<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
/ / TRANSITION REPORT PURSUANT TO 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 registrant as specified in its charter)
DELAWARE
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
SUITE 1003
CLI BUILDING
313 HENNESSY ROAD
HONG KONG
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 011-852-2723-0983
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.0001 per share
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Revenues for the fiscal year ended September 30, 1999 were $4,907,678.
The aggregate market value of the common equity held by non-affiliates of the
registrant as of September 30, 1999 was $0.
The registrant had 2,170,460 shares of common stock, $.0001 par value per share
outstanding as of December 31, 1999.
Documents Incorporated by Reference: None.
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE>
PART I.
BUSINESS
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
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 December 31, 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 CHEMICAL JIANGXI FENGLIN CHEMICAL GUANGXI LINMAO
INDUSTRY CO. LTD. INDUSTRY CO. LTD. FERTILIZER LTD.
1
<PAGE>
<TABLE>
<CAPTION>
CAPACITY
YEAR OF OWNERSHIP PER YEAR
NAME OF SUBSIDIARY ESTABLISHMENT PERCENTAGE LOCATION (MT) PRODUCT
- ----------------------- ------------------ --------------- --------------- ------------- ------------------------------
<S> <C> <C> <C> <C> <C>
Guanxi Linmao 1996 100% Nanning, 50,000 Compound fertilizers for
Compound Fertilizer Guangxi eucalyptus, citrus, fruit
Ltd. trees, paddy rice, sugar
cane and flowers
Jiangxi Fenglin 1996 70% Jiangxi 25,000 Compound fertilizers for
Chemical Industry Nanchang, aspen, citrus, fruit trees,
Co., Ltd. paddy rice, oil vegetable
and flowers
Jiangxi Jiali 1997 100% Fuzhou, 50,000 Compound fertilizers for
Chemical Industry Jiangxi citrus, fruit trees, paddy
Co., Ltd. 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
8-18-10 Wheat
14-6-10 Cotton
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
12-9-9 Corn
5-10-10 Tobacco
12-8-10 Sugar Cane
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."
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.
3
<PAGE>
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 discrete research projects and testings on
its behalf. The Company's management regularly meets with the government
ministry and bureaus to obtain information on national policies and
statistics with regard 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.
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 December 1999, the Company
established a total of 230 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
4
<PAGE>
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 Statistics 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) -/+ (METRIC TONS) -/+
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1961 103.4 109.9 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
</TABLE>
Statistics Yearbook 1998
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.
5
<PAGE>
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 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 Organization (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 December 31, 1999, the Company's
total annual production capacity is approximately 125,000 MT.
THE COMPANY'S MARKETS
In 1997, the usage of fertilizer in selected provinces and cities was
as follows:
<TABLE>
<CAPTION>
- ------------------------- ---------------------- ------------------------ ------------------------ -----------------------
FERTILIZERS FERTILIZERS NPK
ARABLE LAND CONSUMED CONSUMED CONSUMED
PROVINCE (MILLION HECTARE) (1,000 MT) (KG PER HECTARE) (1,000 MT)
- ------------------------- ---------------------- ------------------------ ------------------------ -----------------------
<S> <C> <C> <C> <C>
Guangxi 2.6 1,461 562 338
Jiangxi 2.3 1,204 523 186
Hebei & Tianjin 6.9 2,768 401 591
Henan 6.8 3,553 523 583
Hubei 3.4 2,622 781 394
Hunan 3.2 1,754 540 254
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------- ---------------------- ------------------------ ------------------------ -----------------------
FERTILIZERS FERTILIZERS NPK
ARABLE LAND CONSUMED CONSUMED CONSUMED
PROVINCE (MILLION HECTARE) (1,000 MT) (KG PER HECTARE) (1,000 MT)
- ------------------------- ---------------------- ------------------------ ------------------------ -----------------------
<S> <C> <C> <C> <C>
Guangdon 2.3 1,947 847 392
Shandong 6.7 3,867 577 1,103
Jiangsu 4.4 3,227 733 703
Anhui 4.3 2,406 560 555
Sichuan 6.2 2,709 437 378
Beijing 0.4 197 493 58
Shanghai 0.3 131 437 19
SUB-TOTAL 49.8 27,846 559* 5,554
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.
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,
7
<PAGE>
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 limited arable land, China must apply
modern technology to the
8
<PAGE>
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 December 31, 1999, the Company had approximately 48 full-time
employees. There are 4 employees based in the Company's corporate office in Hong
Kong and 44 based in China. Of the 44 employees based in China, 20 are dedicated
to sales related activities and 24 employees are technical personnel in the
agricultural field.
ITEM 2. PROPERTIES
HONG KONG. The Company occupies office space in Wanchai, Hong Kong
consisting of 810 square feet. The lease expires May 9, 2001.
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's Security holders
during the fourth quarter of the fiscal year ended September 30, 1999.
9
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no "public market" for shares of common stock of the Company.
The Company has submitted an application for quotations of its common stock on
the OTC Bulletin Board of the National Association of Securities Dealers. No
assurances can be given that any market for the Company's common stock will
develop or be maintained.
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 Critical Success Ltd., a third party with a pre-existing business
relationship with the Company, 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 accredited
investors for an aggregate cash purchase price of RMB 4,140,000 in cash. Of the
43 investors, 6 investors had a pre-existing personal relationships with the
Company's officers and/or directors and 37 investors were introduced to the
Company by financial consultants of the Company who were affiliated with
registered broker-dealers. 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 an accredited unrelated financial 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 an accredited unrelated
financial 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 an accredited unrelated
financial 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.
10
<PAGE>
7. On August 25, 1998, the Company issued 150,000 shares of Common
Stock to an accredited unrelated financial 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 an accredited unrelated financial 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 1,700
shares of common stock. The shares were issued pursuant to Rule 504 of
Regulation D.
11. From November 1999 to December 1999, warrants issued in the private
placement in Transaction 3, above, were exercised for an aggregate of 2,000
shares of common stock. The shares were issued pursuant to Rule 504 of
Regulation D.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
Company's consolidated financial statements and the notes thereto appearing
elsewhere in this Form 10-KSB. Certain statements contained herein that are not
related to historical results, including, without limitation, statements
regarding the Company's business strategy and objectives, future financial
position, expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act") and involve risks and uncertainties. Although the
Company believes that the assumptions on which these forward-looking statements
are based are reasonable, there can be no assurance that such assumptions will
prove to be accurate and actual results could differ materially from those
discussed in the forward looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, regulatory
policies, competition from other similar businesses, and market and general
policies, competition from other similar businesses, and market and general
economic factors. All forward-looking statements contained in this Form 10-KSB
are qualified in their entirety by this statement.
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
11
<PAGE>
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 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
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 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. During the fiscal years ended
September 30, 1999 and 1998, the Company relied on a small number of customers
for most of its sales. With respect to sales to customers that
12
<PAGE>
accounted for 10% or more of total sales, during the fiscal year ended
September 30, 1999, three customers accounted for 62% of total sales, and
during the fiscal year ended September 30, 1998, one customer accounted for
76% of total sales. As of September 30, 1999, 86% of accounts receivable were
generated by trade transactions with five significant customers, of which one
customer accounted for 57% of the accounts receivable balance. As of
September 30, 1998, 98% of accounts receivable were generated by trade
transactions with five significant customers, of which one customer accounted
87% 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 fiscal year ended
September 30, 1999, two suppliers accounted for 58% of total purchases, and
during the fiscal year ended September 30, 1998, one supplier accounted for 81%
of total purchases. As of September 30, 1999 and 1998, 78% and 91%,
respectively, 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 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 statements
of operations.
CONSOLIDATED RESULTS OF OPERATIONS:
FISCAL YEAR ENDED SEPTEMBER 30, 1999 AND 1998 -
Revenues. Revenues for the fiscal year ended September 30, 1999 were
RMB 40,733,729, as compared to revenues of RMB 64,869,229 for the year ended
September 30, 1998, a decrease of RMB 24,135,500 or 37.2%. The decrease in
revenues in 1999 as compared to 1998 was a result of several factors, including
an increase in selling prices, the Asian financial crisis, and the Company
reducing sales to customers with low profit margins and/or weak credit profiles.
Gross Profit. Gross profit for the fiscal year ended September 30, 1999
was 5,434,398 or 13.3% of revenues, as compared to RMB 6,882,766 or 10.6% of
revenues for the fiscal year ended September 30, 1998, a decrease of RMB
1,448,368 or 21.0%. The gross profit margin increased in 1999 as compared to
1998 as a result of the Company raising its prices to focus on higher-margin
customers, although total gross profit decreased as a result of the decline in
revenues.
Administrative and General Expenses. Administrative and general
expenses for the fiscal year ended September 30, 1999 increased by RMB 800,971
or 26.9%, to RMB 3,783,228 or 9.3% of revenues, as compared to RMB 2,982,257 or
4.6% of revenues for the fiscal year ended September 30, 1998. Administrative
and general expenses, in particular salaries and related costs, increased in
1999 as compared to 1998 primarily as a result of an 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
13
<PAGE>
professional fees associated with the operation of a public company. Included
in administrative and general expenses in 1999 are non-cash consulting fees
of RMB 1,510,600.
Selling Expenses. Selling expenses for the fiscal year ended September
30, 1999 increased by RMB 442,918 or 542.7%, to RMB 524,525 or 1.3% of revenues,
as compared to RMB 81,607 or .1% of revenues for the fiscal year ended September
30, 1998. Selling expenses increased in 1999 as compared to 1998 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 costs to support expanded marketing and selling efforts,
including office operations, salaries and travel, as well as product promotion
costs.
Other Income (Expense). The Company recorded amortization of loan fees
of RMB 616,283 and RMB 409,868 for the fiscal years ended September 30, 1999 and
1998, respectively. The Company recorded subcontracting income of RMB 1,200,000
and RMB 751,410 for the fiscal years ended September 30,1999 and 1998,
respectively. The Company recorded commission income of RMB 857,880 for the
fiscal year ended September 30, 1999. The Company did not record any commission
income during the fiscal year ended September 30, 1998.
Income Taxes. 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.
The Company recorded income taxes for the fiscal year ended September
30, 1999 of RMB 656,998. The Company did not record any income taxes for the
fiscal year ended September 30, 1998. For two of the Company's three
subsidiaries, the 100% tax exemption expired as of September 30, 1998, with the
third subsidiary's 100% tax exemption expiring as of September 30, 1999.
Accordingly, for two of its three subsidiaries, the Company recorded income
taxes for the fiscal year ended September 30, 1999, which represented the first
full year of profits of such subsidiaries taxable at 50% of the standard rate.
Minority Interest. For the fiscal years ended September 30, 1999 and
1998, the Company recorded a minority interest of RMB 185,547 and RMB 78,527,
respectively, to reflect the interest of the Company's 30% joint venture partner
in Jiangxi Fenglin.
Net Income. Net income was RMB 1,889,042 the fiscal year ended
September 30, 1999, as compared to net income of RMB 4,006,551 for the fiscal
year ended September 30, 1998.
CONSOLIDATED FINANCIAL CONDITION:
LIQUIDITY AND CAPITAL RESOURCES - SEPTEMBER 30, 1999:
Operating. For the fiscal year ended September 30, 1999, the Company's
operations generated cash resources of RMB 2,780,379, as compared to utilizing
cash resources of RMB 563,106 for the fiscal year ended months ended September
30, 1998. The Company's operations generated cash resources in 1999 as compared
to utilizing cash resources in 1998 primarily a result of reductions in accounts
receivable, which reflected improved credit control and asset management. The
increased cash flow
14
<PAGE>
generated from collections of accounts receivable was utilized to reduce
accounts payable. The Company had net working capital at September 30, 1999
of RMB 12,713,791, as compared to net working capital of RMB 8,715,644 at
September 30, 1998, reflecting a current ratio of 2.15:1 at September 30,
1999, as compared to 1.17:1 at September 30, 1998.
Accounts receivable decreased by RMB 41,095,721, to RMB 13,897,249 at
September 30, 1999, from RMB 54,992,970 at September 30, 1998. Accounts
receivable decreased during the fiscal year ended September 30, 1999 as a result
of decreased sales and the collection of accounts receivable.
Accounts payable decreased by RMB 43,146,872, to RMB 4,999,944 at
September 30, 1999, from RMB 48,146,816 at September 30, 1998. Accounts payable
decreased during the fiscal year ended September 30, 1999 as a result cash
generated from accounts receivable collections being utilized to pay accounts
payable.
Investing. During the fiscal year ended September 30, 1999, additions
to property, plant and equipment aggregated RMB 752,228. During the fiscal year
ended September 30, 1998, additions to property, plant and equipment aggregated
RMB 1,139,220.
The Company did not have any additions to construction in progress
during the fiscal year ended September 30, 1999. During the fiscal year ended
September 30, 1998, additions to construction in progress aggregated RMB
2,124,491. Additions to construction in process reflect the construction of an
extension to the main production facility of one of the Company's operating
subsidiaries, to support an increase in annual production capacity. Construction
costs were funded by the sale of the Company's common stock.
The Company had no significant capital expenditure commitments
outstanding at September 30, 1999.
During the fiscal year ended September 30, 1998, the Company acquired
the minority interest in one of its subsidiaries for RMB 724,873.
Financing. During the fiscal year ended September 30, 1999, the Company
incurred a short-term bank loan of RMB 700,000 to fund operations. The bank loan
is secured by the Company's cash deposit of US$120,000, bears interest at 5.61%
per annum, and is due and payable on December 23, 1999.
During the fiscal year ended September 30, 1998, the Company
received RMB 3,988,608 from the issuance of 467,914 shares of common stock,
respectively.
During the fiscal years ended September 30, 1999 and 1998, the
Company's minority interest partner contributed capital to the joint venture of
RMB 138,187 and RMB 488,744, respectively.
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.
15
<PAGE>
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 recent
Asian financial crisis has resulted in a general reduction in domestic
production 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.
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 has 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 of 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 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.
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 defined
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
16
<PAGE>
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. 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, the manufacture and
sale of fertilizer products. The Company adopted SFAS No. 131 for its fiscal
year beginning October 1, 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 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
disclosure.
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 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 will adopt SFAS
No. 133 for its fiscal year beginning October 1, 2000. The Company currently
does not have any derivative instruments nor is it engaged in any hedging
activities, thus the Company does not believe that implementation of SFAS No.
133 will have a material effect on its financial statement presentation and
disclosures.
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 date 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 disruptions 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 Year 2000 compliant.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Filed herewith are the following financial statements:
Consolidated Financial Statements for the Years ended September 30,
1999 and 1998.
17
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
18
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 December 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 51 Chairman of the Board, President and Chief
Executive Officer
David Cheung 45 Chief Financial Officer
Danny Wu 39 Secretary and Director
Yuanhong Chen 37 Vice President, Marketing and Sales
Haibo Li 48 Vice President, Operations
Changfa Li 51 Vice President, Business Development
Chunbao Chen 60 Chief Engineer
Donald Lau 51 Director
Ngai Poon 30 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
19
<PAGE>
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 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 bachelor of 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.
20
<PAGE>
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.
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.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during fiscal
years ended September 30, 1998 and 1999 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 AND POSITION YEAR SALARY
---------------------- ---- ------
<S> <C> <C>
Lawrence Hon, President and CEO 1998 nil
Lawrence Hon, President and CEO 1999 nil
</TABLE>
21
<PAGE>
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, 1999, 2 meetings of the Board of
Directors were held. Additionally, 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, 1999, no stock options were
granted pursuant to the 1998 Stock Option Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December
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 COMMON STOCK STOCK BENEFICIALLY
OF 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%
Donald Lau (2) 420,444 19.37%
Nai Poon (3) 473,200 21.80%
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PERCENTAGE OF
NUMBER OF SHARES OF OUTSTANDING COMMON
NAME AND ADDRESS COMMON STOCK STOCK BENEFICIALLY
OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
All Directors and Executive Officers as a 1,598,646 73.65%
group (5 persons)
Texon Investments Holding Ltd. (1) 705,002 32.48%
c/o AgroCan Corporation
25 Harbour Road
Wanchai, Hong Kong
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 Ltd. 150,000 6.91%
Suite 901
Kee Hung Commercial Building
80 Queen's Road East
Hong Kong
</TABLE>
(1) Messrs. Hon, Wu and Cheung own all the outstanding shares of Texon
Investments Holdings Ltd. which is the record owner of such shares.
(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.
ITEM 12. CERTAIN TRANSACTIONS
TRANSACTIONS WITH RELATED PARTIES
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.
23
<PAGE>
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 RMB30,826
at September 30, 1998 (1997: RMB140,801).
During the year, the Company paid various expenses totaling RMB15,000
on behalf of AgroCan International Holdings Inc.
During the year, the Company paid various expenses on behalf of the PRC
shareholder of Jiangxi Fenglin amounting to RMB129,818.
The Company paid factory and production facilities rental of RMB180,000
during the year (1998: RMB105,197) to the PRC shareholder of Jiangxi Fenglin.
TRANSACTIONS WITH DIRECTORS
During the year, the Group made advances to and paid various expenses
totalling RMB634,469 on behalf of directors.
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.
TRANSACTIONS WITH SHAREHOLDERS
On February 6, 1998, certain shareholders made a loan of US$300,000
(RMB2,484,000) to the Company. 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 of 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
US$241,317 (RMB1,994,355) based upon the market value of the common stock
underlying the options. Of this amount, RMB616,283 (1998 : RMB409,099) has been
recognized as an expense during the year ended September 30, 1999 and RMB968,973
(1998 : RMB1,585,256) has been deferred. The deferred amount is being amortized
to expense through May 1, 2001.
24
<PAGE>
PART IV
Exhibit Number Title
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 Lease Agreement for Jiangxi Jiali*
21.1 Subsidiaries of the Registrant*
27.1 Financial Data Schedule for the year ended September
30, 1999.
* Incorporated by reference to the Company's Form 10-SB
filed with the Commission on May 4, 1999.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
AGROCAN CORPORATION
By: /s/ Lawrence Hon
-----------------
Lawrence Hon
President, Chief
Executive Officer
Dated: January 13, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /S/ LAWRENCE HON Dated: January 13, 2000
-----------------------------------
Lawrence Hon
President, Chief Executive Officer and Director
By: /S/ DAVID CHEUNG Dated: January 13, 2000
-----------------------------------
David Cheung
Chief Financial Officer
(principal financial and accounting officer)
By: /S/ DANNY WU Dated: January 13, 2000
-----------------------------------
Danny Wu
Secretary and Director
By: /S/ DONALD LAU Dated: January 13, 2000
-----------------------------------
Donald Lau
Director
By: /S/ NGAI POON Dated: January 13, 2000
-----------------------------------
Ngai Poon
Director
<PAGE>
AGROCAN CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
Independent Auditors' Reports F-2 to F-3
Consolidated statements of income F-4
Consolidated balance sheets F-5
Consolidated statements of shareholders' equity F-6
Consolidated statements of cash flows F-7
Notes to consolidated financial statements F-8 to F-21
</TABLE>
F-1
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
AGROCAN CORPORATION
We have audited the consolidated balance sheet of AgroCan
Corporation and subsidiaries as of September 30, 1999 and the consolidated
statement of income, shareholders' equity and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with generally accepted
auditing standards. 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 audit provides
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, 1999 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
HORWATH GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
November 18, 1999
F-2
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
AGROCAN CORPORATION
We have audited the consolidated balance sheet of AgroCan
Corporation and subsidiaries as of September 30, 1998 and the consolidated
statement of income, shareholders' equity and cash flows for the year then
ended. 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 audit.
We conducted our audit 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
audit provides 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 the
results of their operations and cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
HORWATH HONG KONG CPA LIMITED
Certified Public Accountants
Hong Kong
November 9, 1998
F-3
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
NOTE 1999 1999 1998
---- ---- ----
US DOLLARS RMB RMB
<S> <C> <C> <C> <C>
NET SALES $ 4,907,678 40,733,729 64,869,229
COST OF SALES 4,252,931 35,299,331 57,986,463
---------------- ---------------- ----------------
GROSS PROFIT 654,747 5,434,398 6,882,766
ADMINISTRATIVE AND GENERAL EXPENSES (455,811) (3,783,228) (2,982,257)
SELLING EXPENSES (63,196) (524,525) (81,607)
---------------- ---------------- ----------------
INCOME FROM OPERATIONS 135,740 1,126,645 3,818,902
OTHER INCOME (EXPENSE)
Commission income 103,359 857,880 -
Subcontracting income 144,578 1,200,000 751,410
Interest income 6,786 56,325 31,654
Amortization of loan fees (74,251) (616,283) (409,868)
---------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 316,212 2,624,567 4,192,098
INCOME TAXES 3 79,156 656,998 -
---------------- ---------------- ----------------
INCOME BEFORE MINORITY INTEREST 237,056 1,967,569 4,192,098
MINORITY INTEREST (9,461) (78,527) (185,547)
---------------- ---------------- ----------------
NET INCOME $ 227,595 1,889,042 4,006,551
================ ================ ================
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 2(o) 2,115,368 2,115,368 1,666,032
Diluted 2(o) 2,459,083 2,459,083 1,771,201
BASIC EARNINGS PER SHARE $ 0.11 0.89 2.40
================ ================ ================
DILUTED EARNINGS PER SHARE $ 0.09 0.77 2.26
================ ================ ================
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOTE 1999 1999 1998
---- ---- ----
US DOLLARS RMB RMB
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 605,759 5,027,798 2,193,264
Accounts receivable, less allowance for
doubtful accounts (1999 : RMB280,000;
1998 : RMB1,159,200) 1,674,367 13,897,249 54,992,970
Other receivables and prepayments 62,623 519,776 521,872
Inventories 131,082 1,087,978 1,111,681
Deposits 175,186 1,454,044 1,245,527
Amounts due from related parties 9 217,132 1,802,193 740,679
---------------- ---------------- ----------------
TOTAL CURRENT ASSETS 2,866,149 23,789,038 60,805,993
PROPERTY, PLANT AND EQUIPMENT - NET 5 761,440 6,319,950 2,961,516
CONSTRUCTION IN PROGRESS 6 2,530 21,000 3,063,956
DEFERRED COSTS 154,938 1,285,984 1,976,353
---------------- ---------------- ----------------
TOTAL ASSETS $ 3,785,057 31,415,972 68,807,818
================ ================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short term bank loan 8 $ 84,337 700,000 -
Accounts payable 602,403 4,999,944 48,146,816
Other payables and accruals 250,053 2,075,443 1,005,631
Deposits received 18,481 153,396 334,024
Amounts due to related parties 9 300,074 2,490,614 2,603,878
Income tax payable 3 79,018 655,850 -
---------------- ---------------- ----------------
TOTAL CURRENT LIABILITIES 1,334,366 11,075,247 52,090,349
MINORITY INTEREST 132,942 1,103,411 886,697
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 2,170,460 shares at September 30,
1999; 2,066,560 at September 30, 1998 217 1,800 1,714
Capital in excess of par value 1,053,721 8,745,884 7,232,133
Stock options and warrants 11 288,230 2,392,308 2,395,545
Retained earnings
Unappropriated 940,537 7,806,456 5,999,381
Appropriated 32,759 271,902 189,935
Other comprehensive income 2,285 18,964 12,064
---------------- ---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 2,317,749 19,237,314 15,830,772
---------------- ---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,785,057 31,415,972 68,807,818
================ ================ ================
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Stock
Capital in options
Common stock excess of and
SHARES AMOUNT PAR VALUE WARRANTS
------ ------ --------- --------
RMB RMB RMB
<S> <C> <C> <C> <C>
Balance, September 30, 1997 1,598,646 1,325 3,641,354 -
Issuance of common stock (net of
offering costs) (Note 1(c) and (d)) 467,914 389 3,590,779 -
Stock options and warrants - - - 2,395,545
Staff welfare reserve
Comprehensive income:
Net income for the year ended
September 30, 1998
Other comprehensive income - - - -
Comprehensive income - - - -
-------------- -------------- -------------- --------------
Balances, September 30, 1998 2,066,560 1,714 7,232,133 2,395,545
Issuance of common stock for
services 100,000 86 1,510,514 -
Exercise of warrants 3,900 - 3,237 (3,237)
Staff welfare reserve - - - -
Comprehensive income:
Net income for the year ended
September 30, 1999 - - -
Other comprehensive income - - - -
Comprehensive income - - - -
-------------- -------------- -------------- --------------
Balances, September 30, 1999 2,170,460 1,800 8,745,884 2,392,308
============== ============== ============== ==============
<CAPTION>
Unappro- Appro-
priated priated Other Total
retained retained comprehensive shareholders'
EARNINGS EARNINGS INCOME EQUITY
-------- -------- ------ ------
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Balance, September 30, 1997 2,169,045 13,720 - 5,825,444
Issuance of common stock (net of
offering costs) (Note 1(c) and (d)) - - - 3,591,168
Stock options and warrants - - - 2,395,545
Staff welfare reserve (176,215) 176,215
Comprehensive income:
Net income for the year ended
September 30, 1998 4,006,551 4,006,551
Other comprehensive income - - 12,064 12,064
Comprehensive income - 4,018,615
-------------- ------------- -------------- --------------
Balances, September 30, 1998 5,999,381 189,935 12,064 15,830,772
Issuance of common stock for
services - - - 1,510,600
Exercise of warrants - - - -
Staff welfare reserve (81,967) 81,967 - -
Comprehensive income:
Net income for the year ended
September 30, 1999 1,889,042 - - 1,889,042
Other comprehensive income - - 6,900 6,900
Comprehensive income - 1,895,942
-------------- ------------- -------------- --------------
Balances, September 30, 1999 7,806,456 271,902 18,964 19,237,314
============== ============= ============== ==============
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1999 1998
---- ---- ----
US DOLLARS RMB RMB
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 227,595 1,889,042 4,006,551
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for doubtful accounts - - 1,159,200
Amortization of deferred costs 87,840 729,073 503,407
Depreciation 52,620 436,750 288,508
Compensation expense related to stock issuance 182,000 1,510,600 -
Loss on disposal of fixed assets - - 17,959
Minority interest in net income 9,461 78,527 185,547
Decrease (increase) in accounts receivable 4,951,292 41,095,721 (50,952,733)
(Increase) in other receivables, deposits and
prepayments (24,870) (206,421) (281,172)
Decrease (increase) in inventories 2,855 23,703 (281,272)
(Increase) decrease in amounts due from
related parties (127,893) (1,061,514) 424,093
(Decrease) increase in accounts payable (5,198,418) (43,146,872) 42,120,691
Increase in tax payable 79,018 655,850 -
Increase in other payables and accruals 128,893 1,069,812 774,784
(Decrease) in deposits received (21,762) (180,628) (891,541)
(Decrease) increase in amounts due to related parties (13,646) (113,264) 2,362,872
---------------- ---------------- ----------------
Net cash provided by (used in) operating activities 334,985 2,780,379 (563,106)
---------------- ---------------- ----------------
INVESTING ACTIVITIES
Deferred costs (4,663) (38,704) (181,746)
Sales proceeds on disposal of fixed assets - - 50,094
Additions to property, plant and equipment (90,630) (752,228) (1,139,220)
Additions to construction in progress - - (2,124,491)
Acquisition of minority interest - - (724,873)
---------------- ---------------- ----------------
Net cash used in investing activities (95,293) (790,932) (4,120,236)
---------------- ----------------- ----------------
FINANCING ACTIVITIES
Short term bank loan 84,337 700,000 -
Minority interest capital contributions 16,649 138,187 488,744
Proceeds from issuance of shares - - 3,988,608
---------------- ---------------- ----------------
Net cash provided by financing activities 100,986 838,187 4,477,352
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents 340,678 2,827,634 (205,990)
Cash and cash equivalents at beginning of period 264,249 2,193,264 2,381,262
Effect of exchange rate changes on cash 832 6,900 17,992
---------------- ---------------- ----------------
Cash and cash equivalents at end of period $ 605,759 5,027,798 2,193,264
================ ================ ================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Stock options issued to shareholders for loan fees
(Note 7(d)) $ - - 1,998,105
================ ================ ================
</TABLE>
See notes to consolidated financial statements
F-7
<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 September 30,
1999, 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.
("Party A"), 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 Group's share in
the equity interest in this company as of September 30, 1997
was 55%. On April 5, 1998, the Group 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
US$101,449 (RMB840,000) and US$236,715 (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. On October 28, 1998, all of the above
required capital was fully contributed by Nanchang and the
Company.
(e) Guangxi Linmao Compound Fertilizer Company Limited was formed
on September 19, 1996 and became a wholly owned subsidiary of
AgroCan (China) Inc. during the year ended September 30, 1997
and 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-8
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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
recapitalisation, 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 Chemical The People's 100 Manufacturer and trading
Industry Company Limited Republic of China of compound fertilizers
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
(hereinafter referred to as the "Group" or "Company"). All
intercompany balances and transactions have been eliminated
upon consolidation.
(h) Pursuant to a board of directors' resolution passed on February
6, 1998, the Company approved a two for one stock split,
whereby the 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.
F-9
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(i) Effective March 26, 1998, the Company issued 47,914 shares of
common stock to a third party for a consideration of US$31,000
(RMB256,680).
(j) During the period ended September 30, 1998, the Company
authourized a $US750,000 (RMB6,210,000) private placement,
consisting of 375,000 units at US$2.00 (RMB16.56) per unit,
whith 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 comprising 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 at the
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) Pursuant to a board of directors' resolution passed on
December 31, 1998, the Company issued 100,000 shares of common
stock at US$1.82 (RMB15.11) per share to a consultant. The
Company recognized RMB1,510,600 of general and administrative
expense related to this transaction.
(m) 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)).
2. PRINCIPAL ACCOUNTING POLICIES
(a) The consolidated financial statements include the accounts of
the Company and it's subsidiaries. Material intercompany
balances and transactions have been eliminated on
consolidation.
F-10
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(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:
<TABLE>
<S> <C>
Land use rights 5%
Buildings 4.5%
Furniture and equipment 18% - 33 1/3%
Machinery 9% - 20%
Motor vehicles 18%
</TABLE>
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, 1999.
(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.
F-11
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(d) Inventories (continued)
Inventory is comprised of the following as of September 30:
<TABLE>
<CAPTION>
1999 1999 1998
----------- ------------ --------------
<S> <C> <C> <C>
US DOLLARS RMB RMB
Raw materials $ 88,096 731,196 858,379
Finished goods 42,986 356,782 253,302
----------- ----------- --------------
$131,082 1,087,978 1,111,681
----------- ------------ --------------
----------- ------------ --------------
</TABLE>
(e) Translation of foreign currencies
Transactions and monetary assets and liabilities denominated
in currencies other than RMB are translated into RMB at the
respective applicable rates of exchange quoted by the People's
Bank of China (the "Exchange Rate"). Monetary assets and
liabilities denominated in other currencies are translated
into RMB at the applicable Exchange Rate at the respective
balance sheet dates. The resulting exchange gains or losses
are credited or charged to the consolidated statements of
income. Currency translation adjustments arising from the use
of different exchange rates from period to period are included
as a separate component in shareholders' equity.
The translation of amounts from RMB into US$ 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 RMB8.30 as of
September 30, 1999 and US$1.00 equal RMB8.28 as of September
30, 1998 and accordingly, differs from the underlying foreign
currency amounts. No representation is made that the RMB
amounts could have been, or could be, converted into US$ at
that rate on the respective balance sheet dates or at any
other date.
(f) 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.
F-12
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(g) Construction in progress
Construction in progress represents the accumulated costs of
factories under construction, which comprise all expenditures
on 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 will be made until assets are
placed in service.
(h) Deferred costs
Expenses incurred in organization of the Company and loan
fees are deferred and amortized by equal installments over
five years or the term of the related financial instrument.
In April 1998, the American Institute of Certified Public
Accountants Issued Statement of Position 98-5 (SOP 98-5),
ACCOUNTING FOR THE COSTS OF START-UP ACTIVITIES, which
requires the costs of start-up activities to be expensed as
incurred. The definition of start-up activities included in
SOP 98-5 encompasses costs that are associated with
organizing a new entity (organization costs), SOP 98-5 is
effective for fiscal years beginning after December 15, 1998
and requires that all capitalized start-up costs be written
off as a cumulative affect of a change in accounting
principle. Management believes that SOP 98-5 will not have
a material impact on Company's financial statements.
(i) Revenue recognition
Revenue from sale of goods by the Company, its subsidiaries
and the joint venture is recognized on the delivery of 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 income in the period that includes the enactment
date.
(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.
F-13
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(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 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 services 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.
(o) Earning per share
The Company adopted Statement of Financial Accounting Standard
No.128 ("SFAS 128") during 1997. This statement requires dual
presentation of basic and diluted earning per share ("EPS")
with a reconciliation of the numerator and denominator of the
EPS computations. Basic earning per share amounts are based on
the weighted average share of common stock outstanding.
Diluted earning 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 as of September 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Weighted average outstanding common share
used for basic EPS 2,115,368 1,666,032
Plus incremental common shares from assumed
issuance of stock options and warrants 343,715 105,169
---------------- ----------------
Weighted average outstanding common shares
used for diluted EPS 2,459,083 1,771,201
================ ================
</TABLE>
F-14
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(p) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, "Reporting Comprehensive Income,"
("SFAS No. 130"). SFAS No. 130 established 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. During the year ended September
30, 1999, the Company adopted SFAS No. 130. The Company's
only current component of comprehensive income is foreign
currency translation adjustment.
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 established 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. The Company adopted
SFAS No. 131 in 1999. The Company's results of operations
and financial position were not affected by implementation
of SFAS No. 131 as it operates in only one segment,
fertilizer manufacturing.
In February 1998, the Financial Accounting Standards Board
issued Statement No. 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits" ("SFAS No.
132"). SFAS No. 132 revises employers' disclosures about
pension and other post retirement benefit plans. The
Company adopted SFAS No. 132 in 1999. The Company's results
of operations and financial position were not affected by
implementation of SFAS No. 132.
F-15
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(p) Recent Accounting Pronouncements (continued)
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 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.
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 comprises two
wholly foreign owned enterprises 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 exempt 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. They are also exempt from the state
income tax throughout the term of the PRC subsidiaries. In 1999, the
two-year, 100% exemption expired for Jiangxi Fenglin and Guangxi
Linmao. Losses incurred by joint ventures may be carried forward for
five years. Deferred tax assets and liabilities are not considered
material at September 30, 1999 and 1998.
The reconciliation between the effective tax rate and the statutory
United States federal income tax rate is as follows:
<TABLE>
<CAPTION>
Year ended Year ended
September 30, September 30,
1999 1998
------------------ ------------------
<S> <C> <C>
Statutory U.S. federal tax rate 34% 34%
Difference in foreign statutory rates (1) (1)
Income tax exemption (8) (33)
------------------ ------------------
Effective tax rate 25% -%
================== ==================
</TABLE>
F-16
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. TAXATION (CONTINUED)
The pro forma effect of the tax holiday on net income and earnings per
share is as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------
1999 1998
---------------------- ----------------------
RMB RMB
<S> <C> <C>
Net income 1,680,000 2,418,108
Basic earnings per share 0.79 1.49
Diluted earnings per share 0.68 1.32
</TABLE>
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 29%
and 76% of the Company's sales were generated from one customer during
the years ended September 30, 1999 and 1998, respectively.
At September 30, 1999 and 1998, approximately 86% and 98% of accounts
receivable were from trade transactions with five customers, of which
one customer accounted for approximately 57% and 87% of the accounts
receivable balance.
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1999 1999 1998
-------- ---- ----
US DOLLARS RMB RMB
<S> <C> <C> <C>
Cost:
Land use rights $ 129,009 1,070,775 430,527
Buildings 495,902 4,115,985 1,038,453
Plant and machinery 179,952 1,493,600 1,443,005
Furniture and equipment 30,904 256,504 229,414
Motor vehicles 30,095 249,792 250,073
------------ ---------------- ----------------
Total cost $ 865,862 7,186,656 3,391,472
------------ ---------------- ----------------
</TABLE>
F-17
<PAGE>
- --------------------------------------------------------------------------------
AGROCAN CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
<TABLE>
<CAPTION>
1999 1999 1998
---- ---- ----
US DOLLARS RMB RMB
<S> <C> <C> <C>
Accumulated depreciation:
Land use rights $ 8,025 66,611 35,563
Buildings 24,854 206,288 71,961
Plant and machinery 43,547 361,437 180,297
Furniture and equipment 13,660 113,376 67,995
Motor vehicles 14,336 118,994 74,140
---------- ---------- ----------
104,422 866,706 429,956
---------- ---------- ----------
Net $ 761,440 6,319,950 2,961,516
========== ========== ==========
</TABLE>
6. CONSTRUCTION IN PROGRESS
<TABLE>
<CAPTION>
1999 1999 1998
---- ---- ----
US DOLLARS RMB RMB
<S> <C> <C> <C>
Cost:
Land use rights - - 636,881
Factories under construction $ 2,530 21,000 2,427,075
-------------- ---------------- ----------------
$ 2,530 21,000 3,063,956
============== ================ ================
</TABLE>
7. RESEARCH AND DEVELOPMENT
Research and development cost for the years ended September 30, 1999
and 1998 was RMB2,000 and RMB175,950, respectively.
8. SHORT TERM BANK LOAN
The bank loan of RMB700,000 (US$84,337) is collateralized by a pledge
of the Company's cash in bank to a maximum amount of US$120,000
(RMB996,000) at September 30, 1999. The bank loan bears interest at
5.61% per annum and is due on December 23, 1999.
F-18
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY BALANCES AND 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
September 30, 1998 and were increased by RMB1,157,325
at September 30, 1999. The advances are non-interest
bearing and payable on demand.
(ii) 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 RMB30,826 at September 30, 1998 and
RMB0 at September 30, 1999.
(iii) During 1999, the Company paid various expenses
totaling RMB15,000 on behalf of AgroCan International
Holdings Inc.
(iv) During 1999, the Company paid various expenses on
behalf of the PRC shareholder of Jiangxi Fenglin
amounting to RMB129,818.
(v) The Company paid factory and production facilities
rental of RMB180,000 during 1999 (1998 :
RMB105,197) to the PRC shareholder of Jiangxi
Fenglin.
(b) Transactions with directors
(i) During 1999, the Company made advances to and
paid various expenses totalling RMB634,469 on
behalf of directors.
(ii) 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,
and RMB0 at September 30, 1999.
(c) Transactions with shareholders
On February 6, 1998, certain shareholders made a loan of
US$300,000 (RMB2,484,000) to the Company. 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 of 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
US$241,317 (RMB1,998,105) based upon the market value of the
common stock underlying the options. Of this amount,
RMB616,283 (1998 : RMB409,099) has been recognized as an
expense during the year ended September 30, 1999 and
RMB968,973 (1998 : RMB1,558,236) has been deferred. The
deferred amount is being amortized to expense through May 1,
2001.
F-19
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LEASE COMMITMENTS
The Company leases land, buildings and other equipment under various
contracts. Rental expenses for the years ended September 30, 1999 and
1998 were RMB180,000 and RMB105,197 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, 1999 are as follows:
<TABLE>
RMB
<S> <C> <C>
Year ending September 30, 2000 180,000
2001 180,000
----------------
360,000
----------------
----------------
</TABLE>
11. 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, 1999, no stock options have been granted under the Plan.
A summary of the status of the Company's stock options and warrants for
the year ended September 30, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS (NOTE 9) WARRANTS (NOTE 1)
------------------------ ----------------------------------------------------
Exercise Exercise Exercise
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- ---------- ---------- ----------- -----------
US$ US$ US$
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
September 30, 1997 754,117 1.50 275,000 1.50 200,000 0.10
Granted - - - - 3,900 0.10
Exercised - - - - - -
Forfeited - - - - - -
---------- ---------- ---------- ---------- ----------- -----------
Outstanding
September 30, 1998 754,117 1.50 275,000 1.50 203,900 0.10
Granted - - - - - -
Exercised - - - - (3,900) 0.10
Forfeited - - - - - -
---------- ---------- ---------- ---------- ----------- -----------
Outstanding at
September 30, 1999 754,117 1.50 275,000 1.50 200,000 0.10
========== ========== ========== ========== =========== ===========
</TABLE>
F-20
<PAGE>
- ------------------------------------------------------------------------------
AGROCAN CORPORATION
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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-21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CURRENCY> CHINESE RENMINBI
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> .12048
<CASH> 5,027,798
<SECURITIES> 0
<RECEIVABLES> 14,177,249
<ALLOWANCES> 280,000
<INVENTORY> 1,087,978
<CURRENT-ASSETS> 23,789,038
<PP&E> 7,186,656
<DEPRECIATION> 866,706
<TOTAL-ASSETS> 31,415,972
<CURRENT-LIABILITIES> 11,075,247
<BONDS> 0
0
0
<COMMON> 1,800
<OTHER-SE> 19,235,514
<TOTAL-LIABILITY-AND-EQUITY> 31,415,972
<SALES> 40,733,729
<TOTAL-REVENUES> 40,733,729
<CGS> 35,299,331
<TOTAL-COSTS> 35,299,331
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,624,567
<INCOME-TAX> 656,998
<INCOME-CONTINUING> 1,889,042
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,889,042
<EPS-BASIC> .89
<EPS-DILUTED> .77
</TABLE>
