000 shares of its common stock pursuant to conversions
by Utah Resources. In addition, at that time, the Company issued 150,000
shares of its common stock to Explorer Fund Management, Inc., pursuant to
its conversion of 50,000 shares of the Company's Series C Convertible
Preferred Stock.
On March 23, 1999 and May 19, 1999, respectively, the Company issues
common stock aggregating 83,334 shares to Utah Resources pursuant to its
Series C conversions. Subsequent conversions of Series C Preferred by Utah
Resources resulted in the issuance of 20,000 shares of common stock on July
30, 1999, 30,000 shares of common stock on October 20, 1999 and 134,000
shares of common stock on November 16, 1999.
<PAGE> Part II Page 6
Series D Preferred
On March 9, 1999 and April 23, 1999, respectively, the Company issued
53,500 and 25,000 shares of its Series D Convertible Preferred Stock to
three accredited and/or sophisticated corporate investors and one
sophisticated/accredited finder. The gross proceeds from this offer
aggregated $750,000. These shares of Series D Convertible Preferred Stock
were issued in reliance upon the exemption from registration provided in
Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, and
the proceeds therefrom were used for general working capital. The issue
consisted of the Series D Convertible Preferred Stock at $10.00 per share,
with Warrants to: Austinvest Anstalt Balzers, 16,250 Series D/16,250
warrants for $162,500; Esquire Trade & Finance Inc.,16,250 Series D/16,250
warrants for $162,500; Amro International, S.A., 17,500 Series D/17,500
warrants for $175,000. The Company filed this SB-2 registration statement on
April 16, 1999, with respect to resale of the shares of common stock
underlying the Series D Convertible Preferred and the warrants.
Series E Preferred
During July, August and September 1999, the Company conducted a
private sale of Series E Convertible Preferred Stock and issued 330,000
shares in five traunches to twenty-four accredited and sophisticated
investors at $2.50 per share, as follows:
July 23, 1999 - 100,000 Series E shares and warrants for 50,000 common to
seven investors
Aug. 16, 1999 - 30,000 Series E shares and warrants for 15,000 common to
three investors
Sept. 1, 1999 - 60,000 Series E shares and warrants for 30,000 common to
three investors
Sept. 14, 1999 - 40,000 Series E shares and warrants for 52,000 common to
three investors
Sept. 27, 1999 - 100,000 Series E shares and warrants for 50,000 common to
eight investors
All twenty four Series E investors are clients of the same small
registered broker dealer. No general solicitation or advertising was
utilized in this offering.
These investor warrants and finder warrants are exercisable as
follows:
<TABLE>
<CAPTION>
Underlying Exercise
Closing Date Common Price Expiration
------------ ---------- -------- ----------
<S> <C> <C> <C>
July 23, 1999
Investors 50,000 $3.00/share 7-22-01
Finder 10,000 $2.75/share 7-22-04
Finder 10,000 $5.00/share 7-22-02
August 16, 1999
Investors 15,000 $3.00/share 8-15-01
Finder 3,000 $2.75/share 8-15-04
Finder 3,000 $5.00/share 8-15-02
<PAGE> Part II Page 7
September 1,1999
Investors 30,000 $3.00/share 8-31-01
Finder 6,000 $2.75/share 8-31-04
Finder 6,000 $5.00/share 8-31-02
September 14,1999
Investors 20,000 $3.00/share 9-13-01
Finder 4,000 $2.75/share 9-13-04
Finder 4,000 $5.00/share 9-13-02
September 27, 1999
Investors 50,000 $3.00/share 9-26-01
Finder 10,000 $2.75/share 9-26-04
Finder 10,000 $5.00/share 9-26-02
</TABLE>
No Series E Warrants have been exercised.
The issuance of this Series E Preferred Stock and warrants was
pursuant to an exemption from registration provided by Rule 506 of
Regulation D. The proceeds of the sale of the Series E Preferred Stock were
utilized for working capital. The net proceeds of this issuance were
$711,963 net of $113,037 of finder's fee, legal and printing expenses.
Series E Preferred - Conversions
On July 29, 1999, four holders of Series E Preferred Stock converted
60,000 shares into 104,896 shares of common stock. In addition, four holders
converted a total of 50,000 shares of Series E Preferred Stock into 89,444
shares of common stock on August 3, 1999 (40,000 shares) and August 23, 1999
(10,000 shares), respectively. The issuance of the common stock underlying
the Series E Preferred Stock was pursuant to an exemption from registration
provided by Rule 506 of Regulation D. On October 29, 1999, sixteen
accredited and sophisticated investors holding Convertible Preferred Stock
Series E, converted a total of 220,000 shares of Preferred Stock Series E
into 440,000 shares of common stock. The Company did not realize any
proceeds upon the conversion of the Series E Preferred Stock to common
stock. All of the Series E Preferred stock has been converted.
Section 4(2) - Issuance to Consultants
During 1999, the Company issued 11,303 shares of common stock were
issued to The Omega Group for dairy consulting services rendered, as
follows:
<TABLE>
<S> <C>
May 28, 1999 4048 shares
June 25, 1999 1999 shares
August 16, 1999 2356 shares
October 14, 1999 1163 shares
December 2, 1999 1737 shares
</TABLE>
These shares of common stock were issued at market value and were
issued in reliance upon the exemption from registration provided in Section
4(2) of the Securities Act of 1933.
<PAGE> Part II Page 8
Warrants and Options
On June 15, 1999, the Company issued a total of five stock options
agreements with certain non-shareholders and non-employees, who had provided
bookkeeping, research and organizational services, for 55,000 restricted
shares of common stock pursuant to Section 4(2) of the Act. These options
contain an exercise price of $1.00 per share and expire in five (5) years.
Fiscal Year 2000
On February 1, 2000, we amended our Rule 506 offering with respect to
the Series D Preferred Stock originally offered on March 9, 1999 and April
23, 1999, respectively. Pursuant to this amended offering, we issued an
additional 50,000 shares of the Series D Preferred Stock and amended the
total number of warrants to be issued by the issuance of additional warrants
for 1,300,000 shares of common stock to the existing sophisticated and
accredited holders of our Series D Preferred Stock. The Series D Preferred
and accompanying warrants were priced at $10.00 per unit and resulted in
proceeds of $490,000 in cash, net of $10,000 of legal and issuance expenses.
The Series D Preferred Stock has a Stated Value of $10.00 per share
and the same conversion feature disclosed before. The warrants for
1,300,000 shares of common stock have an exercise price of $0.625 per share
and an expiration date of January 31, 2003. In connection with this sale,
we issued 125,000 shares of our common stock pursuant to Section 4(2) to
these holders to compensate them for the delay in registering the resale of
the common stock underlying the Series D Preferred and the warrants, and
50,000 shares of common stock to a finder. These shares of common stock are
issued at $0.75 per share, the market value on February 1, 2000 for our
common stock.
On April 6, 2000, we issued 6,374 shares of our common stock to The
Omega Company, pursuant to a written consulting contract. The principal of
The Omega Company is Mr. Arthur Blanding, who has been a member of our Board
of Directors since November of 1999. These shares were issued pursuant to
an exemption to registration provided by Section 4(2) of the 1933 Act. We
did not received cash for these shares.
On April 6, 2000, we issued 150,000 of our Series F Convertible
Preferred Stock and warrants for 4,600,000 shares of our common stock to
three sophisticated and accredited investors and one finder. In addition,
we agreed to issue 75,000 shares of common stock upon the exercise of the
warrants by the respective holders. The Series F Convertible Preferred
Stock and the warrants were priced at $10.00 per unit and resulted in
proceeds of $1,480,000, net of $20,000 of legal and issuance expenses. The
Series F Convertible Preferred Stock has a stated value of $10.00 per share
and a conversion feature equal to $0.50 per share. Warrants for 3,000,000
shares of common stock were issued to the investors with an exercise price
of $1.00 per share and an expiration date of April 5, 2003. Warrants for
1,600,000 shares of common stock were issued to a finder with an exercise
price of $0.84 per share and have an expiration date of April 5, 2000. The
Series F Convertible Preferred Stock, the warrants and the common stock
underlying the Preferred and the warrants have been and will be issued
pursuant to an exemption to registration provided by Regulation D, Rule 506
and Section 4(2) of the 1933 Act. The proceeds of this offering are for
working capital.
On April 25, 2000, we issued 66,785 shares of our common stock to Utah
Resources, Inc. pursuant to the conversion of our remaining Series C
Convertible Preferred Stock issued to Utah
<PAGE> Part II Page 9
Resources in December of 1998. The Series C Convertible Preferred Stock and
the common stock underling the preferred were issued to Utah Resources
pursuant to an exemption to registration provided by Regulation D, Rule 504
and Section 4(2) of the 1933 Act.. Utah Resources, Inc. is an accredited and
sophisticated investor. We did not received cash for these shares.
On May 11, 2000, we issued 10,260 shares of our common stock to The
Omega Company pursuant to the terms of a written consulting contract. We did
not received cash for these shares.
On May 22, 2000, we issued 184,638 shares of our common stock to two
holders of Series D Convertible Preferred Stock pursuant to the conversion
of 10,000 shares of the preferred. The Series D Convertible Preferred and
the common stock underlying the preferred were issued to these sophisticated
and accredited investors pursuant to an exemption from registration provided
by Regulation D, Rule 506 and Section 4(2) of the 1933 Act. We did not
received cash for these shares.
On May 23, 2000, we issued 1,517,441 shares of our common stock to one
holder, pursuant to the conversion of 500,000 shares of Series A Convertible
Preferred Stock and 1,017,441 shares of Series B Convertible Preferred
Stock. The Series A and Series B Convertible Preferred Stock converted was
issued by us in early 1997 to one of our original "founders" pursuant to an
exemption to registration provided by Section 4(2) of the Act. The
conversion of the Series A Convertible Preferred Stock represents all of the
Series A Convertible Preferred Stock issued by us. We did not received cash
for these shares.
On June 8, 2000, we issued 219,566 shares of our common stock to two
holders of Series D Convertible Preferred Stock pursuant to the conversion
of 10,000 shares of the preferred. The Series D Convertible Preferred and
the common stock underlying the preferred were issued to these sophisticated
and accredited investors pursuant to an exemption from registration provided
by Regulation D, Rule 506 and Section 4(2) of the 1933 Act. We did not
received cash for these shares.
On June 19, 2000, we issued 75,000 shares of ours Series G Convertible
Preferred Stock and warrants for 344,330 shares at $0.9625 per share to
three investors and two finders. The recipients of the common stock and the
warrants are all sophisticated and accredited investors. The Series G
convertible Preferred Stock, the warrants and the common stock underlying
both the preferred and the warrants were issued pursuant to an exemption to
registration provided by Regulation D, Rule 506 and Section 4(2) of the 1933
Act. The Series G Convertible Preferred Stock and the warrants were priced
at $10.00 per unit and resulted in proceeds of $675,000 in cash, net of
$60,000 in finder's fees and $15,000 of legal and issuance expenses. The
Series G Convertible Preferred Stock has a stated value of $10.00 per share
and a conversion feature equal to the lesser of $0.85 per share or 80% of
the average of the three lowest closing bid prices of the 22 days
immediately preceding the conversion of the preferred. The warrants for
334,330 shares of common stock have an exercise price of $0.9625 per share
and an expiration date of June 18, 2003. The proceeds of this offering are
for working capital.
On July 14, 2000, we issued 225,735 shares of our common stock to
former holders of our Series E Convertible Preferred Stock. This common
stock was issued pursuant to the exercise of certain participation rights in
favor of these holders at a price determined by the market value of the
common stock on the day of exercise. We received $169,302.50 in cash from
the issuance of this common stock. This stock was issued pursuant to an
exemption to registration provided for the
<PAGE> Part II Page 10
original convertible preferred transaction, and all shares underlying that
transaction, pursuant to Regulation D, Rule 506 and Section 4(2) of the 1933
Act. This stock was issued to fourteen accredited and sophisticated
investors, who were provided with updated financial and corporate information
through our public filings.
Item 27. EXHIBITS
<TABLE>
<CAPTION>
SEC
Exhibit Reference
No. No. Title of Document
------- --------- -----------------
<C> <C> <S> <C>
1a 2 Asset Purchase Agreement China Peregrine Enterprises, Limited (1)
1b 2 Interim Agreement to Operate China Peregrine Project (1)
2a 3(i) Articles of Incorporation (1)
2b 3(i) Amended Articles (name change) (1)
3 3(ii) Restated Bylaws China Peregrine Food Corporation (1)
4a 4 Rights of Equity Holders Common see Articles of
Incorporation (1)
4b 4 Preferred, Series A and B Designation (1)
4c 4 Preferred, Series C Designation (1)
4d 4 Preferred, Series D Designation (2)
4e 4 Preferred, Series D Amended (4)
4f 4 Preferred, Series E Designation (3)
4g 4 Preferred, Series F Designation (4)
4h 4 Preferred, Series G Designation (5)
5.1 Legal opinion of Stibel & Toulan LLP *
5 10 Material Contracts Green Food Joint Venture Contract (1)
6 10 Material Contracts Hangzhou Meilijian Joint Venture Contract (1)
<PAGE> Part II Page 11
7a 10 Material Contracts Asset Purchase Agreement (1)
American Flavors China, Inc
7b 10 First Amendment (1-28-98) (1)
7b 10 Second Amendment (6-19-98) (1)
8 21 Subsidiaries Articles of Association Green Food Peregrine (1)
9 21 Subsidiaries Articles of Association Hangzhou Meilijian (1)
9a 21 Subsidiaries Certificate of Incorporation Bravo! Foods, Inc. *
9b 21 Subsidiaries Articles of Association *
China Premium Food Corporation (Shanghai) Co., Inc.
23.1 Consent of BDO Seidman, LLP *
23.2 Consent of Stibel & Toulan LLP (included in Exhibit 5.1) *
10 27 Financial Data Schedule, 6-30-00 *
11 99 Hangzhou Meilijian Audited Financial (4)
Statements, Years Ending December 31,1998 and 1999
<FN>
* Filed herewith.
<F1> Filed with Form 10SB/A First Amendment
<F2> Filed with Form 10QSB for 3-31-99
<F3> Filed with Form 10QSB for 6-30-99
<F4> Filed with Form 10K-SB for 12-31-99
<F5> Filed with Form 10QSB for 6-30-00
</FN>
<PAGE> Part II Page 12
Item 28. UNDERTAKINGS
The Company hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or change material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions,
or otherwise, the small business issuer has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this amended
registration statement to be signed on its behalf by the undersigned, in
the city of North Palm Beach, Florida, August 23, 2000.
(Registrant) CHINA PREMIUM FOOD CORPORATION
By: /s/ Roy G. Warren
---------------------------------------------
Roy G. Warren, President and Chief Executive Officer
<PAGE> Part II Page 13
In accordance with the requirements of the Securities Act of 1933, this
amended registration statement was signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/ Roy G. Warren President, Director August 23, 2000
/s/ Susan Lurvey Secretary, Treasurer August 23, 2000
/s/ Michael Davis Chief Financial Officer August 23, 2000
<PAGE> Part II Page 14
</TABLE>
