<PAGE>
As filed with the Securities and Exchange Commission on December 10, 1999
Registration No. 0-25963
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- ------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------------------
AGROCAN CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1709 HARBOUR CENTRE
25 HARBOUR ROAD
WANCHAI, HONG KONG
(Address of Principal Executive Offices) (Zip Code)
011-852-2519-3933
(Issuer's Telephone Number)
----------------
SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT: NONE
SECURITIES TO BE REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, Par Value $.0001
(Title of Class)
DOCUMENTS INCORPORATED BY REFERENCE: Form 10-QSB/A for the Quarterly
Period ended June 30, 1999, filed on October 22, 1999
<PAGE>
BUSINESS
GENERAL
AgroCan Corporation (the "Company") (HEREINAFTER, REFERENCE TO THE
"COMPANY" SHALL INCLUDE ITS SUBSIDIARIES UNLESS THE CONTEXT OTHERWISE REQUIRES)
is a Delaware corporation which owns all of the capital stock of AgroCan (China)
Inc., a British Virgin Islands corporation ("AgroCan China"). In turn, AgroCan
China owns three subsidiary companies ("Subsidiaries") one of which is a
Sino-Foreign Joint Venture ("Joint Venture") in the People's Republic of China
("China" or the "PRC").
AgroCan China was established in 1996 to take advantage of the growing
demand for fertilizers and other products and technologies that enhance the
agricultural output of China. As of February 1, 1999, AgroCan has established
an annual production capacity of 125,000 Metric Tons ("MT") for compound
fertilizers in two of the largest agricultural provinces of China, Guangxi and
Jiangxi, and plans to enter markets in other provinces. AgroCan is expanding its
distribution channels, product lines and services in order to provide
comprehensive solutions to niche markets of the agricultural sectors of China.
The following is the organization chart of the Company and a summary
description of the Subsidiaries and Joint Venture:
----------------------
AGROCAN CORPORATION
(Delaware)
----------------------
----------------------
AGROCAN (CHINA) INC.
(BVI)
---------------------
- --------------------- ------------------- -----------------
JIANGXI JIALI JIANGXI FENGLIN GUANGXI LINMAO
CHEMICAL INDUSTRY CHEMICAL INDUSTRY FERTILIZER LTD.
CO. LTD. CO. LTD.
- --------------------- ------------------- -----------------
2
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR OF OWNERSHIP CAPACITY
NAME OF SUBSIDIARY ESTABLISHMENT PERCENTAGE LOCATION PER YEAR PRODUCT
(MT)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GUANXI LINMAO 1996 100% Nanning, 50,000 Compound fertilizers for
COMPOUND FERTILIZER LTD. Guangxi eucalyptus, citrus, fruit trees,
paddy rice, sugar cane and
flowers.
- ------------------------------------------------------------------------------------------------------------------------------------
JIANGXI FENGLIN CHEMICAL 1996 70% Nanchang, 25,000 Compound fertilizers
INDUSTRY CO. LTD. Jiangxi for aspen, citrus, fruit trees,
paddy rice, oil vegetable and
flowers.
- ------------------------------------------------------------------------------------------------------------------------------------
JIANGXI JIALI CHEMICAL 1997 100% Fuzhou, 50,000 Compound fertilizers
INDUSTRY CO. LTD. Jiangxi for citrus, fruit trees, paddy
rice, tobacco and flowers.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PRODUCTS
Through the Subsidiaries, the Company produces various compound
fertilizers. Compound fertilizers are the end product made from the combination
of the three primary nutrients; nitrogen (N), phosphate (P) and potassium (K)
together with other elements, such as iron, zinc, copper and manganese. These
elements are blended in different proportions and are made into pellets and
packed into bags of 50 kg each. Compound fertilizers are also commonly called
NPK fertilizers. The Company's compound fertilizers are designed and formulated
for the specific climate, soil and crop requirements of each individual market
of the Subsidiaries.
According to irrigated area consumption of fertilizer figures
compiled by the State Statistical Bureau, People's Republic of China and
published in the China Statistical Yearbook (1998) (the "1998 China Stats
Yearbook") compound fertilizers are becoming increasingly popular in China
over the last 20 years. The company believes this trend is because compound
fertilizers can provide crops and plants with balanced nutrients and maintain
the Ph values of the soil. The following is a list of the main compound
fertilizers developed by the Company:
<TABLE>
<CAPTION>
----------------------------------------------
N-P-K RATIO APPLICATIONS
----------------------------------------------
<S> <C>
15-6-9 PADDY RICE
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8-18-10 WHEAT
----------------------------------------------
14-6-10 COTTON
----------------------------------------------
12-9-9 CORN
----------------------------------------------
5-10-10 TOBACCO
----------------------------------------------
12-8-10 SUGAR CANE
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16-16-16 GENERAL APPLICATION
----------------------------------------------
12-10-8 EUCALYPTUS PLANTATION
----------------------------------------------
12-12-8 ASPEN PLANTATION
----------------------------------------------
10-7-8 FRUIT TREE
----------------------------------------------
</TABLE>
The Company's compound fertilizers are sold under the brand name
"AgroCan Three Leaves." See "Marketing and Distribution."
3
<PAGE>
PRODUCTION
In order to maintain the consistency of quality and corporate
image, the fertilizer plants are designed and built with standard production
facilities. Management and employees in the Subsidiaries are trained to
operate the plants in the same manner. Standard operation procedures have
been devised. These procedures are based on the requirement of ISO 9000
standards. The ISO 9000 standards were developed by the International
Organization for Standardization, a non-governmental organization with
membership from 120 countries. The ISO is not part of the United Nations
Organization although it has strong links with nearly all bodies and specialized
agencies of the UN family. The ISO 9000 standards represent an international
consensus on good management practice. These standards give organizations
guidelines on what constitutes an effective quality management system, which
in turn can serve as a framework for continuous improvement. The standard
procedures include:
- - raw material storage practices;
- - material feeding steps and speed of the production line;
- - fertilizer blending control;
- - production capability analysis (Cpk);
- - packing and weighting of finished products; and
- - storage and procurement.
All of the Company's products are made from urea, phosphate, potash and other
non-hazardous chemicals. The production process does not cause any chemical
reaction. The Company does not incur any additional costs for compliance with
environmental laws in China.
QUALITY CONTROL
The quality and level of nutrient output can be obtained by blending
different proportions of NPK input. Water and other necessary ingredients have a
significant impact on output cost and quality. All plants operated by the
Subsidiaries are equipped with computer systems to assist in cost and quality
control. Quality assurance (QA) and quality control (QC) are priorities for the
Company. Continuous improvement in product quality is vital to enhancing
competitiveness. The Company plans to establish and implement a comprehensive
quality-upgrading program that will lead to ISO 9000 certification. Training of
quality and quality control personnel is emphasized.
The laboratories of each plant are continually conducting research for
better formulae to meet plant/crop requirements and at the same time to optimize
material combination. The laboratories are also responsible for testing output
to ensure the appropriate level of quantity and quality.
SEASONS AND INVENTORY CONTROL
There are two planting seasons (spring and fall) in China. Prices of
fertilizers fluctuate between the two planting seasons. The prices of
fertilizer increase during planting seasons and decrease during other periods.
Companies generally obtain raw materials by signing purchase contracts at the
end of the off seasons when prices generally drop to the lowest level.
The Company's product mix allows sales of compound fertilizers with
crop rotations in different months. However the Company's sales revenues are
lower in the off season as a result of decreased sales volume and lower
prices.
PRODUCT DEVELOPMENT
The Company places considerable emphasis on the research and
development of new products and technology. The Company benefits from its
relationships with major national and local agricultural and soil research
institutes in China, as well as the Ministry of Agriculture, State Petroleum
and Chemical Bureau, and State Forestry Bureau. The Company regularly engages
the various institutes to conduct discreet research projects and testings on
its behalf. The Company pays a retainer of approximately $120 per month to
each institute and an additional payment of up to $200 as and when specific
research or testing is required. The Company's management regularly meets
with the government ministry and bureaus to obtain information on national
policies and statistics with regards to the fertilizer and agricultural
industries and advises these governmental agencies of industry developments.
The Company retains a group of leading engineers and scientists as
consultants to support the research teams at each subsidiary. The Company has
not applied for and believes that patent protection is not available to
protect the formulations of the Company's products since the ratios and
proportion of the different materials change in accordance with soil, plant,
season and weather conditions.
4
<PAGE>
MARKETING AND DISTRIBUTION
The State Internal Trade Bureau of the PRC maintains distribution
systems and channels from provincial to local levels. The Company's main
customers are the farming supplies bureaus and cooperatives under the State
Internal Trade Bureau. These entities act as wholesalers to individual
farmers. State-owned farms and plantations are also major accounts of the
Company, and are serviced by sales representatives of each Subsidiary. There
direct sales units of the Company are responsible for maintaining good
working relationships with the customers and in some instances having them as
joint-venture partners. The Company has also established its own provincial
distribution channels in the target market. As of July, the Company
established a total of 199 retail points of sales in Guangxi and Jiangxi
provinces.
The Company conducts soil and vegetation surveys on a regular basis
and provides technical support to customers. Prior to the launching of any new
compound fertilizers, testing fields are established and data is collected for
further studies. The tests are conducted in collaboration with customers and
the test results are certified by customers. Management believes that such
close collaboration with customers enhance customers' satisfaction as well as
promote the loyalty of customers.
PRICING
Market prices of fertilizers and constituent ingredients generally
follow a seasonal fluctuation worldwide as well as in China. The Company has
adopted a purchasing policy to order raw materials during the low price
seasons so that product cost can be minimized. The Company has recently
started to source raw material like urea from the producers directly.
Previously, the Company purchased all of its raw material through
intermediaries. This approach is expected to reduce the Company's reliance
on intermediates and thus reduce raw material cost. The Company purchases its
raw materials from over thirty different suppliers. The Company has two
suppliers which provide more than 10% of the Company's raw materials: Hainan
Fudoo Chemical Co. Ltd. and Chungqing Jiangjan Chemical Fertilizer General
Factory. However, the Company believes that it is not reliant on any single
supplier for its raw material supply.
Selling prices of the Company's fertilizers are basically in line with
the market prices in the respective markets where the Subsidiaries' plants are
located. However, the Company is generally able to charge a slight premium (2
to 4%) over its competitors because of the stability and high quality of its
products. The Joint Venture Agreement for Jiangxi Fenlin Chemical Industry
Co. Ltd. provides that the product price shall be calculated, in general, as
the cost of raw materials plus 12% gross profit. However, as the controlling
party to the Joint Venture, the Company has the right to increase or decrease
prices without the approval of any governmental unit or other party.
THE MARKET
According to the population and its composition statistics
published in the 1998 China Stats Yearbook, in 1997, 70% of the population
(about 866 million people) of China live in rural areas. The per capita
irrigated land of China is 0.04 hectare, which is only approximately 50% of
that of the United States. Total arable land area was reduced between 1961
and 1978 when China initiated the open-door economic policy. Arable area has
been further reduced since 1978. However, during this period, grain output
has increased two to three folds. The output per hectare also increased in a
similar way. The following comparative table shows the trend:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ARABLE LAND -/+ GRAIN OUTPUT -/+ OUTPUT PER -/+
(MILLION HECTARES) (MILLION METRIC TONS) HECTARE (METRIC TONS)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1961 103.4 109.6 1.06
- ------------------------------------------------------------------------------------------------------
1978 97.3 - 5.9% 272.9 +167% 2.74 +158%
- ------------------------------------------------------------------------------------------------------
1997 94.9 - 2.4% 443.5 + 62% 4.67 + 71%
- ------------------------------------------------------------------------------------------------------
Source: FAO & China Statistics Yearbook 1998
</TABLE>
With the reduction of usable land, there is a significant need to
increase the output of crops per hectare for China. China imports over 25%
of its fertilizers requirements and is the world's largest importer of
fertilizers. In 1997 total NPKs imported was 2,592,214 metric tons ("MT"), up
21.8% from previous year's 2,128,280 metric tons. The Chinese government
imposes an import quota system to control the import of fertilizers of all
kinds.
THE WORLDWIDE MARKET
Average annual worldwide consumption of fertilizers was about 130
million MT between 1991 and 1997. In that period, developing countries, in the
aggregate consumed annually an average of 59 million MT, accounting for
5
<PAGE>
45.7% of the total consumption. China was the most significant fertilizer
user in the world and consumed an average of 30 million MT between 1991 and
1997, accounting for 23.5% of worldwide consumption total. During 1997
China's consumption increased to a record high of 36.5 million MT,
representing 27% of total worldwide consumption in that year. India's
fertilizer consumption ranked second, with annual consumption of 14.3 million
MT in 1997, accounting for 10.1% of the world total. The statistics were
obtained from two Worldwide organizations: Food and Agriculture Organisation
(FAO) and Fertilizer Advisory, Development and Information Network for Asia
and the Pacific (FADINAP), under a UN Commission.
MARKET TREND OF CHINA
China is the world's largest producer of fertilizer with total output
in 1997 of 27.6 million MT, which accounted for 18.6% of world production.
Despite being the world's largest fertilizer producing country, China still had
a shortage of 8.9 million MT of fertilizer; 24% of the country's requirement.
China, therefore, has to rely on imports of the same amount to make up the
shortage.
Between 1980 and 1997, total consumption of fertilizer in China
increased from 16.7 to 35.9 million MT, representing an average of 6.7% per
annum. The annual average growth for NPK compound fertilizers was 14.5%,
13.4%, 11.7%, 9.5% and 8.6% from 1993 to 1997 respectively. The Company
believes that demand for fertilizers in the next decade will continue to grow
at the same pace as the last decade.
In order to improve efficient utilization of fertilizers, the PRC
Ministry of Agriculture opted for using more NPK compound fertilizers instead of
single nutrients, such as urea. It is expected that demand for NPK compound
fertilizers will gradually increase over the years. This demand can be
satisfied either by increasing imports or local production. In 1996, in order
to capitalize on the market growth in NPK compound fertilizers, the Company
established its first NPK compound fertilizer production plant in Guangxi and
further expanded into Jiangxi in 1997. As of February 1, 1999, the Company's
total annual production capacity is approximately 125,000 MT.
6
<PAGE>
THE COMPANY'S MARKETS
In 1997, the usage of fertilizer in selected provinces and cities was as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
ARABLE LAND FERTILIZERS CONSUMED FERTILIZERS NPK
PROVINCE (MILLION HECTARE) (1,000 MT) CONSUMED CONSUMED
(KG PER HECTARE) (1,000 MT)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Guangxi 2.6 1,461 562 338
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Jiangxi 2.3 1,204 523 186
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Hebei & Tianjin 6.9 2,768 401 591
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Henan 6.8 3,553 523 583
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Hubei 3.4 2,622 781 394
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Hunan 3.2 1,754 540 254
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Guangdong 2.3 1,947 847 392
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Shandong 6.7 3,867 577 1,103
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Jiangsu 4.4 3,227 733 703
-----------------------------------------------------------------------------------------------
Anhui 4.3 2,406 560 555
-----------------------------------------------------------------------------------------------
Sichuan 6.2 2,709 437 378
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Beijing 0.4 197 493 58
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Shanghai 0.3 131 437 19
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- - - -
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SUB-TOTAL 49.8 27,846 559* 5,554
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NATIONAL TOTAL 94.9 39,807 419* 7,981
-----------------------------------------------------------------------------------------------
* Fertilizer consumed divided by Arable Land
Source: China Statistics Yearbook 1998
</TABLE>
For China's 9th Five-Year Plan (1996-2001), these provinces and
cities were allocated more resources for development of the agricultural
sectors by the Central Government. The Company has established one plant in
Guangxi and two plants in Jiangxi. The Company plans to establish at least
one plant in each of the above listed provinces and cities ("Target
Markets"). The Target Markets are prime agricultural developing provinces in
China. Total cultivated land of these provinces constitutes 38.3% of the PRC
total and their fertilizer consumptions exceed 55.6% of the national total.
Fertilizer consumption per hectare in these provinces is above the Chinese
national average.
Fertilizer applications in these provinces and cities are mainly paddy
rice, wheat, corn, sugar cane, tobacco, cotton, vegetables, tree plantation and
fruit trees.
COMPETITION
LOCAL SUPPLIERS
There are many small fertilizer producers in China, each with annual
output of less than 10,000 MT that supply low quality fertilizers and
compound fertilizers. Because of their small size, these producers are
generally less cost effective, have low quality control and minimal product
development capabilities. Generally, the single or dual chemical nutrients
supplied by these producers are less effective at boosting the growth of
plants as compared to the Company's tailor-made compound fertilizers.
7
<PAGE>
INTERNATIONAL SUPPLIERS
The second group of competitors of the Company is international
producers and the traders who import fertilizers into China such as Agrium
Inc., Cargill Group, Norsk Hydro Group, Kemira Agro Group, BASF Group,
Marubeni Corporation, Mitsubishi Corporation, Canpotex Ltd. and Sinochem
Group (China National Chemicals Import & Export Corp.). The products that are
imported and traded range from single chemical elements like urea, phosphate
and potash to standard NPK compound fertilizers. The NPK ratios of imported
products are in the range of 15-15-15. Qualities of imported products are
generally higher and more stable than existing local made fertilizers. Due to
import duties, import license fees, and shipping and transportation expenses,
imported fertilizers are normally priced 10 - 25% higher than local products.
The total quantities imported are also limited by the import quota system
imposed by the Chinese government.
There are presently a small number of joint venture fertilizer
plants China. Most of these plants are Sino-Foreign joint venture companies
between Chinese owned enterprises and foreign companies. They mainly produce
basic fertilizer ingredients such as urea. These fertilizer producers do not
constitute direct competition for the Company because their plants are
isolated and are unable to supply to the whole country as China's
infrastructure is still under development. Moreover, these plants do not
maintain their own laboratories to develop new formulations and therefore do
not have the capability to manufacture tailor-made compound fertilizers that
suit individual markets. These joint venture fertilizer plants can provide a
stable supply of raw materials to the Company's plants in different provinces.
COMPETITIVE EDGES
The Company specializes in producing compound fertilizers, which
are tailor-made to suit local conditions, such as plant, soil and climate.
There are no more than two competitors in the Company's selected markets
capable of producing custom fertilizer. The Company believes that it has the
following competitive advantages:
- - the Subsidiaries are located within a 200 km radius of its market resulting
in savings in transportation costs, responsive customer services and market
intelligence;
- - emphasis on quality - its compound fertilizer is unmatched as compared
to locally supplied compound fertilizer;
- - wide variety of products for different needs by the local farmers;
- - proactive product and market development; and
- - being local - breaking the import quota system, combining local and foreign
expertise, working closely with local farming supplies bureaus and
cooperatives.
EXPANSION PLANS
The Company's strategy in establishing operations in China is to first
seek out operating production facilities suitable for the Company's product
lines. Once a potential site is targeted, the Company will endeavor to
implement a consistent strategy. Typically, the strategy is to form a joint
venture with a local partner and provide initial capital. On-site management,
financial, accounting and sales personnel are also provided and management
personnel of the Company are expected to actively participate in the management
and operations of the joint venture. Facilities are updated as needed. The
Company then will provide technology to the joint venture with the goal of
developing fertilizers suitable for the local market. Management has determined
that the capital outlay for this type of operation is lower than starting a
green field operation.
The Company's short-term objective is to build annual production
capacities of up to 200,000 MT in selected provinces other than Guangxi and
Jiangxi. Thus, standardized compound fertilizers plants will be set up in these
growing markets. At the same time, quality control programs for ISO 9000
certification will be implemented in the Subsidiaries. Advertising and marketing
programs will be launched to enhance the "AgroCan Three Leaves" brand locally
and nationally.
In the long term, the Company's objective is to become an influential
party in the modernization of the agricultural industry of China. The Company
believes that China's agricultural industry requires high quality fertilizers,
pesticides, seedlings and other necessary inputs for the next century. In order
to raise the total land productivity with
8
<PAGE>
limited arable land, China must apply modern technology to the agricultural
industry. The Company is looking into opportunities to bring biotech and genetic
technologies, which are already available and used in developed countries, to
China.
JOINT VENTURE
The Company presently owns a 70% interest in the Joint Venture
pursuant to a Joint Venture Contract dated October 18, 1996 (the "JV
Contract"). The validity, interpretation, execution and settlement of
disputes is to be governed under PRC law and disputes are to be submitted for
arbitration to the Foreign Economic and Trade Arbitration Commission of China
Council for the Promotion of International Trade. Despite some progress in
developing a legal system, China does not have a comprehensive system of
laws. The interpretation of Chinese laws may be subject to policy changes
reflecting domestic political factors. Enforcement of existing laws, including
laws pertaining to PRC joint ventures, may be uncertain and sporadic, and
implementation may be inconsistent.
EMPLOYEES
As of March 31, 1999, the Company had approximately 46 full-time
employees. There are 4 employees based in the Company's corporate office in
Hong Kong and 42 based in China. Of the 42 employees based in China, 18 are
dedicated to sales related activities and 24 employees are technical personnel
in the agricultural field.
PROPERTIES
HONG KONG. The Company occupies office space in Wanchai, Hong Kong
consisting of 810 square feet. The lease expires November 14, 1999.
NANNING, GUANGXI. The Company's subsidiary, Guangxi Linmao Compound
Fertilizer Ltd., owns a fertilizer manufacturing plant in Nanning, Guangxi,
consisting of 25,500 square feet. The plant was newly constructed in 1997 and
is in good condition. The land lease expires January 28, 2017.
NANCHANG, JIANGXI. The Company's joint venture, Jiangxi Fenglin
Chemical Industry Co. Ltd. leases a fertilizer manufacturing plant in Nanchang,
Jiangxi, consisting of 21,800 square feet. The lease expires October 17, 2001.
FUZHOU, JIANGXI. The Company's subsidiary, Jiangxi Jiali Chemical
Industry Co. Ltd. owns a fertilizer manufacturing plant in Fuzhou, Jiangxi,
consisting of 28,010 square feet. The plant was newly constructed in the fourth
quarter of 1997 and completed in the first quarter of 1998. The plant is in good
condition. The land lease expires June 30, 2057.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Registration Statement on Form 10-SB contains "forward-looking
statements" within the meaning of the Federal securities laws. These
forward-looking statements include, among others, statements concerning the
Company's expectations regarding sales trends, gross and net operating margin
trends, political and economic matters, the availability of equity capital to
fund the Company's capital requirements, and other statements of
expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts. Although the Company believes that the assumptions on which
forward-looking statements are based are reasonable, and the forward-looking
statements are within the definition of the Private Securities Litigation
Reform Act of 1995, the forward-looking statements in this Registration
Statement on Form 10-SB are subject to risks and uncertainties that could
cause actual results to differ materially from those results expressed in or
implied by the statements contained herein.
OVERVIEW:
AgroCan Corporation (the "Company") was incorporated on December 8,
1997 in the State of Delaware. Effective December 31, 1997, the Company issued
1,598,646 shares of common stock, which represented all of the capital stock
outstanding at the completion of this transaction, to the shareholders of
AgroCan (China) Inc., a corporation incorporated in the British Virgin Islands,
in exchange for all of the capital stock of AgroCan (China) Inc. As of December
31, 1997, AgroCan (China) Inc. owned interests in three subsidiaries or joint
ventures as follows: Jiangxi Jiali Chemical Industry Company Limited (100%),
Jiangxi Fenglin Chemical Industry Company Limited (70%), and Guangxi Linmao
Fertilizer Company Limited (100%), all of which were located in the People's
Republic of China ("China" or the "PRC"). Prior to this transaction, the
Company had no significant operations. This transaction was accounted for as a
recapitalization of AgroCan (China) Inc., as the shareholders of AgroCan (China)
Inc. acquired all of the capital stock of the Company in a reverse acquisition.
Accordingly, the assets and liabilities of AgroCan (China) Inc. have been
recorded at historical cost, and the shares of common stock issued by the
Company have been reflected in the consolidated financial
9
<PAGE>
statements giving retroactive effect as if the Company had been the parent
company from inception. The historical consolidated financial statements
consist of the combined financial statements of AgroCan (China) Inc. and its
subsidiaries from the dates of their respective formation or acquisition for all
periods presented. All share and per share amounts presented herein have been
adjusted to reflect the two for one stock split effective February 6, 1998.
AgroCan (China) Inc. was established in 1996 to develop, produce and
sell fertilizers and other products and technologies to enhance the agricultural
output of China. The Company produces various compound fertilizers, which are
the end product made from the combination of three primary nutrients, nitrogen,
phosphate and potassium, mixed together with other elements such as iron, zinc,
copper and manganese. These ingredients are blended in different proportions
and packed into 50 kilogram bags. The Company designs its compound fertilizers
for the specific climate, soil and crop requirements of each individual
geographic market. As of February 1, 1999, the Company had established an
annual production capacity of 125,000 metric tons for compound fertilizers in
Guangxi and Jiangxi, two of the largest agricultural provinces in China, and the
Company intends to enter markets in other provinces in China.
Effective September 19, 1996, Guangxi Linmao Compound Fertilizer
Company Limited became a wholly-owned subsidiary of AgroCan (China) Inc, and
changed its name to Guangxi Linmao Fertilizer Company Limited ("Guangxi Linmao")
on December 25, 1997. Guangxi Linmao commenced operations on September 19,
1996, and became fully operational during the fiscal year ended September 30,
1997.
Effective October 8, 1996, AgroCan (China) Inc. entered into a
joint venture agreement with Nanchang Organic Fertilizer Factory, a
state-owned enterprise in the PRC, for the establishment of a Sino-Foreign
Equity Joint Venture, Jiangxi Fenglin Chemical Industry Company Limited
("Jiangxi Fenglin"). In exchange for capital contributions to Jiangxi Fenglin
aggregating RMB 2,090,642 through September 30, 1998, AgroCan (China) Inc.
received a 70% equity interest in the joint venture. Jiangxi Fenglin
commenced operations on November 28, 1996, and became fully operational
during the fiscal year ended September 30, 1998. The Company accounts for
its interest in the joint venture similar to a majority owned subsidiary
because of its 70% interest, its appointment of four out of six directors to
the Board of Directors, the highest authority for the joint venture and the
Company's right to appoint the Chairman of the Board. The Company recognizes
that joint venture interests in the PRC are generally not consolidated in the
financial statements of U.S. reporting issuers due to rights asserted by the
PRC partner under customary joint venture agreements. However, in view of the
above factors unique to the Company, management deems it appropriate to
consolidate the joint venture operations.
Effective November 3, 1996, AgroCan (China) Inc. entered into a
joint venture agreement with Fuzhou Grain and Oil Industry Corp., a
state-owned enterprise in the PRC, for the establishment of a Sino-Foreign
Equity Joint Venture, Jiangxi Jiali Compound Fertilizer Company Limited. The
Company's had a 55% equity interest in the joint venture as of September 30,
1997. Effective April 5, 1998, the Company acquired the remaining 45%
interest in the joint venture for RMB 724,873 and changed its name to Jiangxi
Jiali Chemical Industry Company Limited ("Jiangxi Jiali"). Jiangxi Jiali
commenced operations on May 1, 1998, and became fully operational during the
fiscal year ended September 30, 1998.
The Company's customers are all located in the PRC, and sales to
such customers are generally on an open account basis. Approximately 76% of
the Company's sales were generated from one customer, Jiayao Forestry
Development Ltd., during the fiscal year ended September 30, 1998. As of
September 30, 1998, approximately 98% of accounts receivable were generated
by trade transactions with five customers, Chunsun United Development General
Co. Ltd., Zhongmin Forestry Plantation Development Ltd., Guijia Forestry
Development Ltd, Nanning Rural Forestry Bureau and Zhanjiang Economic & Trade
Holding Co. Ltd., of which one customer accounted for approximately 87% of
the accounts receivable balance. The Company has obtained agreed upon
schedules of payments from two of the Company's largest customers, which in
total represent approximately 89% of the accounts receivable balance at
September 30, 1998. The payment schedules stipulate that the customers will
settle their balances in full within four to six months subsequent to
September 30, 1998. To date, all customers have settled their balances in
full within the scheduled period.
The financial statements have been prepared in Chinese Renminbi,
with a convenience conversion into United States dollars at a rate of US
$1.00 equals RMB8.28. Foreign currency transactions are translated into
Chinese Renminbi at the exchange rate at the transaction dates. Monetary
assets and liabilities in foreign currencies are translated into Chinese
Renminbi at the rate of exchange at the balance sheet date. Exchange gains
or losses on foreign currency transactions are included in the consolidated
statements of income. The financial statements of the subsidiaries are
translated into Chinese Renminbi at the rate of exchange at the balance sheet
date. Currency translation adjustments arising from the use of different
exchange rates from period to period are included as a separate component in
shareholders' equity.
10
<PAGE>
Consolidated Results of Operations:
Three Months Ended December 31, 1998 and 1997:
Revenues. Revenues for the three months ended December 31, 1998
were RMB 20,163,522, as compared to revenues of RMB 15,217,754 for the three
months ended December 31, 1997, an increase of RMB 4,945,768 or 32.5%. The
increase in revenues in 1998 as compared to 1997 was a result of all three
subsidiaries being fully operational during 1998, as compared to only one
subsidiary being fully operational during 1997.
Gross Profit. Gross profit for the three months ended December 31,
1998 increased by RMB 624,750 or 38.8%, to RMB 2,233,016 or 11.1% of
revenues, as compared to gross profit of RMB 1,608,266 or 10.6% of revenues
for the three months ended December 31, 1997. Gross profit increased in 1998
as compared to 1997 primarily as a result of an increase in revenues.
Administrative and General expenses. Administrative and general
expenses for the three months ended December 31, 1998 increased by RMB 139,840
or 36.9%, to RMB 519,139 or 2.6% of revenues, as compared to administrative and
general expenses of RMB 379,299 or 2.5% of revenues for the three months ended
December 31, 1997. Administrative and general expenses increased in 1998 as
compared to 1997 primarily as a result of additional costs incurred to support
increased revenues.
Selling Expenses. Selling expenses for the three months ended
December 31, 1998 increased by RMB 61,263 or 25.6%, to RMB 300,721 or 1.5% of
revenues, as compared to selling expenses of RMB 239,458 or 1.6% of revenues
for the three months ended December 31, 1997. Selling expenses increased in
1998 as compared to 1997 primarily as a result of increased revenues.
Other Income (Expense). The Company recorded amortization of loan
fees of RMB 153,711 for the three months ended December 31, 1998.
Income Taxes. The Company did not recognize any income taxes for the
three months ended December 31, 1998 and 1997. The Company is subject to income
taxes on an entity basis on income arising in or derived from the tax
jurisdiction in which each entity is domiciled. The Company's British Virgin
Islands subsidiary is not liable for income taxes. The Company's PRC
subsidiaries are subject to income taxes at an effective rate of 33%. Pursuant
to the approval of the relevant PRC tax authorities, the joint venture is fully
exempted from PRC income taxes for two years starting from the date profits are
first recognized, followed by a 50% exemption for the next three years.
Minority Interest. For the three months ended December 31, 1998
and 1997, the Company recorded a minority interest of RMB 49,456 and
RMB 21,304 respectively, to reflect the interest of the Company's 30% joint
venture partner in Jiangxi Fenglin.
Net Income. Net income was RMB 1,209,989 for the three months ended
December 31, 1998, as compared to net income of RMB 968,205 for the three months
ended December 31, 1997.
Fiscal Year Ended September 30, 1998 and the Period from September 19,
1996 to September 30, 1997:
Revenues. Revenues for the fiscal year ended September 30, 1998 were
RMB 64,869,229, as compared to revenues of RMB 20,636,393 for the period from
September 19, 1996 to September 30, 1997, an increase of RMB 44,232,836 or
214.3%. The increase in revenues in 1998 as compared to 1997 was a result of
all three subsidiaries becoming fully operational during 1998, as compared to
only one subsidiary being fully operational during 1997.
Gross Profit. Gross profit for the fiscal year ended September 30,
1998 increased by RMB 4,232,512 or 159.7%, to RMB 6,882,766 or 10.6% of
revenues, as compared to gross profit of RMB 2,650,254 or 12.8% of revenues for
the period from September 19, 1996 to September 30, 1997. Gross profit
increased in 1998 as compared to 1997 as a result of an
11
<PAGE>
increase in revenues, although the gross profit margin declined by 17.2%,
primarily as a result of increases in the cost of raw materials for which the
Company was unable to increase its selling prices to compensate in the
short-term. The Company considers a gross profit margin ranging from 10% to 14%
to be in the normal operating range.
Administrative and General expenses. Administrative and general
expenses for the fiscal year ended September 30, 1998 increased by
RMB 2,551,035 or 591.6%, to RMB 2,982,257 or 4.6% of revenues, as compared to
administrative and general expenses of RMB 431,222 or 2.1% of revenues for the
period from September 19, 1996 to September 30, 1997. Administrative and
general expenses increased in 1998 as compared to 1997 as a result of additional
costs, primarily personnel related, incurred to support increased revenues, and
start-up costs incurred during 1998 related to the two manufacturing plants
that commenced operations during 1998.
Selling Expenses. Selling expenses for the fiscal year ended
September 30, 1998 increased by RMB 67,340 or 472.0%., to RMB 81,607 or .1%
of revenues, as compared to selling expenses of RMB 14,267 or .1% of revenues
for the period from September 19, 1996 to September 30, 1997. Selling
expenses increased in 1998 as compared to 1997 primarily as a result of
increased revenues.
Other Income (Expense). The Company recorded amortization of loan
fees of RMB 409,868 for the fiscal year ended September 30, 1998. On
February 6, 1998, certain shareholders loaned the Company RMB 2,484,000. The
loan is repayable at the earlier of two years from May 1, 1998 or sixty days
after demand by all and/or individual shareholders. In consideration for the
loan, the Company granted to these shareholders stock options to purchase
754,117 shares of common stock of the Company at an exercise price of
$1.50 (RMB 12.42) per share, exercisable during a two year period beginning
February 6, 1998. The stock options were determined to have a fair value of
RMB 1,998,105, which was recorded as an addition to deferred costs, and which
is being charged to operations during the period from February 1998 through
April 2001.
The Company recorded subcontracting income of RMB 751,410 for the
fiscal year ended September 30, 1998, relating to fertilizer processing
services that the Company provided to a customer. The Company did not record
any subcontracting income for the period from September 19, 1996 to September
30, 1997.
Income Taxes. The Company did not recognize any income taxes for the
fiscal year ended September 30, 1997 or the period from September 19, 1996 to
September 30, 1997. The Company is subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which each entity
is domiciled. The Company's British Virgin Islands subsidiary is not liable for
income taxes. The Company's PRC subsidiaries are subject to income taxes at an
effective rate of 33%. Pursuant to the approval of the relevant PRC tax
authorities, the joint venture is fully exempted from PRC income taxes for two
years starting from the date profits are first recognized, followed by a 50%
exemption for the next three years.
Minority Interest. For the fiscal year ended September 30, 1998
and the period from September 19, 1996 to September 30, 1997, the Company
recorded a minority interest of RMB 185,547 and RMB 26,264, respectively,
to reflect the interest of the Company's 30% joint venture partner in Jiangxi
Fenglin.
Net Income. Net income was RMB 4,006,551 for the fiscal year
ended September 30, 1998, as compared to net income of RMB 2,182,765 for the
period from September 19, 1996 to September 30, 1997.
Consolidated Financial Condition:
Liquidity and Capital Resources:
Operating. For the fiscal year ended September 30, 1998, the
Company's operations utilized cash resources of RMB 563,106, as compared to
generating cash resources of RMB 1,451,111 for the period from September 19,
1996 to September 30, 1997. The Company had net working capital of
RMB 8,715,644 at September 30, 1998, as compared to net working capital of
RMB 3,338,563 at September 30, 1997, reflecting a current ratio of 1.17:1 at
September 30, 1998, as compared to 1.43:1 at September 30, 1997. The
Company's operations used cash resources in 1998 as compared to
12
<PAGE>
providing cash resources in 1997 primarily to support substantially increased
revenues, which caused a commensurate increase in accounts receivable, but which
was only partially offset by an increase in accounts payable.
For the three months ended December 31, 1998, the Company's
operations generated cash resources of RMB 1,519,057, as compared to
utilizing cash resources of RMB 1,043,429 for the three months ended December
31, 1997. The Company had net working capital of RMB 8,310,379 at December
31, 1998, as compared to net working capital of RMB 8,715,645 at September
30, 1998, reflecting a current ratio of 1.18:1 at December 31, 1998, as
compared to 1.17:1 at September 30, 1998. The Company's operations provided
cash resources in 1998 as compared to using cash resources in 1997 primarily
as a result of improved accounts receivable collections.
Accounts receivable decreased by RMB 17,019,482 to RMB 37,973,488
at December 31, 1998, from RMB 54,992,970 at September 30, 1998, and
increased by RMB 49,793,535 to RMB 54,992,970 at September 30, 1998, from
RMB 5,199,435 at September 30, 1997. Accounts receivable increased in 1998
as a result of increased sales, and decreased during the three months ended
December 31, 1998 as the rate of sales growth decreased and collections
improved. The Company recorded a provision for doubtful accounts of
RMB 1,159,200 for the fiscal year ended September 30, 1998.
Inventories increased by RMB 10,007,531, from RMB 1,111,681 at
September 30, 1998 to RMB 11,119,212 at December 31, 1998, to support increased
revenues.
Investing. During the fiscal year ended September 30, 1998,
additions to property, plant and equipment aggregated RMB 1,139,220 and
additions to construction in progress aggregated RMB 2,124,491. During the
fiscal year ended September 30, 1997, additions to property, plant and
equipment aggregated RMB 2,329,818 and additions to construction in progress
aggregated RMB 939,465. The Company also acquired the remaining 45% interest
in Jiangxi Jiali during 1998 for RMB 724,873.
During the three months ended December 31, 1998, additions to
property, plant and equipment aggregated RMB 1,476,829 and additions to
construction in progress aggregated RMB 487,460. During the three months
ended December 31, 1997, additions to property, plant and equipment
aggregated RMB 442,359 and additions to construction in progress aggregated
RMB 306,203.
As of December 31, 1998, the Company's had budgeted capital
expenditures of approximately RMB 828,000 through September 30, 1999.
Financing. During August, 1998, the Company completed a private
placement consisting of 250,000 units at $2.00 per unit, with each unit
consisting of one share of common stock and one-tenth of a two-year warrant
to purchase shares of common stock at $.10 per share. This offering generated
net proceeds of RMB 3,731,928. During March 1998, the Company issued 47,914
shares of common stock for RMB 256,680.
The Company anticipates, based on currently proposed plans and
assumptions relating to its operations, that its projected cash flows from
operations, combined with cash that the Company expects to generate from the
sale of its securities during the fiscal year ending September 30, 1999, will
be sufficient to support its planned operations for 12 months. Depending upon
the rate of growth, the Company may seek additional capital in the future to
support expansion of operations and acquisitions.
Inflation and Currency Matters:
In recent years, the Chinese economy has experienced periods of
rapid growth as well as relatively high rates of inflation, which in turn has
resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation. Since
1993, the Chinese government has implemented an economic program designed to
control inflation, which has resulted in the tightening of working capital
available to Chinese business enterprises. The recent Asian financial crisis
has resulted in a general reduction in domestic production
13
<PAGE>
and sales, and a general tightening of credit, throughout China. The success
of the Company depends in substantial part on the continued growth and
development of the Chinese economy. In the last two fiscal years inflation
and changing prices have had minor impact on the Company's financial position
because the actual inflation in the agricultural sector has been relatively
flat and the price level of fertilizer has been stable.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative value
of currencies occur periodically and may, in certain instances, materially
affect the Company's results of operations. In addition, the Renminbi is not
freely convertible into foreign currencies, and the ability to convert the
Renminbi is subject to the availability of foreign currencies. As a result of
the Asian financial crisis, China recently tightened foreign exchange controls.
Effective December 1, 1998, all foreign exchange transactions involving the
Renminbi must take place through authorized banks in China at the prevailing
exchange rates quoted by the People's Bank of China. The Company expects that a
portion its revenues will need to be converted into other currencies to meet
foreign exchange currency obligations, including the payment of any dividends
declared.
The continuing Asian financial crisis has had a negative impact on the
Company's operations by reducing the Chinese economy's growth and general level
of activity. Although the central government of China has recently indicated
that it does not intend to devalue its currency in the near future, devaluation
still remains a possibility. Should the central government of China decide to
devalue the Renminbi, the Company does not believe that such an action would
have a detrimental effect on the Company's operations, since the Company
conducts virtually all of its business in China, and the sale of its products is
settled in Renminbi. However, devaluation of the Renminbi against the United
States dollar would adversely effect the Company's financial performance when
measured in United States dollars.
Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income," ("SFAS No. 130"), which is
effective for financial statements issued for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income, its components and accumulated balances in a
full set of general purpose financial statements. SFAS No. 130 defines
comprehensive income to include all changes in equity except those resulting
from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is presented with the same
prominence as other financial statements. The Company's only current component
of comprehensive income is foreign currency translation adjustment. The Company
adopted SFAS No. 130 for its fiscal year beginning October 1, 1998. Adoption of
SFAS No. 130 did not have a material effect on the Company's financial statement
presentation and disclosures.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise" and which is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
SFAS No. 131 establishes standards for the way that public companies report
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. SFAS No. 131 also establishes standards for
disclosures by public companies regarding information about their major
customers, operating segments, products and services, and the geographic areas
in which they operate. SFAS No. 131 defines operating segments as components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 requires
comparative information for earlier years to be restated. The Company operates
in only one segment, fertilizer manufacturing. The Company adopted SFAS No. 131
for its fiscal year beginning October, 1998. Adoption of SFAS No. 131 did not
have a material effect on the Company's financial statement presentation and
disclosures.
In February 1998, the Financial Accounting Standards Board issued
Statement No. 132, "Employers' Disclosures about Pensions and Other Post
Retirement Benefits" ("SFAS No. 132"), which is effective for financial
statements issued for fiscal years beginning after December 15, 1997. SFAS No.
132 revises employers' disclosures about pension and other post retirement
benefit plans. SFAS No. 132 requires comparative information for earlier years
to be
14
<PAGE>
restated. The Company does not have any pension or other post retirement
benefit plans. The Company adopted SFAS No. 132 for its fiscal year beginning
October 1, 1998. Adoption of SFAS No. 132 did not have a material effect on the
Company's financial statement presentation and disclosures.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), which is effective for financial statements for
all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS No.
133 standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. The Company will adopt SFAS No. 133
for its fiscal year beginning October 1, 1999. The Company currently does not
have any derivative instruments nor is it engaged in hedging activities, thus
the Company does not believe implementation of SFAS No. 133 will have a material
impact on its financial statement presentation and disclosures.
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, REPORTING ON THE COSTS OF
START-UP ACTIVITIES (SOP 98-5). SOP 98-5 requires that costs of start-up
activities, including organization costs, must be expensed as incurred. This
accounting treatment is required for fiscal years beginning after December
15, 1998. On October 1, 1999, the Company will have approximately RMB 149,040
of unamortized costs covered by SOP 98-5 which will be charged to income at
that date.
Year 2000 Issue:
The Year 2000 Issue results from the fact that certain computer
programs have been written using two digits rather than four digits to define
the applicable year. Computer programs that have sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruption of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Based on a recent internal assessment, the Company has determined
that its software programs are already Year 2000 compliant, or that the cost
of any needed modifications will not have a material effect on the Company's
consolidated financial position, results of operations or cash flows. The
Company updated and upgraded its operating systems, accounting and other
software in the second quarter of 1999. All such system and software updates
and upgrades were from major manufacturers and are Year 2000 compliant.
15
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of August 31,
1999 with respect to (i) the beneficial ownership of the Common Stock of the
Company by each beneficial owner of more than 5% of the outstanding shares of
Common Stock of the Company, each director, each executive officer and all
executive officers and directors of the Company as a group, (ii) the number of
shares of Common Stock owned by each such person and group and (iii) the percent
of the Company's Common Stock so owned.
As used in this section, the term beneficial ownership with respect to
a security is defined by Rule 13d-3 under the Exchange Act as consisting of sole
or shared voting power (including the power to vote or direct the vote) and/or
sole or shared investment power (including the power to dispose of or direct the
disposition of) with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, subject to community property laws
where applicable. Each person has sole voting and investment power with respect
to the shares of Common Stock, except as otherwise indicated. Beneficial
ownership consists of a direct interest in the shares of Common Stock, except as
otherwise indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OF OUTSTANDING COMMON
NAME AND ADDRESS OF COMMON STOCK STOCK BENEFICIALLY
BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
<S> <C> <C>
Lawrence Hon(1) 705,002 32.48%
David Cheung(1) 705,002 32.48%
Danny Wu(1) 705,002 32.48%
Yuanhong Chen -- --
Haibo Li -- --
Changfa Li -- --
Chunbao Chen -- --
Donald Lau(2) 420,444 19.37%
Ngai Poon(3) 473,200 21.80%
All Directors and Executive 1,598646 73.65%
Officers as a group (9 persons)
Texon Investments Holding Ltd.(1) 705,002 32.48%
c/o AgroCan Corporation
25 Harbour Road
Wanchai, Hong Kong
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OF OUTSTANDING COMMON
NAME AND ADDRESS OF COMMON STOCK STOCK BENEFICIALLY
BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
<S> <C> <C>
Intermax Ltd.(3) 473,200 21.80%
811, Wing Shan Tower,
73 Des Voeux Road Central,
Hong Kong
Masterpiece Development Ltd.(2) 420,444 19.37%
c/o T. C. Lau & Co
501, China Insurance Group Bldg,
141, Des Voeux Rd.
Central, Hong Kong
Shenton Development 150,000 6.91%
Suite A-3
13/F, Block A
Elizabeth House
250 Gloucester Road
Causeway Bay, Hong Kong
</TABLE>
(1) Messrs. Hon, Wu and Cheung own all the outstanding shares of
Texon Investments Holdings Ltd.
(2) Mr. Lau owns a majority interest in Masterpiece Development Ltd.
(3) Ms. Poon owns all the outstanding shares of Intermax Ltd.
CHANGES IN CONTROL
The Company is unaware of any contract or other arrangement, the
operation of which may at a subsequent date result in a change in control of the
Company.
17
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table and text sets forth the names and ages of all
directors and executive officers of the Company and the key management
personnel as of August 31, 1999. The Board of Directors of the Company is
comprised of only one class. All of the directors will serve until the next
annual meeting of stockholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal.
Executive officers serve at the discretion of the Board of Directors, and are
appointed to serve until the first Board of Directors meeting following the
annual meeting of stockholders. Also provided is a brief description of the
business experience of each director and executive officer and the key
management personnel during the past five years and an indication of
directorships held by each director in other companies subject to the
reporting requirements under the Federal securities laws.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lawrence Hon 50 Chairman of the Board, President and
Chief Executive Officer
David Cheung 44 Chief Financial Officer
Danny Wu 38 Secretary and Director
Yuanhong Chen 36 Vice President, Marketing and Sales
Haibo Li 47 Vice President, Operations
Changfa Li 50 Vice President, Business Development
Chunbao Chen 59 Chief Engineer
Donald Lau 50 Director
Ngai Poon 29 Director
</TABLE>
LAWRENCE HON. Mr. Hon has been Chairman of the Board, President
and Chief Executive Officer of the Company since December 1997. Mr. Hon has
over twenty years of senior managerial experience, in trading and
manufacturing environment, covering different functions. He started his
career as a professional accountant. He served as accounting manager, company
secretary and financial controller in the early stage of his career.
Throughout his career, Mr. Hon has worked mainly for multinational companies.
In 1984, Mr. Hon joined Modern Printing Equipment Ltd. as the Financial
Director. Modern Printing was a subsidiary of KNP BT, a Dutch based
multinational group. KNP BT is the World's eighth largest forestry group
specializing in paper, packaging and printing business. He was promoted to
KNP BT's Regional Financial Director in 1986 and Deputy Managing Director of
Asian Operations in 1990, responsible for Hong Kong, China, Taiwan and Korea.
In 1994 Mr. Hon, together with other entrepreneurs, formed a forestry
company, Sino-Forest Corporation. Sino-Forest's main business is supplying
wood fiber in the form of wood chips to the pulp and paper industry in Japan,
China and other Asian countries. Sino-Forest was first listed in the OTC in
Canada in 1994. Today, Sino-Forest is listed on the Toronto Stock Exchange
with a market capitalization of US$150 million. Mr. Hon is a professional
accountant with fellowship in the respective accountants' associations in
Hong Kong and U.K. He also holds a MBA degree and a professional
qualification in Information Technology.
DANNY WU. Mr. Wu has been Secretary and a director of the Company
since December 1997. Mr. Wu has over ten years of experience in international
trade, manufacturing management and direct investment in China. He started as a
loan officer in the Hang Lung Bank, Hong Kong. He joined the Hong Kong Trade
Development Council (HKTDC) in 1985 and was in charge of promoting HKTDC's
services to the local business community. Subsequently, he
18
<PAGE>
was assigned to promote Hong Kong's export trade and investments and assisted
a number of foreign companies to invest in Hong Kong and China during that
period. Mr. Wu was then promoted to project manager, responsible for
organizing and the overall management of a number of international
conventions and exhibitions. He joined Quanta Industries Inc., a Taiwanese
conglomerate, in 1989 as the general manager of Quanta's Hong Kong office
overseeing trading, direct investment activities and setting up joint venture
enterprises in China. The joint ventures were in catering, cable
manufacturing and metal processing. He was also involved in the general and
financial management of these ventures. Mr. Wu was a founding member of
Sino-Forest Corporation, a listed Canadian company, with investments in
forestry in China. He was responsible for market development of wood chips
and procurement in China and Asia. He is a graduate of University of Hong
Kong with a degree in management studies and economics.
DONALD LAU. Mr. Lau has been a director of the Company since
December 1997. Mr. Lau started his career in New York. He joined Bank of
America in 1974 and specialized in commercial lending for the agricultural
and forest products industries. He covered Colorado, Oregon, Utah, and
Washington. In 1978, he was promoted to vice president and was in charge of
correspondent bank lending in Asia. Based in Hong Kong, he covered the
business of Japan, Taiwan, Philippines, Malaysia, Thailand, Singapore and
Indonesia. He joined Sinomay Company, Inc., New York, in 1982. He was
involved in the building of the first modern bromine extraction plant in
China and a number of technology transfer projects. He also developed the
export business of logs from Oregon and Washington to China. In 1986, he
joined Sinomart International Inc., New York. Sinomart is an investment
company owned by the Guangdong Provincial government of China. He established
a number of joint venture projects in the U.S. and China. Mr. Lau joined
Wonton Food Inc. of New York in 1988 and expanded Wonton's sales and
distribution network. Wonton is the world's largest fortune cookies
manufacturer. He is presently the vice president of Wonton. Mr. Lau received
his science degree and MBA degree from Columbia University, New York, in 1971
and 1974 respectively.
NGAI POON. Miss Poon has been a director of the Company since
December 1997. Miss Poon joined Dupont Inc.'s New York office in 1991 as a
management accountant. In 1996, she moved to Hong Kong and joined Sino Forest
Corporation as an investment analyst. She was responsible for financial
modeling, due diligence and reviewing investment proposals. During her service
with Sino-Forest, she traveled extensively in China. Miss Poon is a graduate of
Columbia University, New York, majoring in accounting.
MANAGEMENT
DAVID CHEUNG. Mr. Cheung has been Chief Financial Officer of the
Company since December 1997. Mr. Cheung has over ten years of experience in
corporate finance covering both commercial and investment banking with emphasis
on merger and acquisitions, treasury and financial control. He has worked for
several major international financial institutions such as the Citibank in the
US, Hong Kong and Canada. He has an MBA in Finance from the University of
California, Berkeley, and also is a US Certified Public Accountant.
YUANHONG CHEN. Mr. Chen has been Vice President, Marketing and Sales,
of the Company since December 1997. Born in Guangxi, Mr. Chen has over fifteen
years experience in marketing and distribution of commodities and general goods
in Southern and Central China. Prior to joining the Company, he was the general
manager of Guangxi Jinhong Trading Co. Ltd. He is a graduate of Nanning
University in Guangxi. He oversees the marketing and sales operations of the
Company.
19
<PAGE>
HAIBO LI. Mr. Li has been Vice President, Operations, of the Company
since December 1997. Mr. Li started as a technician in the Fuzhou Chemical
Factory in the 1970's. He was assigned to the Forestry Bureau of Fuzhou,
Jiangxi, in 1982. In 1990, he returned to Fuzhou Chemical Factory and was
promoted to factory manager. He joined the Company in 1996 and was involved in
establishing the two Jvs in Jiangxi. Mr. Li is responsible for the operations
and control of the Company's plants. Mr. Li is a graduate of Nanchang Technical
College.
CHANGFA LI. Mr. Li has been Vice President, Business Development, of
the Company since December 1997. Mr. Changfa Li has been a manager of the
Company since its inception. He has more than twenty years experience in
management within the chemical industry. He has been involved in the
establishment of four medium and large scaled chemical fiber companies. Since
the early 1980s, he has served as factory manager of Shengma Group, a listed
company in China, manufacturing director of Shenzhen Shunchang Company, and
President of Zhongshan Kesheng Chemical Limited. In 1994, he was appointed as
researcher for the Economic Adjustment Department of the China National Textile
Council. He is now Vice President, Business Development of the Company and is
responsible for formulating strategies and development planning. He received
his chemical engineering degree from Wuhan University and a law degree from
Henan Law School in 1986.
CHUNBAO CHEN. Mr. Chen has been Chief Engineer of the Company since
December 1997. Mr. Chen is a qualified chemical engineer with over 30 years in
the fertilizer and chemical industries. He started as a chemical analyst in
Jiangxi Gandong Chemical Factory where he was responsible for quality control
and product development. During that period, he developed a number of new
products. He received numerous provincial awards for his outstanding
achievements. He was promoted to senior engineer in the 1980's and factory
manager in 1992. He joined the Company in 1997 and is responsible for overall
technical aspects and R & D of the Company. Mr. Chen is a graduate of Fuzhou
University with a major in chemistry.
20
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during fiscal
years ended September 30, 1997 and 1998 to the Company's Chief Executive
Officer. No officer of the Company received annual compensation in excess of
$100,000 per annum.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and
Principal Position Year Salary
------------------ ---- ------
<S> <C> <C>
Lawrence Hon, President and CEO 1997 nil
Lawrence Hon, President and CEO 1998 nil
</TABLE>
COMPENSATION AGREEMENTS
There are currently no long-term employment or consulting agreements
between the Company and the executive officers or directors of the Company.
BOARD OF DIRECTORS
During the year ended September 30, 1998, 2 meetings of the Board of
Directors were held; certain corporate actions were also conducted by unanimous
written consent of the Board of Directors. Directors receive no compensation
for serving on the Board of Directors, but are reimbursed for any out-of-pocket
expenses incurred in attending board meetings. The Board of Directors has
established an audit committee which consists of Lawrence Hon and Ngai Poon.
STOCK OPTION PLAN
The Company adopted the 1998 Stock Option Plan in order to compensate,
motivate and retain key employees, directors and consultants of the Company.
During the year ended September 30, 1998, no stock options were granted pursuant
to the 1998 Stock Option Plan.
21
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS WITH RELATED PARTIES
During 1997, the Company paid various expenses totaling RMB 1,164,772
on behalf of affiliated companies. The advances were reduced to RMB 740,679 at
December 31, 1998. The advances are non-interest bearing and
payable on demand.
During 1997, the PRC shareholder of Jiangxi Fenglin made advances of
RMB 140,801 to the joint venture company for the purchase of raw materials. The
advances are non-interest bearing, payable on demand and amounted to RMB 30,826
at September 30, 1998 (1997: RMB 140,801).
The Company paid factory and production facilities rental of
RMB 105,197 during 1998 (1997: RMB 90,111) to the PRC shareholder of Jiangxi
Fenglin.
TRANSACTIONS WITH A DIRECTOR
Lawrence Hon, a director, has paid various expenses on behalf of
AgroCan (China) Inc., a subsidiary of the Company. The amount due to the
director is non-interest bearing, repayable on demand and amounted to
RMB 88,439 at September 30, 1998 (1997: RMB 100,205).
TRANSACTIONS WITH SHAREHOLDERS
On February 6, 1998, Texan Investment Holding Ltd, Intermax Ltd and
Masterpiece Development Ltd., principal shareholders of the Company, made a
loan of RMB 2,484,000 to the Company. The loan is repayable at the earlier
of three years from May 1, 1998 or sixty days after demand by all and/or
individual shareholders. In consideration for the loan, the Company granted
to these shareholders options to purchase 754,117 shares of common stock of
the Company at an exercise price of $1.50 (RMB 12.42) per share exercisable
during a two-year period beginning February 6, 1998. The options have been
valued at RMB 1,998,105 based upon the fair value of the common stock
underlying the options. Of this amount, RMB 409,868 has been recognized as
an expense during the year ended September 30, 1998 and RMB 1,588,236 has
been deferred. The deferred amount will be charged to expense through April
2001.
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized by its Certificate of Incorporation to issue
an aggregate of 25,000,000 shares of Common Stock, par value $.0001 per share,
and 10,000,000 shares of preferred stock, par value $.0001 per share, which
preferred stock may be issued with such rights, designations and privileges
(including redemption and voting rights) as the Board of Directors may, from
time to time, determine.
The following summary descriptions are qualified in their entirety by
reference to the Company's Restated Certificate of Incorporation, a copy of
which has been filed as an exhibit to the Registration Statement.
COMMON STOCK
The Company is authorized to issue 25,000,000 shares of Common Stock,
par value $.0001 per share. As of April 19, 1999, 2,170,460 shares of Common
Stock were issued and outstanding and held of record by 26 stockholders. Each
stockholder is entitled to one vote per share of Common Stock owned by such
stockholder on all matters submitted to a vote of the stockholders.
22
<PAGE>
The Common Stock is not entitled to preemptive rights and is not
subject to redemption. Subject to the dividend rights of holders of any then
outstanding preferred stock, holders of Common Stock are entitled to receive
dividends at such times and in such amounts as the Board of Directors, from time
to time, may determine. Subject to the liquidation preference of any then
outstanding preferred stock, holders of Common Stock are entitled to receive, on
a pro rata basis, all remaining assets of the Company available for distribution
to the holders of Common Stock in the event of the liquidation, dissolution or
winding up of the Company.
All outstanding shares of Common Stock are validly issued, fully paid
and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority to cause the Company to
issue, without any further vote or action by the stockholders, up to 10,000,000
shares of preferred stock, par value $.0001 per share, in one or more series, to
designate the number of shares constituting any series, and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
voting rights, rights and terms of redemption, redemption price or prices and
liquidation preferences of such series. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders. The issuance of preferred
stock with voting and conversion rights may adversely effect the voting power of
the holders of Common Stock, including the loss of voting control. The Company
has no present plans to issue any shares of preferred stock.
23
<PAGE>
PART II
ITEM 1. MARKET PRICE FOR THE COMMON STOCK
As of April 19, 1999, the number of security holders of record of the
Company's Common Stock was 26. As of such date, 2,170,460 shares were
outstanding. There is no active public market for the Company's Common Stock.
Upon the effective date of this Registration Statement, the Company plans to
apply to have its Common Stock traded on the OTC Electronic Bulletin Board.
ITEM 2. LEGAL PROCEEDINGS
The Company is neither a plaintiff nor a defendant in any pending
legal matters.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The following is information for all securities that the Company has
sold within the past three years without registering the securities under the
Securities Act:
1. On December 31, 1997, the Company issued an aggregate of
1,598,646 shares of Common Stock to the shareholders of AgroCan (China) Inc.
in exchange for all of the outstanding capital stock of AgroCan (China) Inc.
The shares were issued in a private transaction not involving an offering
pursuant to Section 4(2) of the Securities Act. This transaction was
characterized as a reincorporation and had no financial impact on the Company.
2. During March 1998, the Company issued 47,914 shares of Common
Stock to a third party for consideration of RMB 256,680 in cash. The shares
were issued in a private transaction not involving an offering pursuant to
Section 4(2) of the Securities Act.
3. On August 25, 1998, the Company issued an aggregate of 250,000
units, each unit consisting of one share of Common Stock and 1/10th of a
warrant to purchase one share of Common Stock at $0.10 per share, to 43
investors for an aggregate cash purchase price of RMB 4,140,000 in cash. The
shares were issued in a private placement pursuant to Rule 504 of Regulation
D.
4. On August 25, 1998, the Company issued 20,000 shares of Common
Stock and 2-year Warrants to purchase 125,000 shares of Common Stock at $0.10
per share to a consultant for services rendered in connection with the
private placement discussed in Transaction 3, above. The securities were
issued pursuant to Rule 504 of Regulation D.
5. On August 25, 1998, the Company issued 2-year Warrants to
purchase 150,000 shares of Common Stock at $1.50 per share to a consultant
for services rendered in connection with the private placement discussed in
Transaction 3, above. The securities were issued pursuant to Rule 506 of
Regulation D.
6. On August 25, 1998, the Company issued 2-year Warrants to
purchase 25,000 shares of Common Stock at $0.10 per share to a consultant for
services rendered in connection with the private placement discussed in
Transaction 3, above. The shares were issued pursuant to Rule 504 of
Regulation D.
7. On August 25, 1998, the Company issued 150,000 shares of
Common Stock to a consultant for services rendered in connection with the
private placement discussed in Transaction 3, above. The shares were issued
pursuant to Rule 506 of Regulation D.
8. On April 6, 1999, the Company issued 100,000 shares of Common
Stock to a consultant for services rendered in connection with the private
placement discussed in Transaction 3, above. The shares were issued
pursuant to Rule 504 of Regulation D.
9. From October 1998 to December 1998, warrants issued in the
private placement in Transaction 3, above, were exercised for an aggregate of
2,200 shares of common stock. The shares were issued pursuant to Rule 504 of
Regulation D.
10. From January 1999 to February 1999, warrants issued in the
private placement in Transaction 3, above, were exercised for an aggregate of
3,700 shares of common stock. The shares were issued pursuant to Rule 504 of
Regulation D.
24
<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation includes provisions which
limit the liability of its directors. As permitted by applicable provisions of
the Delaware Law, directors will not be liable to the Company for monetary
damages arising from a breach of their fiduciary duty as directors in certain
circumstances. This limitation does not affect liability for any breach of a
director's duty to the Company or its stockholders (i) with respect to approval
by the director of any transaction from which he or she derives an improper
personal benefit, (ii) with respect to acts or omissions involving an absence of
good faith, that the director believes to be contrary to the best interests of
the Company or its stockholders, that involve intentional misconduct or a
knowing and culpable violation of law, that constitute an unexcused pattern or
inattention that amounts to an abdication of his or her duty to the Company or
its stockholders, or that show a reckless disregard for duty to the Company or
its stockholders in circumstances in which he or she was, or should have been
aware, in the ordinary course of performing his or her duties, of a risk of
serious injury to the Company or its stockholders, or (iii) based on
transactions between the Company and its directors or another corporation with
interrelated directors or based on improper distributions, loans or guarantees
under applicable sections of Delaware Law. This limitation of directors'
liability also does not affect the available of equitable remedies, such as
injunctive relief or rescission.
The Company has been advised that it is the position of the Commission
that insofar as the provision in the Company's Restated Certificate of
Incorporation may be invoked for liabilities arising under the Securities Act,
the provision is against public policy and is therefore unenforceable.
25
<PAGE>
AGROCAN CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND
PERIOD FROM SEPTEMBER 19, 1996
TO SEPTEMBER 30, 1997
AND
FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND 1997 (UNAUDITED)
26
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND
PERIOD FROM SEPTEMBER 19, 1996 TO SEPTEMBER 30, 1997 AND
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED)
<TABLE>
<S> <C>
CONTENTS PAGE
Independent auditors' report F-2
Consolidated statements of income F-3
Consolidated balance sheets F-4
Consolidated statements of shareholders' equity F-5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
AGROCAN CORPORATION
We have audited the consolidated balance sheets of AgroCan
Corporation and subsidiaries as of September 30, 1998 and 1997 and the
consolidated statements of income, shareholders' equity and cash flows for
the year ended September 30, 1998 and the period from September 19, 1996 to
September 30, 1997. These consolidated 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 auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit 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 financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above, present fairly, in all material respects, the financial position of
AgroCan Corporation and its subsidiaries as of September 30, 1998 and 1997
and the results of their operations and cash flows for the year ended
September 30, 1998 and the period from September 19, 1996 to September 30,
1997 in conformity with accounting principles generally accepted in the
United States.
HORWATH HONG KONG CPA LIMITED
Certified Public Accountants
Hong Kong
November 9, 1998, except for Note 12,
as to which the date is September 15, 1999
F-2
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND
PERIOD FROM SEPTEMBER 19, 1996 TO SEPTEMBER 30, 1997 AND
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31
1998 1997 1998 1998 1997
---- ---- ---- ---- ----
RMB RMB US$ RMB RMB
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
NET SALES 64,869,229 20,636,393 2,435,208 20,163,522 15,217,754
COST OF SALES 57,986,463 17,986,139 2,165,520 17,930,506 13,609,488
---------- ----------- ------------- ---------- ----------
GROSS PROFIT 6,882,766 2,650,254 269,688 2,233,016 1,608,266
ADMINISTRATIVE AND GENERAL
EXPENSES (2,982,257) (431,222) (62,698) (519,139) (379,299)
SELLING EXPENSES (81,607) (14,267) (36,319) (300,721) (239,458)
------------- -------------- -------------- ----------- ------------
INCOME FROM OPERATIONS 3,818,902 2,204,765 170,671 1,413,156 989,509
OTHER INCOME (EXPENSE)
Subcontracting income 751,410 - - - -
Interest income 31,654 4,264 - - -
Amortization of loan fees (409,868) - (18,564) (153,711) -
------------ ------------------ ------------- ----------------------------
INCOME BEFORE MINORITY INTEREST 4,192,098 2,209,029 152,107 1,259,445 989,509
MINORITY INTEREST (185,547) (26,264) (5,973) (49,456) (21,304)
------------- ------------- -------------- ------------- ------------
NET INCOME 4,006,551 2,182,765 146,134 1,209,989 968,205
============ =========== ============ =========== =========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,666,032 1,598,646 2,067,648 2,067,648 1,598,684
Diluted 1,771,201 1,598,646 2,391,998 2,391,998 1,598,684
BASIC EARNINGS PER SHARE 2.40 1.36 0.07 0.58 0.60
=============== ============== ================ ============== ============
DILUTED EARNINGS PER SHARE 2.26 1.36 0.06 0.51 0.60
=============== ============== ================ ============== ============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION> DECEMBER 31
September 30 ----------------------------------
NOTE 1998 1997 1998 1998 1997
---- ---- ---- ---- ----
RMB RMB US$ RMB RMB
<S> <C> <C> <C> <C> <C> <C>
ASSETS (Unaudited) (Unaudited) (Unaudited)
CURRENT ASSETS
Cash and cash equivalents 2,193,264 2,381,262 211,335 1,749,854 589,271
Accounts receivable, less allowance for doubt-
ful accounts (1998: RMB1,159,200; 1997: $NIL) 4 54,992,970 5,199,435 4,586,170 37,973,488 9,046,092
Other receivables and prepayments 521,872 653,963
Inventories 1,111,681 830,409 1,342,900 11,119,212 3,885,994
Deposits 1,245,527 832,264 505,712 4,187,295 1,233,165
Amounts due from related parties 8 740,679 1,164,772 - - -
------------ ----------- ---------- ----------- -------------
TOTAL CURRENT ASSETS 60,805,993 11,062,105 6,646,117 55,029,849 14,754,522
PROPERTY, PLANT AND EQUIPMENT - NET 5 2,961,516 2,178,857 521,032 4,314,145 2,676,046
CONSTRUCTION IN PROGRESS 6 3,063,956 939,465 428,915 3,551,416 1,245,668
DEFERRED COSTS 1,976,353 299,910 217,729 1,802,796 813,957
------------ ----------- ---------- ----------- -------------
TOTAL ASSETS 68,807,818 14,480,337 7,813,793 64,698,206 19,490,193
=========== =========== ========= ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 48,146,816 6,026,125 4,717,587 39,061,621 7,194,385
Other payables and accruals 1,005,631 230,846 570,042 5,053,971 4,549,512
Deposits received 334,024 1,225,565 40,341
Amounts due to related parties 8 2,603,878 241,006 314,478 2,603,878 -
------------ ----------- ---------- ----------- -------------
TOTAL CURRENT LIABILITIES 52,090,349 7,723,542 5,642,448 46,719,470 11,743,897
MINORITY INTEREST 886,697 931,351 113,062 936,153 952,655
SHAREHOLDERS' EQUITY
Preferred stock, par value US $0.0001 per share,
Authorized 10,000,000 shares; none issued - - - -
Common stock, par value US $0.0001 per share,
authorized 25,000,000 shares; issued and
outstanding 2,068,760 shares at December 31, 1998;
2,066,560 shares at September 30, 1998;
1,598,646 at September 30, 1997 and
December 31, 1997 1,714 1,325 207 1,714 1,325
Capital in excess of par value 7,232,133 3,641,354 873,666 7,233,955 3,641,354
Stock options and warrants 2,395,545 - 289,317 2,395,545 -
Retained earnings
Unappropriated 5,999,381 2,169,045 870,697 7,209,370 3,150,962
Appropriated 189,935 13,720 22,939 189,935
Cumulative foreign currency translation adjustments 12,064 1,457 12,064 -
----------- ------------ --------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 15,830,772 5,825,444 2,058,283 17,042,583 6,793,641
----------- ------------ --------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 68,807,818 14,480,337 7,813,793 64,698,206 19,490,193
=========== =========== ========= =========== ==========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND
PERIOD FROM SEPTEMBER 19, 1996 TO SEPTEMBER 30, 1997
AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
(EXPRESSED IN CHINESE RENMINBI)
<TABLE>
<CAPTION>
CUMULATIVE
STOCK UNAPPRO- APPRO- FOREIGN
COMMON STOCK CAPITAL IN OPTIONS PRIATED PRIATED CURRENCY TOTAL
---------------- EXCESS OF AND RETAINED RETAINED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT PAR VALUE WARRANTS EARNINGS EARNINGS ADJUSTMENTS EQUITY
------- ------ --------- -------- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 19, 1996 - - - - - - - -
Common shares issued
(Note 1(c) and (d)) 1,598,646 1,325 3,641,354 - - - - 3,642,679
Net income - - - - 2,182,765 - - 2,182,765
Staff welfare fund - - - - (13,720) 13,720 - -
--------- ----- --------- --------- --------- ------- -------- -----------
Balance, September 30, 1997 1,598,646 1,325 3,641,354 - 2,169,045 13,720 - 5,825,444
Common shares issued (net
of offering costs) 467,914 389 3,590,779 - - - - 3,591,168
Stock options and warrants 2,395,545 - 2,395,545
Net income - - - - 4,006,551 - - 4,006,551
Cumulative foreign currency
translation adjustments - - - - - - 12,064 12,064
Staff welfare fund - - - - (176,215) 176,215 - -
--------- ----- --------- --------- --------- ------- -------- -----------
Balance, September 30, 1998 2,066,560 1,714 7,232,133 2,395,545 5,999,381 189,935 12,064 15,830,772
Common shares issued 2,200 - 1,822 - - - 1,822
Net income - - - - 1,209,989 - - 1,209,989
--------- ----- --------- --------- --------- ------- -------- -----------
Balance, December 31, 1998 2,068,760 1,714 7,233,955 2,395,545 7,209,370 189,935 12,064 17,042,583
--------- ----- --------- --------- --------- ------- -------- -----------
--------- ----- --------- --------- --------- ------- -------- -----------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND
PERIOD FROM SEPTEMBER 19, 1996 TO SEPTEMBER 30, 1997 AND
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31
-----------------------------------------
1998 1997 1998 1998 1997
----------- --------- ---------- ---------- -----------
RMB RMB US$ RMB RMB
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income 4,006,551 2,182,765 146,134 1,209,989 968,205
Adjustments to reconcile net income to
net cash (used in) provided by operating
activities:
Provision for doubtful accounts 1,159,200 - - - -
Amortization of deferred costs 503,407 48,421 20,961 173,557 17,413
Depreciation 288,508 150,961 15,000 124,200 54,830
Loss (gain) on disposal of fixed assets 17,959 - - - (109,652)
Minority interest in net income 185,547 26,264 5,973 49,456 21,304
(Increase) decrease in accounts receivable (50,952,733) (5,199,434) 2,015,152 16,685,460 (5,603,697)
(Increase) decrease in other receivables,
deposits and prepayments (281,172) (1,486,227) (292,285) (2,420,120) 253,063
(Increase) in inventories (281,272) (830,409) (1,208,639) (10,007,531) (3,055,585)
(Increase) decrease in amounts due from related parties 424,093 (1,164,772) 89,454 740,679 1,164,772
(Decrease) increase in accounts payable 42,120,691 6,026,126 (1,097,246) (9,085,197) 1,168,258
Increase in other payables and accruals 774,784 230,846 488,957 4,048,564 4,318,666
(Increase) decrease in deposits received (891,541) 1,225,564 - - -
(Decrease) increase in amounts due to related parties 2,362,872 241,006 - - (241,006)
---------- ----------- --------- ------------ ----------
Net cash (used in) provided by operating activities (563,106) 1,451,111 183,461 1,519,057 (1,043,429)
---------- ----------- --------- ------------ ----------
INVESTING ACTIVITIES
Deferred costs (181,746) (348,331) - - -
Sales proceeds on disposal of fixed assets 50,094 - - - -
Additions to property, plant and equipment (1,139,220) (2,329,818) (178,361) (1,476,829) (442,359)
Additions to construction in progress (2,124,491) (939,465) (58,872) (487,460) (306,203)
Acquisition of minority interest (724,873) - - - -
---------- ----------- --------- ------------ ----------
Net cash used in investing activities (4,120,236) (3,617,614) (237,233) (1,964,289) (748,562)
---------- ----------- --------- ------------ ----------
FINANCING ACTIVITIES
Minority interest capital contributions 488,744 907,281 - - -
Proceeds from issuance of shares 3,988,608 3,640,484 220 1,822 -
---------- ----------- --------- ------------ ----------
Net cash provided by financing activities 4,477,352 4,547,765 220 1,822 -
---------- ----------- --------- ------------ ----------
Net (decrease) increase in cash and cash equivalents (205,990) 2,381,262 (53,552) (443,410) (1,791,991)
Cash and cash equivalents at beginning of period 2,381,262 - 264,887 2,193,264 2,381,262
Effect of exchange rate changes on cash 17,992 - - -
---------- ----------- --------- ------------ ----------
Cash and cash equivalents at end of period 2,193,264 2,381,262 211,335 1,749,854 589,271
---------- ----------- --------- ------------ ----------
---------- ----------- --------- ------------ ----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Stock options issued to shareholders for loan
fees (Note 8) 1,998,105
---------
---------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
(a) AgroCan Corporation ("The Company") was incorporated on
December 8, 1997 in the State of Delaware, and currently has a
wholly owned subsidiary AgroCan (China) Inc., which has two
wholly owned subsidiaries, Guangxi Linmao Fertilizer Company
Limited and Jiangxi Jiali Chemical Industry Company Limited.
(b) The Company was incorporated with authorized share capital of
25,000,000 shares of common stock with a par value of
US$0.0001 per share and 10,000,000 shares of preferred stock
with a par value of US$0.0001 per share. The shares of
preferred stock may be issued in series having such
designations, powers, preferences, rights and limitations, and
on such terms and conditions as the board of directors may
from time to time determine including the rights, if any, of
the holders thereof with respect to voting, dividends,
redemption, liquidation and conversion. As of December 31,
1998, no shares of preferred stock had been issued.
(c) On November 3, 1996, AgroCan (China) Inc. entered into a joint
venture agreement with FuZhou Grain And Oil Industry Corp., a
state majority owned enterprise in the People's Republic of
China ("PRC"), for the establishment of a Sino-Foreign Equity
Joint Venture, Jiangxi Jiali Compound Fertilizer Company
Limited, in the PRC. The Company's share in the equity
interest in this company as of September 30, 1997 was 55%. On
April 5, 1998, the Company acquired the remaining 45%
interest. On the same date, the subsidiary changed its name to
Jiangxi Jiali Chemical Industry Company Limited ("Jiangxi
Jiali"). Jiangxi Jiali is engaged in the manufacture and
trading of compound fertilizers with production commencing on
May 1, 1998.
(d) On October 8, 1996, AgroCan (China) Inc. entered into a joint
venture agreement with another state majority owned enterprise
in the PRC, Nanchang Organic Fertilizer Factory ("Nanchang")
for the establishment of a Sino-Foreign Equity Joint Venture,
Jiangxi Fenglin Chemical Industry Company Limited ("Jiangxi
Fenglin") in the PRC. AgroCan (China) Inc.'s share in the
equity interest of Jiangxi Fenglin is 70%. The joint venture
has a term of 30 years from November 28, 1996, the date of
incorporation.
Under the terms of the joint venture agreement, Nanchang and
AgroCan (China) Inc. are required to contribute capital of
RMB840,000 and RMB1,960,000 respectively in the form of cash
and business assets relating to the manufacture and retailing
of compound fertilizers to the joint venture. As of September
30, 1998, capital contributions totalling RMB674,895 (1997:
RMB180,214) and RMB2,090,642 (1997: RMB995,223) have been made
by Nanchang and AgroCan (China) Inc. respectively.
F-7
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(e) Guangxi Linmao Compound Fertilizer Company Limited was formed
September 19, 1996, and became a wholly owned subsidiary of
AgroCan (China) Inc. It changed its name to Guangxi Linmao
Fertilizer Company Limited ("Guangxi") on December 25, 1997.
Guangxi is engaged in the manufacture and trading of compound
fertilizers.
(f) Effective December 31, 1997, the Company issued 1,598,646
shares of common stock at US$0.0001 par value to the
shareholders of AgroCan (China) Inc. in exchange for their
interest in AgroCan (China) Inc. and its three subsidiaries
in the PRC. Prior to the exchange, the Company had no
substantial operations and, under generally accepted
accounting principles; the transaction was accounted for as
a recapitalization, as the shareholders of AgroCan (China)
Inc. acquired all of the stock of the Company. Accordingly,
there was no revaluation of assets or liabilities for
financial statement accounting purposes. The transaction
resulted in the following subsidiaries:
<TABLE>
<CAPTION>
COUNTRY OF PERCENTAGE
INCORPORATION OF EQUITY
NAME OF COMPANY AND OPERATION INTEREST HELD PRINCIPAL ACTIVITY
- --------------- ------------- ------------- ------------------
<S> <C> <C> <C>
AgroCan (China) Inc. The British Virgin 100 Investment holding
Islands
Guangxi Linmao Fertilizer The People's 100 Manufacturer and trading
Company Limited Republic of China of compound fertilizers
Jiangxi Jiali The People's 100 Manufacturer and trading
Chemical Industry Republic of China of compound fertilizers
Company Limited
Jiangxi Fenglin Chemical The People's 70 Manufacturer and trading
Industry Company Limited Republic of China of compound fertilizers
</TABLE>
(g) For financial reporting purposes, the consolidated financial
statements reflect the above-mentioned reorganization similar
to a pooling of interests, with assets and liabilities
recorded at historical cost. Because the transaction has been
accounted for as a reverse acquisition, the shares issued by
the Company have been reflected in the financial statements
giving retroactive effect as if the Company had been the
parent company from inception. The consolidated financial
statements incorporate the results of operations and assets
and liabilities of the Company and its subsidiaries. All
intercompany balances and transactions have been eliminated
upon consolidation.
F-8
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(h) Pursuant to a board of directors' resolution of February 6,
1998, the Company approved a two for one stock split, whereby
the outstanding shares of the common stock issued and
outstanding were converted to 1,598,646 shares of common
stock. All references to shares of common stock in the
financial statements have been restated to reflect the two for
one stock split.
(i) Effective March 26, 1998, the Company issued 47,914 shares of
common stock to a third party for consideration of US$31,000
(RMB256,680).
(j) During the period ended September 30, 1998, the Company
authorized a $US750,000 (RMB6,210,000) private placement,
consisting of 375,000 units at US$2.00 (RMB16.56) per unit,
with each unit containing one share of common stock and 1/10th
of a two year warrant to purchase shares of common stock at
US$0.10 (RMB0.828) per share. In connection with the private
placement, the Company also issued 150,000 two-year warrants
to purchase common stock at US$0.10 (RMB0.828) per share to
its financial advisors.
In August 1998, 250,000 units consisting of 250,000 shares of
common stock and 25,000 two-year warrants expiring in August,
2000 were issued pursuant to the above private placement for
consideration of US$450,716 (RMB3,731,928), net of offering
costs. Each warrant entitles the holder upon exercise to
receive from the Company one share of common stock for a
purchase price of US$0.10 (RMB0.828) per share.
Also in August 1998, the Company issued 20,000 shares of
common stock, two-year warrants to purchase 125,000 shares of
common stock at US$0.10 (RMB0.828) per share and two-year
warrants to purchase 150,000 shares of common stock at US$1.50
(RMB12.42) per share to a consultant for services rendered in
connection with the private placement.
In addition, the Company issued two-year warrants to another
consultant to purchase 25,000 shares of common stock at
US$0.10 (RMB0.828) per share for services rendered in
connection with the private placement.
(k) Pursuant to a board of directors' resolution of August 25,
1998, the Company issued 150,000 shares of the Company's
common stock to its financial advisor for services rendered
in connection with the private placement.
(l) The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States
of America ("US GAAP"), and are presented in Chinese Renminbi
("RMB"), the national currency of the PRC (note 2(e)).
F-9
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(m) The consolidated balance sheets as of December 31, 1998 and
1997, the consolidated statements of income and cash flows for
the three months ended December 31, 1998 and 1997, and the
consolidated statements of shareholders' equity for the three
months ended December 31, 1998 have been prepared by the
Company without audit. In the opinion of management, all
adjustments (which include normal recurring adjustments)
necessary to present fairly the financial position, results of
operations and cash flows for all such periods have been made.
2. PRINCIPAL ACCOUNTING POLICIES
(a) The consolidated financial statements include the accounts of
the Company and it's wholly and majority owned subsidiaries.
Material intercompany accounts have been eliminated on
consolidation.
(b) Cash and cash equivalents
For financial reporting purposes, the Company considers all
highly liquid investments purchased with original maturities
of three months or less to be cash equivalents.
(c) Property, plant and equipment
Property, plant and equipment are carried at cost less
accumulated depreciation. Depreciation is provided over their
estimated useful lives, using the straight line method, at the
following annual rates:
Land use rights 5%
Buildings 4.5%
Furniture and equipment 18% - 33 1/3%
Machinery 9% - 20%
Motor vehicles 18%
Repairs and maintenance costs are expensed as incurred.
Management assesses the carrying value of its long-lived
assets for impairment when circumstances warrant such a
review. Management considers projected future operating
results, cash flows, trends and other circumstances in its
assessment. Based on its review, management does not believe
that any impairment has occurred as of September 30, 1998 (or
December 31, 1998, unaudited).
F-10
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(d) Inventories
Inventories are valued at the lower of cost or net realizable
value. Cost includes the cost of raw materials computed using
the first-in, first-out method and, in the case of work in
progress and finished goods, direct labor and an appropriate
proportion of production overhead. Net realizable value is
determined by reference to the sales proceeds of items sold in
the ordinary course of business after the balance sheet date
or management estimates based on prevailing market conditions.
Inventory is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------ -------------------------
1998 1997 1998 1997
---------- --------- ---------- -----------
RMB RMB RMB RMB
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Raw materials 858,379 830,409 7,176,914 3,274,078
Finished goods 253,302 - 3,942,298 611,916
--------- ------- ---------- ---------
1,111,681 830,409 11,119,212 3,885,994
--------- ------- ---------- ---------
--------- ------- ---------- ---------
</TABLE>
(e) Translation of foreign currencies
Transactions and monetary assets and liabilities denominated
in currencies other than RMB are translated into RMB at the
respective applicable rates of exchange quoted by the People's
Bank of China (the "Exchange Rate"). Monetary assets and
liabilites denominated in other currencies are translated into
RMB at the applicable Exchange Rate at the respective balance
sheet dates. The resulting exchange gains or losses are
credited or charged to the consolidated statements of income.
Currency translation adjustments arising from the use of
different exchange rates from period to period are included as
a separate component in shareholders' equity.
The translation of amounts from RMB into US$ for the
convenience of the reader has been made at the rate of
exchange quoted by the People's Bank of China on the
respective balance sheet dates of US$1.00 equal RMB8.28, and
accordingly, differs from the underlying foreign currency
amounts. No representation is made that the RMB amounts could
have been, or could be, converted into US$ at that rate on the
respective balance sheet dates or at any other date.
F-11
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(f) Operating leases
Leases where substantially all the risks and rewards of
ownership of assets remain with the lessors are accounted for
as operating leases. Rentals under operating leases are
charged to expense over the lease term.
(g) Construction in progress
Construction in progress represents the accumulated costs of
factories under construction, which comprise all expenditures
for land use rights and other direct costs attributable to
construction, including the cost of financing. Construction in
progress also includes the cost of machinery under development
and construction for production.
No charge for depreciation is made until assets are placed in
service.
(h) Deferred costs
Expenses incurred in organization of the Company are deferred
and amortized by equal installments over five years.
(i) Revenue recognition
Revenue from sale of goods by the Company, its subsidiaries
and the joint venture is recognized on the delivery of the
goods to customers.
(j) Income taxes
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in the consolidated
statement of operations in the period that includes the
enactment date.
F-12
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(k) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with
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 the financial statements
and the reported amounts of revenues and expenses during the
reporting periods. Management makes these estimates using the
best information available at the time the estimates are made;
however actual results could differ materially from these
estimates.
(l) Offering costs
Costs incurred by the Company for its private placement
offerings of shares of common stock were charged to capital in
excess of par value at the completion of the offerings.
(m) Staff welfare reserve
PRC rules and regulations governing joint ventures and
enterprises require allocation of a portion of annual net
income, if any, to a welfare reserve fund. The amounts to be
reserved are stipulated by PRC laws and regulations. The
reserve cannot be used for purposes other than those for which
it is created and is not distributable as cash dividends.
(n) Stock-based compensation
Statement of Financial Accounting Standards (SFAS) No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, defines a
fair-value-based method of accounting for stock-based employee
compensation and transactions in which an entity issues its
equity instruments to acquire goods or service from
non-employees, and encourages but does not require companies
to record compensation cost for stock-based employee
compensation at fair value. The Company has chosen to account
for stock-based employee compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related
interpretations.
F-13
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(o) Earnings per share
The Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128") during 1997. This statement
requires dual presentation of basic and diluted earnings per
share ("EPS") with a reconciliation of the numerator and
denominator of the EPS computations. Basic per share amounts
are based on the weighted average shares of common stock
outstanding. Diluted earnings per share assume the conversion,
exercise or issuance of all potential common stock instruments
such as options, warrants and convertible securities, unless
the effect is to reduce a loss or increase earnings per share.
Accordingly, this presentation has been adopted for all
periods presented. The basic and diluted weighted average
common shares outstanding are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
PERIOD FROM DECEMBER 31,
YEAR ENDED SEPTEMBER 19, 1996 --------------------------
SEPTEMBER 30, 1998 TO SEPTEMBER 30, 1997 1998 1997
------------------ --------------------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Weighted average
outstanding common
shares used for
basic EPS 1,666,032 1,598,646 2,067,648 1,598,684
Plus incremental
common shares from
assumed issuance
of stock options
and warrants 105,169 - 324,350 -
--------- --------- --------- ---------
Weighted average
outstanding common
shares used for
diluted EPS 1,771,201 1,598,646 2,391,998 1,598,684
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
(p) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income," ("SFAS
No. 130"), which is effective for financial statements issued
for fiscal years beginning after December 15, 1997. SFAS No.
130 establishes standards for the reporting and display of
comprehensive income, its components and accumulated balances
in a full set of general purpose financial statements. SFAS
No. 130 defines comprehensive income to include all changes in
equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized
under current accounting standards as components of
comprehensive income be reported in a financial statement that
is presented with the same prominence as other financial
statements. The Company's only current component of
comprehensive income is foreign currency translation
adjustment. Adoption of SFAS No. 130 is not expected to have a
material effect on the Company's financial statement
presentation and disclosures.
F-14
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(p) Recent Accounting Pronouncements (continued)
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131"), which
supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise" and which is effective for financial
statements issued for fiscal years beginning after December
15, 1997. SFAS No. 131 establishes standards for the way that
public companies report information about operating segments
in annual financial statements and requires reporting of
selected information about operating segments in interim
financial statements issued to the public. SFAS No. 131 also
establishes standards for disclosures by public companies
regarding information about their major customers, operating
segments, products and services, and the geographic areas in
which they operate. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial
information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate
resources and in assessing performance. SFAS No. 131 requires
comparative information for earlier years to be restated. The
Company's results of operations and financial position will
not be affected by implementation of SFAS No. 131 as it
operates in only one segment, fertilizer manufacturing. The
Company is evaluating the effect that adoption of SFAS No. 131
will have on its financial statement disclosures.
In February 1998, the Financial Accounting Standards Board
issued Statement No. 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits" ("SFAS No. 132"),
which is effective for financial statements issued for fiscal
years beginning after December 15, 1997. SFAS No. 132 revises
employers' disclosures about pension and other post retirement
benefit plans. SFAS No. 132 requires comparative information
for earlier years to be restated. The Company's results of
operations and financial position will not be affected by
implementation of SFAS No. 132.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"), which is effective for
financial statements for all fiscal quarters of all fiscal
years beginning after June 15, 1999. SFAS No. 133 standardizes
the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by
requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure
them at fair value. SFAS No. 133 also addresses the accounting
for hedging activities. The Company currently does not have
any derivative instruments nor is it engaged in hedging
activities, thus the Company does not believe implementation
of SFAS No. 133 will have a material impact on its financial
statement presentation or disclosures.
F-15
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. TAXATION
The Company is subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdiction in which each entity is
domiciled. The Company's British Virgin Islands subsidiary is not
liable for income taxes. The Company's PRC subsidiaries include two
wholly owned subsidiaries and a 70% held Sino-Foreign Equity Joint
Venture. The PRC subsidiaries are subject to income taxes at an
effective rate of 33% (30% Chinese national income tax plus 3% Chinese
state income tax). Pursuant to the approval of the relevant PRC tax
authorities, the subsidiaries have been granted a "tax holiday", where
by the subsidiaries are fully exempted from PRC income taxes for two
years starting from the date profits are first made, followed by a 50%
exemption for the next three years. The first year of full income tax
exemption is for the 1998 calendar year. Losses incurred by joint
ventures may be carried forward for five years. Deferred tax assets and
liabilities are not considered material at September 30, 1998 and 1997.
The reconciliation between the effective tax rate and the statutory
United States federal income tax rate is as follows:
<TABLE>
<CAPTION>
Three months ended
Period from December 31,
Year ended September 19, 1996 -------------
September 30,1998 to September 30, 1997 1998 1997
----------------- --------------------- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Statutory U.S. federal tax rate 34% 34% 34% 34%
Difference in foreign statutory rates (1) (1) (1) (1)
Income tax exemption (33) (33) (33) (33)
---- ---- ---- ----
Effective tax rate -% -% -% -%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
The pro forma effect of the tax holiday on net income and earnings per
share is as follows:
<TABLE>
<CAPTION>
Three months ended
December 31,
------------
1998 1997 1998 1997
---- ---- ---- ----
RMB RMB RMB RMB
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income 2,418,108 1,462,455 810,695 648,697
Basic earnings per share 1.49 .91 .41 .41
Diluted earnings per share 1.32 .91 .33 .41
</TABLE>
F-16
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SIGNIFICANT CONCENTRATIONS
The Company grants credit, generally on open account to its customers.
The Company's customers are all located in the PRC. Approximately 76%
of the Company's sales were generated from one customer during the year
ended September 30, 1998.
At September 30, 1998, approximately 98% of accounts receivable were
from trade transactions with five customers, of which one customer
accounted for approximately 87% of the accounts receivable balance. The
Company has obtained agreed upon schedules of payments from two of the
Company's largest customers, which in total represent approximately 89%
of the September 30, 1998 accounts receivable balance. The payment
schedules stipulate that the customers will settle their balances in
full within four to six months from September 30, 1998. Both customers
have made payments on or before the due dates required by the schedules
through November 9, 1998. A general provision of RMB1,159,200 was
provided in 1998, which represents approximately 2% of the accounts
receivable balance as of September 30, 1998.
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1998 1997 1998 1997
---- ---- ---- ----
RMB RMB RMB RMB
Cost: (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Land use rights 430,527 420,508 1,067,408 420,508
Buildings 1,038,453 746,964 1,657,317 995,455
Plant and machinery 1,443,005 681,485 1,650,850 875,353
Furniture and equipment 229,414 202,992 242,654 202,992
Motor vehicles 250,073 277,869 250,073 277,869
---------- ---------- ---------- ----------
Total cost 3,391,472 2,329,818 4,868,302 2,772,177
---------- ---------- ---------- ----------
Accumulated depreciation:
Land use rights 35,563 14,018 48,902 6,964
Buildings 71,961 25,213 90,600 16,328
Plant and machinery 180,297 45,995 249,137 41,433
Furniture and equipment 67,995 28,227 80,126 15,343
Motor vehicles 74,140 37,508 85,392 16,063
---------- ---------- ---------- ----------
429,956 150,961 554,157 96,131
---------- ---------- ---------- ----------
Net 2,961,516 2,178,857 4,314,145 2,676,046
========== ========== ========== ==========
</TABLE>
F-17
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CONSTRUCTION IN PROGRESS
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1998 1997 1998 1997
---- ----- ---- ----
RMB RMB RMB RMB
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cost:
Land use rights 636,881 315,377 - 315,377
Factories under construction 2,427,075 547,871 3,551,416 748,843
Machinery under construction - 76,217 - 181,448
----------- --------- ---------- ----------
3,063,956 939,465 3,551,416 1,245,668
=========== ========= ========== ==========
</TABLE>
7. RESEARCH AND DEVELOPMENT
Research and development cost for the year ended September 30, 1998 and
the period ended September 30, 1997 was RMB175,950 and RMB86,667
respectively. Research and development cost for the three months ended
December 31, 1998 and December 31, 1997 was RMB60,303 (Unaudited) and
RMB20,758 (Unaudited) respectively.
8. RELATED PARTY TRANSACTIONS
(a) Transactions with related parties
(i) During 1997, the Company paid various expenses
totaling RMB1,164,772 on behalf of affiliated
companies. The advances were reduced to RMB740,679 at
December 31, 1998. The advances are non-interest
bearing and payable on demand
(ii) During 1997, the PRC shareholder of Jiangxi Fenglin
made advances of RMB140,801 to the joint venture
company for the purchase of raw materials. The
advances are non-interest bearing, payable on demand
and amounted to RMB30,826 at September 30, 1998
(1997: RMB140,801).
(iii) The Company paid factory and production facilities
rental of RMB105,197 during 1998 (1997: RMB90,111) to
the PRC shareholder of Jiangxi Fenglin.
(b) Transactions with a director
A director has paid various expenses on behalf of a
subsidiary. The amount due to the director is non-interest
bearing, repayable on demand and amounted to RMB88,439 at
September 30, 1998 (1997: RMB100,205).
F-18
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
(c) Transactions with shareholders
On February 6, 1998, certain shareholders made a loan of
RMB2,484,000 to the Company. The loan is repayable at the
earlier of three years from May 1, 1998 or sixty days after
demand by all and/or individual shareholders. In consideration
for the loan, the Company granted to these shareholders
options to purchase 754,117 shares of common stock of the
Company at an exercise price of US$1.50 (RMB12.42) per share
exercisable during a two-year period beginning February 6,
1998. The options have been valued at RMB1,998,105 based upon
the fair value of the common stock underlying the options. Of
this amount, RMB409,868 has been recognized as an expense
during the year ended September 30, 1998 and RMB1,558,236 has
been deferred. The deferred amount will be charged to expense
through April 2001.
9. LEASE COMMITMENTS
The Company leases land, buildings and other equipment under various
contracts. Rental expense for the year ended September 30, 1998 and
the period ended September 30, 1997 was RMB105,197 and RMB90,111,
respectively. Rental expense for the three months ended December 31,
1998 and December 31, 1997 was RMB45,085 (Unaudited) and RMB26,297
(Unaudited), respectively. The future total minimum rental payments
required under operating leases that have remaining non-cancellable
lease terms in excess of one year at September 30, 1998 are as
follows:
<TABLE>
<CAPTION>
RMB
<S> <C> <C>
Year ending September 30, 1999 180,338
2000 180,338
2001 180,338
----------
541,014
----------
----------
</TABLE>
10. WARRANTS AND OPTIONS
The Company adopted a stock option plan (the "Plan") as of February 6,
1998. The Plan allows the Board of Directors, or a committee thereof at
the Board's discretion, to grant stock options to officers, directors,
key employees, and consultants of the Company and its affiliates. An
aggregate of 250,000 shares of common stock has been reserved for
issuance upon exercise of the options granted under the Plan. Pursuant
to the Plan, the exercise price shall in no event be less than the fair
market value of the shares of common stock at the date of grant. As of
September 30, 1998, no stock options have been granted under the Plan.
F-19
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. WARRANTS AND OPTIONS (CONTINUED)
The following is a summary of the status of the Company's stock options
and warrants issued in 1998 in transactions with parties other than
employees:
<TABLE>
<CAPTION>
Options (Note 8) Warrants (Note 1)
------------------------- -----------------------------------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ -----
US$ US$ US$
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year - - - - - -
Granted 754,117 1.50 275,000 1.50 200,000 0.10
Exercised - - - - - -
Forfeited - - - - - -
------- ---- ------- ---- ------- ----
Outstanding at end
of year 754,117 1.50 275,000 1.50 200,000 0.10
------- ---- ------- ---- ------- ----
------- ---- ------- ---- ------- ----
</TABLE>
There were no issued or outstanding stock options or warrants as of
September 30, 1997.
11. RISK CONSIDERATIONS
As a majority of the Company's operations are conducted in the PRC, the
Company is subject to special considerations and significant risks not
typically associated with investments in equity securities of North
American and Western European companies. The Company's operations may
be adversely affected by significant political, economic and social
uncertainties in the PRC.
Although the PRC government has been pursuing economic reform policies
for the past several years, no assurance can be given that the PRC
government will continue to pursue such policies or that such policies
may not be significantly altered, especially in the event of a change
in leadership, social, or political disruption or unforeseen
circumstances affecting the PRC's political, economic and social life.
There is also no guarantee that the PRC government's pursuit of
economic reforms will be consistent or effective.
The Company expects that substantially all of its revenues will be
denominated in RMB. A portion of such revenues will need to be
converted into other currencies to meet foreign currency obligations
such as payment of any dividends declared. Both the conversion of RMB
into foreign currencies and their remittance of foreign currencies
abroad require the PRC government's approval.
F-20
<PAGE>
- -------------------------------------------------------------------------------
AGROCAN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RESTATEMENT OF 1998 FINANCIAL STATEMENTS
Subsequent to the original issue of the Company's 1998 financial
statements, management determined that options issued to a consultant
were issued in connection with the Company's private placement
discussed in Note 1(j) instead of for other consulting services. In
addition, the Company discovered certain clerical errors in computing
the 1998 average outstanding shares of common stock. The effects of
correcting these items was to increase 1998 net income by RMB397,400
and to increase basic and diluted earnings per share by RMB0.16 and
RMB0.25, respectively, from what was originally reported.
F-21
<PAGE>
PART III
<TABLE>
<CAPTION>
Exhibit Number Title
<S> <C>
3.1 Certificate of Incorporation as filed with the Delaware
Secretary of State with amendment.*
3.2 Bylaws*
10.1 Agreement with Nanchang Organic Fertilizer Factory for the
establishment of Jiangxi Fenglin Chemical Industry Company
Limited*
10.2 Lease Agreement for Hong Kong office*
10.3 Land Lease Agreement for Guangxi Linmao*
10.4 Lease Agreement for Jiangxi Fenglin*
10.5 Land Lease Agreement for Jiangxi Jiali*
21.1 Subsidiaries of the Registrant*
27.1 Financial Data Schedule for the year ended September 30,
1998 and the three months ended December 31, 1998
* Previously filed.
</TABLE>
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
AGROCAN CORPORATION
Dated: December 10, 1999 By: /s/ Lawrence Hon
--------------------
Lawrence Hon
President/Chief Executive Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CURRENCY> CHINESE RENMINBI
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1999
<PERIOD-START> OCT-01-1997 OCT-01-1998
<PERIOD-END> SEP-30-1998 DEC-31-1998
<EXCHANGE-RATE> .12077 .12077
<CASH> 2,193,264 1,749,854
<SECURITIES> 0 0
<RECEIVABLES> 56,152,170 39,132,688
<ALLOWANCES> 1,159,200 1,159,200
<INVENTORY> 1,111,681 11,119,212
<CURRENT-ASSETS> 60,805,993 55,029,849
<PP&E> 3,391,472 4,868,302
<DEPRECIATION> 429,956 554,157
<TOTAL-ASSETS> 68,807,818 64,698,206
<CURRENT-LIABILITIES> 52,090,348 46,719,470
<BONDS> 0 0
0 0
0 0
<COMMON> 1,714 1,714
<OTHER-SE> 15,829,058 17,040,869
<TOTAL-LIABILITY-AND-EQUITY> 68,807,818 64,698,206
<SALES> 64,869,229 20,163,522
<TOTAL-REVENUES> 64,869,229 20,163,522
<CGS> 57,986,463 17,930,506
<TOTAL-COSTS> 57,986,463 17,930,506
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 1,159,200 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 4,192,098 1,259,445
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 4,006,551 1,209,989
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,006,551 1,209,989
<EPS-BASIC> 2.40 0.58
<EPS-DILUTED> 2.26 0.51
</TABLE>
