<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-25963
AGROCAN CORPORATION
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
CLI Building, 313 Hennessy Road, Suite 1003, Hong Kong
------------------------------------------------------
(Address of principal executive offices)
852-2723-0983
--------------------------
(Issuer's telephone number)
Not applicable
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of March 31, 2000, the Company had 2,197,460 shares of common stock issued
and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents incorporated by reference: None.
1
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AGROCAN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - March 31, 2000 and
September 30, 1999
Consolidated Statements of Operations and Comprehensive Income
(Loss) (Unaudited) - Three Months and Six Months Ended March
31, 2000 and 1999
Consolidated Statements of Cash Flows (Unaudited) - Six Months
Ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements (Unaudited) - Six
Months Ended March 31, 2000 and 1999
Item 2. Management's Discussion and Analysis or Plan of Operation
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
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AgroCan Corporation
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
September 30,
March 31, 2000 1999
----------------------- -------------
USD RMB RMB
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 473,431 3,929,476 5,027,798
Accounts receivable, net 2,775,029 23,032,739 13,897,249
Inventories (Note 2) 717,585 5,955,955 1,087,978
Deposits and other current assets 350,537 2,909,458 1,973,820
Amounts due from related parties 139,878 1,160,987 1,802,193
--------- ---------- ----------
Total current assets 4,456,460 36,988,615 23,789,038
--------- ---------- ----------
Property, plant and equipment, net 756,625 6,279,987 6,319,950
Construction in progress 2,530 21,000 21,000
Deferred costs 111,898 928,755 1,285,984
--------- ---------- ----------
Total assets 5,327,513 44,218,357 31,415,972
========= ========== ==========
</TABLE>
3
<PAGE>
AgroCan Corporation
Consolidated Balance Sheets (Unaudited) (continued)
<TABLE>
<CAPTION>
September 30,
March 31, 2000 1999
----------------------- -------------
USD RMB RMB
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank loans (Note 3) 93,976 780,000 700,000
Accounts payable 684,109 5,678,106 4,999,944
Other payables and accruals 413,315 3,430,517 2,075,443
Amounts due to related parties 465,326 3,862,208 2,490,614
Income tax payable 31 255 655,850
Advances from customers 1,150,896 9,552,436 153,396
--------- ---------- ----------
Total current liabilities 2,807,653 23,303,522 11,075,247
--------- ---------- ----------
Minority interest 117,422 974,603 1,103,411
Shareholders' equity (Note 4):
Preferred stock, par value
US$0.0001 per share;
authorized - 10,000,000
shares; issued - none
Common stock, par value
US$0.0001 per share;
authorized - 25,000,000 shares;
issued and outstanding - 2,197,460
shares at March 31, 2000
and 2,170,460 shares at
September 30, 1999 219 1,821 1,800
Capital in excess of par 1,056,420 8,768,275 8,745,884
Stock options and warrants 285,532 2,369,919 2,392,308
Retained earnings
- unappropriated 1,020,279 8,468,313 7,806,456
- appropriated 37,682 312,761 271,902
Accumulated other
comprehensive income 2,306 19,143 18,964
--------- ---------- ----------
Total shareholders' equity 2,402,438 19,940,232 19,237,314
--------- ---------- ----------
Total liabilities and
shareholders' equity 5,327,513 44,218,357 31,415,972
========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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AgroCan Corporation
Consolidated Statements of Operations and
Comprehensive Income (Loss) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
2000 2000 1999
--------- ---------- ----------
USD RMB RMB
<S> <C> <C> <C>
Sales 1,687,724 14,008,110 7,167,300
Sales return (Note 7) (10,570,620)
--------- ---------- ----------
Net sales 1,687,724 14,008,110 (3,403,320)
Cost of sales (Note 7) 1,344,958 11,163,154 (2,918,046)
--------- ---------- ----------
Gross profit (loss) 342,766 2,844,956 (485,274)
Administrative and general expenses 272,155 2,258,888 1,342,983
Selling expenses 65,120 540,496 37,318
--------- ---------- ----------
Income (loss) from operations 5,491 45,572 (1,865,575)
Other income (expense):
Interest income 1,261 10,463 32,375
Commission income 30,253 251,100
Amortization of loan fees (18,563) (154,072) (153,692)
--------- ---------- ---------
Income (loss) before income taxes 18,442 153,063 (1,986,892)
Income taxes (Note 5) 14,896 123,636
--------- ---------- ---------
Income (loss) before minority interest 3,546 29,427 (1,986,892)
Minority interest 5,956 49,439 94,665
--------- ---------- ---------
Net income (loss) 9,502 78,866 (1,892,227)
Other comprehensive income (loss):
Foreign currency translation adjustment 260 2,162
--------- ---------- ---------
Comprehensive income (loss) 9,762 81,028 (1,892,227)
========= ========== =========
Net income (loss) per common share
(Note 6):
Basic - .04 (.91)
========= ========== =========
Diluted - .03
========= ==========
Weighted average number of common shares
outstanding:
Basic 2,188,944 2,188,944 2,070,098
========= ========= =========
Diluted 2,505,659 2,505,659
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AgroCan Corporation
Consolidated Statements of Operations and
Comprehensive Income (Loss) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
-----------------------------------
2000 2000 1999
--------- ---------- ----------
USD RMB RMB
<S> <C> <C> <C>
Sales 2,963,965 24,600,910 27,066,342
Sales return (Note 7) (10,570,620)
--------- ---------- ----------
Net sales 2,963,965 24,600,910 16,495,722
Cost of sales (Note 7) 2,405,869 19,968,717 15,012,460
--------- ---------- ----------
Gross profit (loss) 558,096 4,632,193 1,483,262
Administrative and general expenses 398,122 3,304,411 1,862,123
Selling expenses 72,409 600,996 263,403
--------- ---------- ----------
Income (loss) from operations 87,565 726,786 (642,264)
Other income (expense):
Interest income 3,497 29,023 32,375
Commission income 30,253 251,100 264,480
Amortization of loan fees (37,126) (308,143) (307,403)
--------- ---------- ---------
Income (loss) before income taxes 84,189 698,766 (652,812)
Income taxes (Note 5) 15,043 124,857
--------- ---------- ---------
Income (loss) before minority interest 69,146 573,909 (652,812)
Minority interest 15,519 128,808 45,209
--------- ---------- ---------
Net income (loss) 84,665 702,717 (607,603)
Other comprehensive income (loss):
Foreign currency translation adjustment 21 178
--------- ---------- ---------
Comprehensive income (loss) 84,686 702,895 (607,603)
========= ========== =========
Net income (loss) per common share
(Note 6):
Basic .04 .32 (.29)
========= ========== =========
Diluted .03 .28
========= ==========
Weighted average number of common shares
outstanding:
Basic 2,180,023 2,180,023 2,070,098
========= ========= =========
Diluted 2,496,738 2,496,738
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
AgroCan Corporation
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
-----------------------------------
2000 2000 1999
--------- ---------- ----------
USD RMB RMB
<S> <C> <C> <C>
Operating activities:
Net income (loss) 84,665 702,717 (607,603)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Amortization of deferred costs 43,040 357,229 346,491
Depreciation 26,643 221,135 128,017
Minority interest (15,519) (128,808) (45,209)
Changes in operating assets and
liabilities:
(Increase) decrease in -
Accounts receivable (1,100,661) (9,135,490) 37,412,046
Other receivables, deposits and
prepayments (115,225) (956,366) (384,747)
Inventories (586,503) (4,867,977) (3,018,590)
Amounts due from related parties 77,254 641,206 740,679
Increase (decrease) in -
Accounts payable 81,706 678,162 (36,647,030)
Other payables and accruals 84,273 699,480 2,356,346
Amounts due to related parties 165,252 1,371,594 (119,265)
Advances from customers 1,132,414 9,399,040 587,450
--------- ---------- ----------
Net cash provided by (used in)
operating activities (122,661) (1,018,078) 748,585
--------- ---------- ----------
Investing activities:
Additions to property, plant and
equipment (21,828) (181,172) (178,300)
--------- ---------- ----------
Net cash used in investing activities (21,828) (181,172) (178,300)
--------- ---------- ----------
Financing activities:
Proceeds from short-term bank loan 93,976 780,000 699,180
Repayment of short-term bank loan (84,337) (700,000)
Proceeds from issuance of common stock 2,500 20,750
--------- ---------- ----------
Net cash provided by financing
activities 12,139 100,750 699,180
--------- ---------- ----------
Cash and cash equivalents:
Net increase (decrease) (132,350) (1,098,500) 1,269,465
Effect of exchange rate changes on cash 22 178
At beginning of period 605,759 5,027,798 2,193,264
--------- ---------- ----------
At end of period 473,431 3,929,476 3,462,729
========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
AgroCan Corporation
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended March 31, 2000 and 1999
1. Organization and Basis of Presentation
Basis of Presentation - The accompanying consolidated financial statements
include the operations of AgroCan Corporation and its wholly-owned and
majority-owned subsidiaries (the "Company"). All material intercompany balances
and transactions are eliminated at consolidation. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles in the United States and have been presented in Chinese Renminbi
("RMB").
Business - The Company's operations are located in the People's Republic of
China ("China" or the "PRC"), where the Company develops, produces and sells
fertilizers and other products and technologies to enhance the agricultural
output of China. The Company relies on a small number of customers located in
the PRC for most of its sales. The Company also relies on a small number of
suppliers located in the PRC for its raw material purchases.
Foreign Currency Translation - The functional currency of the Company's
operations in the People's Republic of China ("PRC") is the RMB. The accounts of
foreign operations are prepared in their local currency and translated into RMB
using the applicable rate of exchange. The resulting translation adjustments are
included in comprehensive income (loss). Transactions denominated in currencies
other than the RMB are translated into RMB at the applicable exchange rates.
Monetary assets and liabilities denominated in other currencies are translated
into RMB at the applicable rate of exchange at the balance sheet date. The
resulting exchange gains or losses are credited or charged to the consolidated
statement of operations.
The Company's share capital is denominated in USD and the reporting currency is
the RMB.
Translation of amounts from RMB into the USD for the convenience of the reader
has been made at the exchange rate as quoted by the People's Bank of China at
March 31, 2000 of US$1.00 = RMB8.30. No representation is made that the RMB
amounts could have been, or could be, converted into USD at that rate or any
other certain rate.
Comments - The accompanying consolidated financial statements are unaudited, but
in the opinion of management of the Company, contain all adjustments, which
include normal recurring adjustments, necessary to present fairly the financial
position at March 31, 2000, the results of operations for the three months and
8
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six months ended March 31, 2000 and 1999, and the cash flows for the six months
ended March 31, 2000 and 1999. The consolidated balance sheet as of September
30, 1999 is derived from the Company's audited financial statements.
Certain information and footnote disclosures normally included in financial
statements that have been prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the United States Securities and Exchange Commission, although
management of the Company believes that the disclosures contained in these
financial statements are adequate to make the information presented therein not
misleading. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the fiscal year ended September 30, 1999, as filed with the
Securities and Exchange Commission.
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, 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 those estimates.
The results of operations for the three months and six months ended March 31,
2000 are not necessarily indicative of the results of operations to be expected
for the full fiscal year ending September 30, 2000.
2. Inventories
Inventories consisted of the following at March 31, 2000 and September 30, 1999:
<TABLE>
<CAPTION>
March 31, 2000 September 30, 1999
--------------------- ------------------
USD RMB RMB
<S> <C> <C> <C>
Raw materials 477,357 3,962,059 731,196
Finished goods 240,228 1,993,896 356,782
------- --------- ---------
717,585 5,955,955 1,087,978
======= ========= =========
</TABLE>
9
<PAGE>
3. Short-Term Bank Loans
During the fiscal year ended September 30, 1999, the Company arranged a
short-term bank loan of RMB 700,000 to fund operations, which was repaid during
the six months ended March 31, 2000. During the six months ended March 31, 2000,
the Company arranged a new short-term bank loan of RMB 780,000, which was
outstanding at March 31, 2000.
4. Shareholders' Equity
During the three months and six months ended March 31, 2000, 25,000 shares and
27,000 shares of common stock were issued, respectively, as a result of an
equivalent number of two-year common stock purchase warrants being exercised at
$.10 per warrant.
5. Income Taxes
The Company recognized income taxes of RMB 123,636 and RMB 124,857 for the three
months and six months ended March 31, 2000. The Company did not recognize any
income taxes for the three months and six months ended March 31, 1999. 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 effect rate of 33%.
Pursuant to the approval of the relevant PRC tax authorities, the subsidiaries
are 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.
6. Earnings Per Share
Basic earnings per share is based on the weighted average shares of common stock
outstanding. Diluted earnings per share assumes the conversion, exercise or
issuance of all potential common stock instruments such as options, warrants and
convertible securities, unless the effect is to reduce loss per share or
increase earnings per share. Basic and diluted weighted average common shares
outstanding at March 31, 2000 and 1999, as applicable, are presented below. At
March 31, 2000, potentially dilutive securities representing 1,202,117 shares of
common stock were outstanding, consisting of stock options and warrants
exercisable at prices ranging from $0.10 per share (173,000 shares) to $1.50 per
share (1,029,117 shares).
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Weighted average
outstanding
common shares
for basic EPS 2,188,944 2,070,098
=========
Add incremental
common shares
from assumed
issuance of
stock options
and warrants 316,715
---------
Weighted average
outstanding
common shares
used for
diluted EPS 2,505,659
=========
<CAPTION>
Six Months Ended March 31,
--------------------------
2000 1999
---- ----
<S> <C> <C>
Weighted average
outstanding
common shares
for basic EPS 2,180,023 2,070,098
=========
Add incremental
common shares
from assumed
issuance of
stock options
and warrants 316,715
---------
Weighted average
outstanding
common shares
used for
diluted EPS 2,496,738
=========
</TABLE>
11
<PAGE>
7. Sales Return
During the three months ended March 31, 1999, the Company recorded a sales
return of RMB 10,570,620 for product previously sold to a customer that was
returned to the Company for repackaging during March 1999, which has been
reflected in the accompanying financial statements as a reduction to sales for
the three months ended March 31, 1999. The product was repackaged and delivered
to the customer in April 1999, at which time the Company reissued an invoice to
the customer for the full amount.
8. Segment and Geographic Information; Major Customers and
Suppliers
The Company's customers are all located in the PRC, and sales to such customers
are generally on an open account basis. The Company relies on a small number of
customers for most of its sales. With respect to sales to customers that
accounted for 10% or more of total sales, during the three months ended March
31, 2000, three customers accounted for 80% of total sales, and during the three
months ended March 31, 1999, three customers accounted for 71% of total sales;
during the six months ended March 31, 2000, three customers accounted for 86% of
total sales, and during the three months ended March 31, 1999, three customers
accounted for 50% of total sales. As of March 31, 2000, 62% of accounts
receivable were generated by trade transactions with two significant customers,
of which two customers accounted for 64% of the accounts receivable balance.
The Company has also relied on a small number of suppliers located in the PRC
for its raw material purchases. With respect to purchases from suppliers that
accounted for 10% or more of total purchases, during the three months ended
March 31, 2000, two suppliers accounted for 94% of total purchases, and during
the three months ended March 31, 1999, two suppliers accounted for 58% of total
purchases; during the six months ended March 31, 2000, two suppliers accounted
for 93% of total purchases, and during the six months ended March 31, 1999, two
suppliers accounted for 58% of total purchases. As of March 31, 2000, 90% of
accounts payable were generated by trade transactions with such significant
suppliers.
12
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ITEM 2. 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 Quarterly Report on Form 10-QSB for the quarterly period ended March 31,
2000 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. The forward-looking statements in this Quarterly
Report on Form 10-QSB for the quarterly period ended March 31, 2000 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 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.
13
<PAGE>
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
specific climate, soil and crop requirements of each individual geographic
market. As of December 31, 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 contractual ability
to appoint four out of six directors to the Board of Directors, which is 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 companies
that report under the periodic reporting requirements of the United States
Securities and Exchange Commission due to the rights asserted by the PRC partner
under customary joint venture agreements. However, in view of the above factors
specific to the Company, management believes that it is appropriate to
consolidate the joint venture's operations into the Company's consolidated
financial statements.
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
14
<PAGE>
Fertilizer Company Limited. The Company 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. The Company relies on a small number of
customers for most of its sales. With respect to sales to customers that
accounted for 10% or more of total sales, during the three months ended March
31, 2000, three customers accounted for 80% of total sales, and during the three
months ended March 31, 1999, three customers accounted for 71% of total sales;
during the six months ended March 31, 2000, three customers accounted for 86% of
total sales, and during the three months ended March 31, 1999, three customers
accounted for 50% of total sales. As of March 31, 2000, 62% of accounts
receivable were generated by trade transactions with two significant customers,
of which two customers accounted for 64% of the accounts receivable balance.
The Company has also relied on a small number of suppliers located in the PRC
for its raw material purchases. With respect to purchases from suppliers that
accounted for 10% or more of total purchases, during the three months ended
March 31, 2000, two suppliers accounted for 94% of total purchases, and during
the three months ended March 31, 1999, two suppliers accounted for 58% of total
purchases; during the six months ended March 31, 2000, two suppliers accounted
for 93% of total purchases, and during the six months ended March 31, 1999, two
suppliers accounted for 58% of total purchases. As of March 31, 2000, 90% of
accounts payable were generated by trade transactions with such significant
suppliers.
The consolidated financial statements of the Company include the accounts of the
Company and its wholly-owned and majority-owned subsidiaries. All material
intercompany balances and transactions are eliminated at consolidation. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States and have been
presented in Chinese Renminbi ("RMB"). The functional currency of the Company's
PRC operations is the RMB. The accounts of foreign operations are prepared in
their local currency and are translated into RMB using the applicable rate of
exchange. The resulting transaction adjustments are included in comprehensive
income (loss). Transactions denominated in currencies other than the RMB are
translated into RMB at the applicable exchange rates. Monetary assets and
liabilities denominated in other currencies are translated into RMB at the
applicable rate of exchange at the balance sheet date. The resulting exchange
gains or losses are
15
<PAGE>
credited or charged to the consolidated statements of operations.
Consolidated Results of Operations:
Three Months Ended March 31, 2000 and 1999:
Sales. Excluding the effect of a sales return of RMB 10,570,620 during the three
months ended March 31, 1999, sales for the three months ended March 31, 2000
were RMB 14,008,110, as compared to sales of RMB 7,167,300 for the three months
ended March 31, 1999, an increase of RMB 6,840,810 or 95.4%. The increase in
sales in 2000 as compared to 1999 was a result of higher demand resulting in
part from the addition of new customers.
During the three months ended March 31, 1999, the Company recorded a sales
return of RMB 10,570,620 for product previously sold to a customer that was
returned to the Company for repackaging during March 1999, which has been
reflected in the accompanying financial statements as a reduction to sales for
the three months ended March 31, 1999. The product was repackaged and delivered
to the customer in April 1999, at which time the Company reissued an invoice to
the customer for the full amount.
Gross Profit. Gross profit for the three months ended March 31, 2000 was RMB
2,844,956 or 20.3% of sales. The Company had a negative gross margin for the
three months ended March 31, 1999 as a result of the sales return of RMB
10,570,620 during such period.
Administrative and General Expenses. Administrative and general expenses for
the three months ended March 31, 2000 were RMB 2,258,888 or 16.1% of sales,
as compared to RMB 1,342,983 or 18.7% of sales for the three months ended
March 31, 1999, an increase of RMB 915,905 or 68.2%. Administrative and
general expenses, in particular salaries and related costs, increased in 1999
as compared to 1998 primarily as a result of increase in costs incurred to
support and expand business operations, including costs related to office
operations, salaries and travel, as well as the legal and professional fees
associated with the operation of a public company.
Selling Expenses: Selling expenses for the three months ended March 31, 2000
were RMB 540,496 or 3.9% of sales, as compared to RMB 37,318 or .5% of sales for
the three months ended March 31, 1999, an increase of RMB 503,178 or 1,348.4%.
Selling expenses increased in 2000 as compared to 1999 as a result of the
Company's efforts to broaden its customer base and thereby reduce its reliance
on sales to a small number of customers. In that regard, the Company incurred
increased selling costs to support expanded marketing and selling efforts,
including office operations, salaries and travel, as well as product promotion
costs.
16
<PAGE>
Income (Loss) from Operations. Income from operations was RMB 45,572 for the
three months ended March 31, 2000, as compared to a loss from operations of RMB
1,865,575 for the three months ended March 31, 1999.
Other Income (Expense). The Company recorded amortization of loan fees of RMB
154,072 and RMB 153,692 for the three months ended March 31, 2000 and 1999,
respectively.
The Company had interest income of RMB 10,463 and RMB 32,375 for the three
months ended March 31, 2000 and 1999, respectively.
The Company recorded commission income of RMB 251,100 for the three months ended
March 31, 2000. The Company did not have any commission income for the three
months ended March 31, 1999.
Income Taxes. The Company recognized income taxes of RMB 123,636 for the three
months ended March 31, 2000. The Company did not recognize any income taxes for
the three months ended March 31, 1999. 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 effect rate of 33%. Pursuant to the approval of the relevant
PRC tax authorities, the subsidiaries are 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 March 31, 2000 and 1999, the
Company recorded a minority interest of RMB 49,439 and RMB 94,665, respectively,
to reflect the interest of the Company's 30% joint venture partner in Jiangxi
Fenglin.
Net Income (Loss). Net income was RMB 81,028 for the three months ended March
31, 2000, as compared to a net loss of RMB 1,892,227 for the three months ended
March 31, 1999.
Six Months Ended March 31, 2000 and 1999:
Sales. Excluding the effect of a sales return of RMB 10,570,620 during the six
months ended March 31, 2000, sales for the six months ended March 31, 2000 were
RMB 24,600,910, as compared to sales of RMB 27,066,342 for the six months ended
March 31, 1999, a decrease of RMB 2,465,432 or 9.1%. The decrease in sales in
2000 as compared to 1999 was a result of several factors, including an increase
in selling prices and a reduction in sales to customers with low profit margins
and/or weak credit ratings.
17
<PAGE>
During the six months ended March 31, 1999, the Company recorded a sales return
of RMB 10,570,620 for product previously sold to a customer that was returned to
the Company for repackaging during March 1999, which has been reflected in the
accompanying financial statements as a reduction to sales for the six months
ended March 31, 1999. The product was repackaged and delivered to the customer
in April 1999, at which time the Company reissued an invoice to the customer for
the full amount.
Gross Profit. Gross profit for the six months ended March 31, 2000 was RMB
4,632,193 or 18.8% of sales. Gross profit for the six months ended March 31,
1999 was effected by the sales return of RMB 10,570,620 during such period.
Administrative and General Expenses. Administrative and general expenses for the
six months ended March 31, 2000 were RMB 3,304,411 or 13.4% of sales, as
compared to RMB 1,862,123 or 6.9% of sales for the six months ended March 31,
1999, an increase of RMB 1,442,288 or 77.5%. Administrative and general
expenses, in particular salaries and related costs, increased in 1999 as
compared to 1998 primarily as a result of increase in costs incurred to support
and expand business operations, including costs related to office operations,
salaries and travel, as well as the legal and professional fees associated with
the operation of a public company.
Selling Expenses: Selling expenses for the six months ended March 31, 2000 were
RMB 600,996 or 2.4% of sales, as compared to RMB 263,403 or 1.0% of sales for
the six months ended March 31, 1999, an increase of RMB 337,593 or 128.2%.
Selling expenses increased in 2000 as compared to 1999 as a result of the
Company's efforts to broaden its customer base and thereby reduce its reliance
on sales to a small number of customers. In that regard, the Company incurred
increased selling costs to support expanded marketing and selling efforts,
including office operations, salaries and travel, as well as product promotion
costs.
Income (Loss) from Operations. Income from operations was RMB 726,786 for the
six months ended March 31, 2000, as compared to a loss from operations of RMB
642,264 for the six months ended March 31, 1999.
Other Income (Expense). The Company recorded amortization of loan fees of RMB
308,143 and RMB 307,403 for the six months ended March 31, 2000 and 1999,
respectively.
The Company had interest income of RMB 29,023 and RMB 32,375 for the three
months ended March 31, 2000 and 1999, respectively.
The Company recorded commission income of RMB 251,100 for the six months ended
March 31, 2000, as compared to RMB 264,480 for the six months ended March 31,
1999.
18
<PAGE>
Income Taxes. The Company recognized income taxes of RMB 124,857 for the six
months ended March 31, 2000. The Company did not recognize any income taxes for
the six months ended March 31, 1999. 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 effect rate of 33%. Pursuant to the approval of the relevant
PRC tax authorities, the subsidiaries are 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 six months ended March 31, 2000 and 1999, the Company
recorded a minority interest of RMB 128,808 and RMB 45,209, respectively, to
reflect the interest of the Company's 30% joint venture partner in Jiangxi
Fenglin.
Net Income (Loss). Net income was RMB 702,717 for the six months ended March 31,
2000, as compared to a net loss of RMB 607,603 for the six months ended March
31, 1999.
Consolidated Financial Condition - March 31, 2000:
Liquidity and Capital Resources:
Operating. For the six months ended March 31, 2000, the Company's operations
utilized cash resources of RMB 1,018,078, as compared to generating cash
resources of RMB 748,585 for the six months ended March 31, 1999. The Company's
operations utilized cash resources in 2000 as compared to generating cash
resources in 1999 primarily as a result of increases in accounts receivable and
inventories. The increase in accounts receivable and inventories was financed in
substantial part by advances from customers and amounts due from related
parties. At March 31, 2000, cash and cash equivalents had decreased by RMB
1,098,322, to RMB 3,929,476, as compared to RMB 5,027,798 at September 30, 1998.
The Company had working capital of RMB 13,685,093 at March 31, 2000, as compared
to RMB 12,713,791 at September 30, 1998, resulting in current ratios of 1.59:1
and 2.15:1 at March 31, 2000 and September 30, 1999, respectively.
Accounts receivable increased by RMB 9,135,490, to RMB 23,032,739 at March 31,
2000, from RMB 13,897,249 at September 30, 1999. Accounts receivable increased
during the six months ended March 31, 2000 as a result of extended credit terms
offered to certain credit-worthy customers.
Inventories increased by RMB 4,867,977, to RMB 5,955,955 at March 31, 2000, from
RMB 1,087,978 at September 30, 1999. Inventories
19
<PAGE>
increased during the six months ended March 31, 2000 in anticipation of the
forthcoming selling season.
Advances from customers increased by RMB 9,399,040, to RMB 9,552,436 at March
31, 2000, from RMB 153,396 at September 30, 1999.
Investing. During the six months ended March 31, 2000 and 1999, additions to
property, plant and equipment aggregated RMB 181,172 and RMB 178,300,
respectively.
The Company had no significant capital expenditure commitments outstanding at
March 31, 2000.
Financing. During the fiscal year ended September 30, 1999, the Company arranged
a short-term bank loan of RMB 700,000 to fund operations, which was repaid
during the six months ended March 31, 2000. During the six months ended March
31, 2000, the Company arranged a new short-term bank loan of RMB 381,000, which
was outstanding at March 31, 2000.
The Company anticipates, based on currently proposed plans and assumptions
relating to its existing operations, that its projected cash flows from
operations, combined with cash that the Company expects to generate from the
issuance of its securities and from borrowings, will be sufficient to support
its planned operations for the next twelve months. Depending on the Company's
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 economic
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 success of the Company depends in substantial
part on the continued growth and development of the Chinese economy.
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.
20
<PAGE>
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 of its revenues will need to be converted into other currencies to meet
foreign exchange currency obligations, including the payment of any dividends
declared.
Although the central government of China has repeatedly indicated that it does
not intend to devalue its currency in the near future, recent announcements by
the central government of China indicate that devaluation is an increasing
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.
Year 2000 Issue:
As of December 31, 1999, the Company had completed any required modifications to
its software to ensure that its software systems were Year 2000 compliant. The
cost of such modifications was not significant.
Since the date rollover on January 1, 2000, the Company has not experienced any
material adverse effect from the Year 2000 Issue. While the primary risk to the
Company with respect to the Year 2000 Issue continued to be the ability of third
parties to provide goods and services in a timely and accurate manner, the
Company has not experienced any such disruption to date. The Company does not
expect any remaining risks with respect to the Year 2000 Issue to have a
material adverse effect on the Company.
New Accounting Pronouncement:
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, 2000. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those item 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 will adopt SFAS No. 133 for its fiscal
21
<PAGE>
year beginning January 1, 2001. The Company does not expect that adoption of
SFAS No. 133 will have a material impact on its financial statement presentation
or disclosures.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Equity Securities
During the three months and six months ended March 31, 2000, the
Company issued 25,000 shares and 27,000 shares of common stock, respectively, as
a result of an equivalent number of two-year common stock purchase warrants
being exercised at $.10 per warrant. The shares of common stock were issued
without registration in reliance upon the exemption afforded by Section 4(2) of
the Securities Act of 1933, as amended, based on certain representations made to
the Company by exercising warrant holders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K:
Three Months Ended March 31, 2000 - None
23
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AGROCAN CORPORATION
-------------------
(Registrant)
Date: May 19, 2000 By: /s/ LAWRENCE HON
----------------------
Lawrence Hon
President and Chief
Executive Officer
(Duly Authorized
Officer)
Date: May 19, 2000 By: /s/ DAVID CHEUNG
----------------------
David Cheung
Chief Financial Officer
(Principal Financial
and Accounting Officer)
24
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<PAGE>
<ARTICLE> 5
<CURRENCY> CHINESE RENMINBI
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> .12048
<CASH> 3,929,476
<SECURITIES> 0
<RECEIVABLES> 23,032,739
<ALLOWANCES> 0
<INVENTORY> 5,955,955
<CURRENT-ASSETS> 37,262,519
<PP&E> 6,279,987
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,492,261
<CURRENT-LIABILITIES> 23,303,522
<BONDS> 0
0
0
<COMMON> 1,821
<OTHER-SE> 20,212,315
<TOTAL-LIABILITY-AND-EQUITY> 44,492,261
<SALES> 24,600,910
<TOTAL-REVENUES> 24,600,910
<CGS> 19,968,717
<TOTAL-COSTS> 19,968,717
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 698,766
<INCOME-TAX> 124,857
<INCOME-CONTINUING> 702,717
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 702,717
<EPS-BASIC> .32
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