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, 2000
[ ] 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
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(Exact name of small business issuer in its charter)
DELAWARE
------------------------------- ----------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
CLI BUILDING, SUITE 1003, 313 HENNESSY ROAD, HONG KONG
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: 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 $0.0001 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 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]
The issuer's revenues for the fiscal year ended September 30, 2000 were RMB
51,526,030.
The aggregate market value of the issuer's common stock held by non-affiliates
of the issuer as of September 30, 2000 was $2,165,282.
The issuer had 2,334,970 shares of common stock issued and outstanding as of
September 30, 2000.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents incorporated by reference: None.
1
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
AgroCan Corporation, a Delaware corporation (the "Company"), owns all of the
capital stock of AgroCan (China) Inc., a British Virgin Islands corporation
("AgroCan China"). AgroCan China owns three subsidiary companies (the
"Subsidiaries") located in the People's Republic of China ("China" or the
"PRC"), one of which is a Sino-Foreign Equity Joint Venture (the "Joint
Venture"). Unless the context indicates otherwise, reference to the Company
shall include the Subsidiaries.
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, 2000, the Company had
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 planned to enter markets in other provinces. The
Company 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 a summary description of the Subsidiaries and the Joint
Venture:
NAME OF YEAR OF OWNERSHIP CAPACITY PER PRODUCT
SUBSIDIARY ESTABLISHMENT PERCENTAGE LOCATION YEAR (MT) DESCRIPTION
---------- ------------- ---------- -------- ------------ -----------
Subsidiaries:
Guangxi 1996 100% Nanning, 50,000 Compound
Linmao Guangxi, fertilizers for
Fertilizer PRC eucalyptus,
Company citrus, paddy
Limited rice, sugar cane
and flowers
Jiangxi 1997 100% Fuzhou, 50,000 Compound
Jiali Jiangxi, fertilizers for
Chemical PRC citrus, fruit
Industry trees, paddy
Company rice, tobacco
Limited and flowers
Joint Venture:
Jiangxi 1996 70% Nanchang, 25,000 Compound
Fenglin Jiangxi, fertilizers for
Chemical PRC aspen, citrus,
Industry fruit trees,
Company paddy rice, oil
Limited vegetable and
flowers
2
PRODUCTS
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 kilograms
("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.
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), compound fertilizers have become 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:
N-P-K RATIO APPLICATIONS
----------- ------------
15-6-9 Paddy rice
8-18-10 Wheat
14-6-10 Cotton
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
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.
The Company's management and employees 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 United Nations 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
- 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.
3
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
Company 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. The Company
emphasizes the training of quality control personnel.
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 combinations. 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 testing 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 any patents, since it 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 the
Company's sales representatives at each Subsidiary. These direct sales units of
the Company are responsible for maintaining good working relationships with the
customers. The Company has also established its own provincial distribution
channels in the target market. As of September 30, 2000, the Company had
established a total of 250 retail points of sales in Guangxi and Jiangxi
provinces. During the fiscal year ended September 30, 2000, the Company had
five customers that accounted for more than 10% of total sales: Chunsun
Development Co. Ltd., Zhongce Industrial and Commercial Investment Co., Ltd.,
Zhanjiang Jinhua Agriculture Co., Ltd., Jinhua Co., Ltd. and Gaoyao Forestry
Trading & Development Co., Ltd.
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 enhances customer satisfaction and promotes
customer loyalty.
4
PRICING
Market prices of fertilizers and constituent ingredients generally follow a
seasonal fluctuation worldwide as well as in China. The Company has adopted a
purchasing policy to order raw materials during the low price seasons so that
product cost can be minimized. The Company has recently started to source raw
material like urea from the producers directly. Previously, the Company
purchased all of its raw material through intermediaries. This approach is
expected to reduce the Company's reliance on intermediates and thus reduce raw
material costs. The Company purchases its raw materials from over thirty
different suppliers. During the fiscal year ended September 30, 2000, the
Company had two suppliers that provided more than 10% of the Company's raw
materials: Hainan Fudao Chemical Co. Ltd. and Chungqing Jiangjan Chemical
Fertilizer General Factory. The Company 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 Company's 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 Fenglin Chemical Industry Company
Limited 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
of 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) live in rural areas of China. 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-fold. The
output per hectare also increased in a similar way. The following comparative
table shows the trend:
ARABLE LAND GRAIN OUTPUT OUTPUT PER
(MILLION (MILLION METRIC HECTARE
YEAR HECTARES) -/+ TONS) -/+ (METRIC TONS) -/+
---- --------- --- --------------- --- ------------- ---
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 Statistical Yearbook (1998)
With the reduction of usable land, there is a significant need in China to
increase the output of crops per hectare. China is the world's largest importer
of fertilizers, importing over 25% of its fertilizer requirements. In 1997,
China imported 2,592,214 metric tons of NPKs, up 21.8% from the previous year's
2,128,280 metric tons. The Chinese government imposes an import quota system to
control the import of various types of fertilizers.
5
THE WORLDWIDE MARKET
Average annual worldwide consumption of fertilizers was about 130 million metric
tons between 1991 and 1997. In that period, developing countries in the
aggregate consumed an average of 59 million metric tons annually, accounting for
45.7% of the total consumption. China was the most significant fertilizer user
in the world, consuming an average of 30 million metric tons between 1991 and
1997, accounting for 23.5% of total worldwide consumption. During 1997, China's
consumption increased to a record high of 36.5 million metric tons, representing
27% of total worldwide consumption. India's fertilizer consumption ranked
second, with annual consumption of 14.3 million metric tons in 1997, accounting
for 10.1% of the world total. These statistics were obtained from two worldwide
Organizations, the Food and Agriculture Organization (FAO) and Fertilizer
Advisory Development and Information Network for Asia and the Pacific (FADINAP),
under a United Nations commission.
MARKET TREND OF CHINA
China is the world's largest producer of fertilizer, with total output in 1997
of 27.6 million metric tons, 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 metric tons of fertilizer, equivalent to 24% of its
requirement. Therefore, China had to rely on imports to make up the shortage.
Between 1980 and 1997, total consumption of fertilizer in China increased from
16.7 metric tons to 35.9 million metric tons, 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 in 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 September 30, 2000, the Company's
total annual production capacity is approximately 125,000 metric tons.
THE COMPANY'S MARKETS
In 1999, the usage of fertilizer in selected provinces and cities in the PRC was
as follows:
ARABLE LAND FERTILIZERS FERTILIZERS NPK
PROVINCE (MILLION CONSUMED CONSUMED CONSUMED
OR CITY HECTARES) (1,000 MT) (KG PER HECTARE) (1,000 MT)
------- --------- ---------- ---------------- ----------
Guangxi 7.7 4,193 545 1,259
Jiangxi 5.1 3,354 663 766
Hebei and Tianjin 8.1 3,999 493 738
Henan 7.4 2,882 391 655
Hubei 6.0 2,557 428 654
Hunan 4.9 2,515 508 440
Guangdong 3.3 1,728 528 248
Shandong 9.2 2,103 229 364
Jiangsu 4.4 1,538 349 408
Anhui 4.0 1,809 458 280
Sichuan 3.0 1,167 390 211
Beijing 0.3 190 552 59
Shanghai 0.3 204 647 23
SUB-TOTAL 63.6 28,239 444* 6,105
NATIONAL TOTAL 130.0 41,243 317* 8,800
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*Fertilizer consumed divided by Arable Land
Source: China Statistics Yearbook (2000)
6
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 (the "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
consumption exceeds 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 metric tons 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 custom-made compound fertilizers.
INTERNATIONAL SUPPLIERS
The second group of competitors of the Company consists of international
producers and the traders who import fertilizers into China, including 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 locally made fertilizers. Due to import duties,
import license fees and shipping and transportation expenses, imported
fertilizers are normally priced 10% to 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 Equity 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 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 custom-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 custom-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 products. The Company believes that it has the following
competitive advantages:
- the Company's operations are located within a 200 kilometer radius of its
market, resulting in savings in transportation costs, responsive customer
services and market intelligence
- the Company emphasizes quality, as its compound fertilizer is unmatched
as compared to locally supplied compound fertilizer
- the Company has a wide variety of products for different needs by local
farmers
- the Company conducts proactive product and market development
- the Company is local, thus avoiding the import quota system, and combines
local and foreign expertise, and works 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 and 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 forming a new operation.
The Company's short-term objective is to build annual production capacities of
up to 200,000 metric tons in selected provinces other than Guangxi and Jiangxi,
thus establishing standardized compound fertilizers plants in these growing
markets. At the same time, quality control programs for ISO 9000 certification
will be implemented in the Company's operations. Advertising and marketing
programs will be launched to enhance the "AgroCan Three Leaves" brand locally
and nationally.
The Company's long-term objective is to become an influential participant in the
modernization of the agricultural industry in 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
total land productivity with limited arable land, China must apply modern
technology to the agricultural industry. The Company is evaluating
opportunities to bring biotech and genetic technologies, which are already
available and used in developed countries, to China.
JOINT VENTURE
The Company owns a 70% interest in the Joint Venture pursuant to a Joint Venture
Contract dated October 18, 1996. The validity, interpretation, execution and
settlement of disputes is governed under PRC law and disputes are 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 September 30, 2000, the Company had approximately 44 full-time employees.
There are 4 employees based in the Company's corporate office in Hong Kong and
40 employees based in China. Of the 40 employees based in China, 18 employees
are involved with sales related activities and 22 employees are technical
personnel in the agricultural field.
7
ITEM 2. DESCRIPTION OF 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 Fertilizer Company
Limited, 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 Company Limited, 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
Company Limited 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 and is in good
condition. The land lease expires June 30, 2057.
ITEM 3. LEGAL PROCEEDINGS
There are no pending or threatened legal proceedings against the Company,
including its Subsidiaries and the Joint Venture.
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, 2000.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since July 14, 2000, the Company's common stock has been listed for trading on
the OTC Bulletin Board under the symbol "AGRN". The trading market is limited
and sporadic and should not be deemed to constitute an "established trading
market".
The following table sets for the range of bid prices of the Company's common
stock as quoted on the OTC Bulletin Board during the periods indicated. Such
prices reflect prices between dealers in securities and do not include any
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions. The information set forth the below was obtained from America
Online.
HIGH LOW
------ ------
FISCAL YEAR ENDED SEPTEMBER 30, 1999
------------------------------------
Three months ended December 31, 1998 (1) (1)
Three months ended March 31, 1999 (1) (1)
Three months ended June 30, 1999 (1) (1)
Three months ended September 30, 1999 (1) (1)
FISCAL YEAR ENDED SEPTEMBER 30, 2000
------------------------------------
Three months ended December 31, 1999 (1) (1)
Three months ended March 31, 2000 (1) (1)
Three months ended June 30, 2000 $3.25 $2.50
Three months ended September 30, 2000 $2.31 $1.19
--------------------------------
(1) Not quoted during the period
As of September 30, 2000, there were 35 holders of record of the Company's
common stock.
8
DIVIDEND POLICY
The Company has never paid dividends on its common stock and does not anticipate
paying dividends on its common stock in the foreseeable future. It is the
present policy of the Board of Directors to retail all earnings to provide for
the future growth of the Company. Earnings of the Company, if any, are expected
to be retained to finance the expansion of the Company's business. The payment
of dividends on the Company's common stock in the future will depend on the
results of operations, financial condition, capital expenditure plans and other
cash obligations of the Company and will be at the sole discretion of the Board
of Directors.
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 cash consideration of RMB 256,680. 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. Of the 43
investors, 6 investors had 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 two-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. The
securities were issued pursuant to Rule 504 of Regulation D.
5. On August 25, 1998, the Company issued two-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. The securities were issued
pursuant to Rule 506 of Regulation D.
6. On August 25, 1998, the Company issued two-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. The shares were issued pursuant
to Rule 504 of Regulation D.
7. On August 25, 1998, the Company issued 150,000 shares of common
stock to an accredited unrelated financial consultant for services rendered in
connection with the private placement discussed in Transaction 3. 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. 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 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 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 were exercised for an aggregate of 2,000
shares of common stock. The shares were issued pursuant to Rule 504 of
Regulation D.
12. From January 2000 to March 2000, warrants issued in the private
placement in Transaction 3 were exercised for an aggregate of 25,000 shares of
common stock. The shares were issued pursuant to Rule 504 of Regulation D.
13. From July to September 2000, warrants issued in the private
placement in Transaction 3 were exercised for an aggregate of 137,510 shares of
common stock. The shares were issued pursuant to Rule 504 of Regulation D.
9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Annual Report on Form 10-KSB for the fiscal year ended September 30, 2000
contains "forward-looking" statements within the meaning of the Federal
securities laws. These forward-looking statements include, among others,
statements concerning the Company's expectations regarding sales trends, gross
and net operating margin trends, political and economic matters, the
availability of equity capital to fund the Company's capital requirements, and
other statements of expectations, beliefs, future plans and strategies,
anticipated events or trends, and similar expressions concerning matters that
are not historical facts. The forward-looking statements in this Annual Report
on Form 10-KSB for the fiscal year ended September 30, 2000 are subject to risks
and uncertainties that could cause actual results to differ materially from
those results expressed in or implied by the statements contained herein.
Overview:
AgroCan Corporation (the "Company") was incorporated on December 8, 1997 in the
State of Delaware. Effective December 31, 1997, the Company issued 1,598,646
shares of common stock, which represented all of the capital stock outstanding
at the completion of this transaction, to the shareholders of AgroCan (China)
Inc., a corporation incorporated in the British Virgin Islands, in exchange for
all of the capital stock of AgroCan (China) Inc.
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. were recorded at historical cost, and the shares of
common stock issued by the Company were reflected in the consolidated financial
statements giving retroactive effect as if the Company had been the parent
company from inception.
The Company, through AgroCan (China) Inc., currently owns 100% interests in two
wholly-owned subsidiaries, Guangxi Linmao Fertilizer Company Limited ("Guangxi
Linmao") and Jiangxi Jiali Chemical Industry Company Limited ("Jiangxi Jiali").
The Company, through AgroCan (China) Inc., also owns a 70% interest in Jiangxi
Fenglin Chemical Industry Company Limited, a Sino-Foreign Equity Joint Venture
("Jiangxi Fenglin"). All of the aforementioned entities are located in the
People's Republic of China ("China" or the "PRC").
The Company accounts for its interest in Jiangxi Fenglin 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. Due to the rights asserted by the PRC partner under
customary joint venture agreements, 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. However, as a result of the aforementioned factors
specific to Jiangxi Fenglin, management believes that it is appropriate to
consolidate the joint venture's operations into the Company's consolidated
financial statements.
10
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, 2000, 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.
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, 2000 and 1999, the Company relied on a small number of customers for most of
its sales. During the fiscal year ended September 30, 2000, four customers
accounted for 59% of total sales (18%, 15%, 15% and 11% of total sales). During
the fiscal year ended September 30, 1999, three customers accounted for 62% of
total sales (29%, 17% and 16% of total sales). As of September 30, 2000,
approximately 67% of accounts receivable were generated by trade transactions
with five significant customers, of which one customer accounted for
approximately 51% of the accounts receivable balance. As of September 30, 1999,
approximately 86% of accounts receivable were generated by trade transactions
with five significant customers, of which one customer accounted for
approximately 57% 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. During the fiscal years ended September 30,
2000 and 1999, two suppliers accounted for 54% and 58%, respectively, of total
purchases. As of September 30, 2000 and 1999, 75% and 78%, 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.
11
Consolidated Results of Operations:
Fiscal Years Ended September 30, 2000 and 1999:
Revenues. Revenues for the fiscal year ended September 30, 2000 were RMB
51,526,030, as compared to revenues of RMB 40,733,729 for the fiscal year ended
September 30, 1999, an increase of RMB 10,792,301 or 26.5%. The increase in
revenues in 2000 as compared to 1999 was a result of several factors, including
an increase in selling prices and an increase in demand from both existing and
new customers.
Gross Profit. Gross profit for the fiscal year ended September 30, 2000 was RMB
9,581,094 or 18.6% of revenues, as compared to RMB 5,434,398 or 13.3% of
revenues for the fiscal year ended September 30, 1999, an increase of RMB
4,146,696 or 76.0%. The gross profit margin increased in 2000 as compared to
1999, both on an absolute basis and as a percentage of revenues, as a result of
the Company raising its prices to focus on higher-margin customers and
fluctuations in the cost of certain raw material components.
Administrative and General Expenses. Administrative and general expenses for
the fiscal year ended September 30, 2000 increased by RMB 1,257,151 or 33.2%, to
RMB 5,040,379 or 9.8% of revenues, as compared to RMB 3,783,228 or 9.3% of
revenues for the fiscal year ended September 30, 1999. For the fiscal year
ended September 30, 2000, directors' remuneration of RMB 747,000 was included in
administrative and general expenses. For the fiscal year ended September 30,
1999, non-cash consulting fees of RMB 1,510,600 were included in administrative
and general expenses. Administrative and general expenses, particularly
compensation and related costs, increased in 2000 as compared to 1999 in part 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 professional fees associated with the operation of a
public company.
Selling Expenses. Selling expenses for the fiscal year ended September 30, 2000
increased by RMB 505,117 or 96.3%, to RMB 1,029,642 or 2.0% of revenues, as
compared to RMB 524,525 or 1.3% of revenues for the fiscal year ended September
30, 1999. Selling expenses increased in 2000 as compared to 1999 as a result of
the Company's continuing efforts to broaden its customer base and thereby reduce
its reliance on sales to a small number of customers. The Company incurred
increased costs to support expanded marketing and selling efforts, including
office operations, salaries and travel, as well as product promotion costs.
12
Other Income (Expense). The Company recorded subcontracting income of RMB
1,025,000 and RMB 1,200,000 for the fiscal years ended September 30, 2000 and
1999, respectively. The Company recorded commission income of RMB 251,100 and
RMB 857,880 for the fiscal years ended September 30, 2000 and 1999,
respectively. The Company recorded interest income of RMB 31,747 and RMB 56,325
for the fiscal years ended September 30, 2000 and 1999, respectively. The
Company recorded amortization of loan fees of RMB 616,283 for the fiscal years
ended September 30, 2000 and 1999.
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 consist of two wholly-owned
foreign enterprises and a 70%-owned Sino-Foreign Equity Joint Venture. PRC
companies are generally subject to income taxes at an effect rate of 33% (30%
national income tax plus 3% state income tax). As manufacturing companies, the
Company's subsidiaries operate in special zones, which entitles them to a
reduced national income tax rate of 24%, and the subsidiaries are exempt from
state income tax. Further, pursuant to the approval of the relevant PRC tax
authorities, the subsidiaries have been granted a "tax holiday", whereby the
subsidiaries are fully exempt from PRC income taxes for two years starting from
the year profits are first recognized, followed by a 50% exemption for the next
three years. In 1999, the two-year, 100% exemption expired for Jiangxi Fenglin
and Guangxi Linmao, subjecting them to an income tax at a rate of 12%. Effective
October 1, 2000, the two-year, 100% exemption expired for Jiangxi Jiali,
subjecting it to an income tax at a rate of 12%. Losses incurred by joint
ventures may be carried forward for five years.
The Company recorded income taxes of RMB 464,966 and RMB 656,998 for the fiscal
years ended September 30, 2000 and 1999, respectively.
Minority Interest. For the fiscal years ended September 30, 2000 and 1999, the
Company recorded a minority interest of RMB 78,527 and RMB 26,120, respectively,
to reflect the interest of the Company's 30% joint venture partner in Jiangxi
Fenglin.
Net Income. Net income was RMB 3,711,551 for the fiscal year ended September
30, 2000, as compared to net income of RMB 1,889,042 for the fiscal year ended
September 30, 1999.
13
Consolidated Financial Condition:
Liquidity and Capital Resources - September 30, 2000:
Operating. For the fiscal year ended September 30, 2000, the Company's
operations utilized cash resources of RMB 3,381,008, as compared to generating
cash resources of RMB 2,780,379 for the fiscal year ended September 30, 1999.
The Company's operations utilized cash resources in 2000, as compared to
generating cash resources in 1999, primarily a result of an increase in accounts
receivable resulting from increased revenues, which was only partly offset by an
increase in accounts payable. The Company had net working capital at September
30, 2000 of RMB 17,557,262, as compared to net working capital of RMB 12,713,791
at September 30, 1999, reflecting a current ratio of 1.54:1 at September 30,
2000, as compared to 2.15:1 at September 30, 1999.
Accounts receivable increased by RMB 24,133,591, to RMB 38,030,840 at September
30, 2000, from RMB 13,897,249 at September 30, 1999. Accounts receivable
increased during the fiscal year ended September 30, 2000 as a result of
increased revenues.
Accounts payable increased by RMB 16,159,698, to RMB 21,159,642 at September 30,
2000, from RMB 4,999,944 at September 30, 1999. Accounts payable increased
during the fiscal year ended September 30, 2000 as a result of increased
purchases of raw materials to support increased revenues.
Investing. During the fiscal years ended September 30, 2000 and 1999, additions
to property, plant and equipment aggregated RMB 445,943 and RMB 752,228,
respectively.
The Company had no significant capital expenditure commitments outstanding at
September 30, 2000.
Financing. During the fiscal year ended September 30, 1999, the Company
incurred a short-term bank loan of RMB 700,000, with interest at 5.61% per
annum, to fund operations. This bank loan was secured by the Company's cash
deposit of US$120,000 (RMB 996,000), and was repaid during the fiscal year ended
September 30, 2000.
During the fiscal year ended September 30, 2000, the Company borrowed RMB
4,580,212 pursuant to advances and short-term loans from various third parties,
of which RMB 600,000 had been repaid at September 30, 2000. With respect to the
remaining balance outstanding of RMB 3,980,212 at September 30, 2000, RMB
1,510,212 consisted of unsecured notes, with interest at 5% per annum, which are
repayable within one year, and RMB 2,470,000 consisted of non-interest bearing
advances which are repayable on demand.
During the fiscal year ended September 30, 2000, the Company issued 164,510
shares of common stock upon exercise of common stock purchase warrants and
received net proceeds of RMB 136,541.
During the fiscal year ended September 30, 1999, the Company's minority interest
partner contributed capital to the joint venture of RMB 138,187.
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.
14
Inflation and Currency Matters:
In recent years, the Chinese economy has experienced periods of rapid economic
growth as well as relatively high rates of inflation, which in turn has resulted
in the periodic adoption by the Chinese government of various corrective
measures designed to regulate growth and contain inflation. Since 1993, the
Chinese government has implemented an economic program designed to control
inflation, which has resulted in the tightening of working capital available to
Chinese business enterprises. The success of the Company depends in substantial
part on the continued growth and development of the Chinese economy. During the
fiscal years ended September 30, 2000 and 1999, inflation and changing prices
have had a minor impact on the Company's operations and financial position. The
actual rate of inflation in the agricultural sector has been nominal, and the
price level of fertilizer products has been stable.
Foreign operations are subject to certain risks inherent in conducting business
abroad, including price and currency exchange controls, and fluctuations in the
relative value of currencies. Changes in the relative value of currencies occur
periodically and may, in certain instances, materially affect the Company's
results of operations. In addition, the Renminbi is not freely convertible into
foreign currencies, and the ability to convert the Renminbi is subject to the
availability of foreign currencies. Effective December 1, 1998, all foreign
exchange transactions involving the Renminbi must take place through authorized
banks in China at the prevailing exchange rates quoted by the People's Bank of
China. The Company expects that a portion of its revenues will need to be
converted into other currencies to meet foreign exchange currency obligations,
including the payment of any dividends declared.
Although the central government of China has repeatedly indicated that it does
not intend to devalue its currency in the near future, recent announcements by
the central government of China indicate that devaluation is an increasing
possibility. Should the central government of China decide to devalue the
Renminbi, the Company does not believe that such an action would have a
detrimental effect on the Company's operations, since the Company conducts
virtually all of its business in China, and the sale of its products is settled
in Renminbi. However, devaluation of the Renminbi against the United States
dollar would adversely effect the Company's financial performance when measured
in United States dollars.
15
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 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 disclosures.
16
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
which, as amended, 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.
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB No. 101"). SAB No. 101, as amended by SAB No. 101A and SAB No. 101B, is
effective no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. SAB No. 101 provides the Staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
The Company believes that it currently complies with the accounting and
disclosures provisions described in SAB No. 101. Accordingly, the Company does
not believe that implementation of SAB No. 101 will have a material effect on
its financial statement presentation and disclosures.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements for the fiscal years ended September 30,
2000 and 1999 are listed at the "Index to Consolidated Financial Statements".
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table and text sets forth the names and ages of all directors and
executive officers of the Company as of September 30, 2000. 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
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.
NAME AGE POSITION(S)
---- --- -----------
Lawrence Hon 52 Chairman of the Board, President and Chief
Executive Officer
Donald Lau 52 Chief Financial Officer and Director
Danny Wu 40 Secretary and Director
Yuanhong Chen 38 Vice President, Marketing and Sales
Haibo Li 49 Vice President, Operations
Changfa Li 52 Vice President, Business Development
Ngai Poon 31 Director
18
LAWRENCE HON. Mr. Hon has been Chairman of the Board, President and Chief
Executive Officer of the Company since December 1997. Mr. Hon started his
career as a professional accountant. In 1984, Mr. Hon joined Modern Printing
Equipment Ltd. as the Financial Director. Modern Printing Equipment Ltd. was a
subsidiary of KNP BT, a Dutch-based multinational group. KNP BT was the world's
eight largest forestry group specializing in paper, packaging and printing. He
was promoted to KNP BT's Regional Financial Director in 1986 and Deputy Managing
Director of Asian Options in 1990, responsible for Hong Kong, China, Taiwan and
Korea. In 1994, Mr. Hon participated in the formation of Sino-Forest
Corporation, a company listed on the Toronto Stock Exchange. Sino-Forest
Corporation's main business was supplying wood fiber in the form of wood chips
to the pulp and paper industry in Japan, China and other Asian countries.
Between 1994 and 1996, Mr. Hon served as the Senior Vice President of
Sino-Forest Corporation, and was responsible for tree plantation, which provided
wood fiber for paper, packaging and panel-board production. Since March 1999,
Mr. Hon has been a director of China Gateway Holdings Inc. Mr. Hon is a
professional accountant with fellowship in the respective accountants
associations in Hong Kong and the United Kingdom. Mr. Hon holds an 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 at 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 the organization and 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 its
Hong Kong office overseeing trading, direct investment activities and setting up
joint venture enterprises in China related to catering, cable manufacturing and
metal processing. He was also involved in the general financial management of
these ventures. Mr. Wu was a founding member of Sino-Forest Corporation, a
company listed on the Toronto Stock Exchange, with investments in forestry in
China. He was responsible for market development of wood chips and procurement
in China and Asia. From 1994 to 1995, Mr. Wu was Senior Manager of Sino-Wood
Partners Limited, an investment company. From 1996 to 1999, Mr. Wu was
Executive Director of Gateway China Limited, an investment company. From March
1999 to present, Mr. Wu has been Chairman, Chief Executive Officer and Secretary
of China Gateway Holdings Inc. 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, and
he has been Chief Financial Officer since September 2000. 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 conducted business in 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 United States and China. Mr. Lau joined Wonton
Food Inc., New York, in 1988 and expanded Wonton's sales and distribution
network. Wonton is the world's largest fortune cookie manufacturer. He is
currently a director of Wonton. Mr. Lau received his Bachelor of Science Degree
and MBA Degree from Columbia University, New York, in 1971 and 1974,
respectively.
19
NGAI POON. Ms. Poon has been a director of the Company since December 1997.
Ms. Poon joined the New York office of Dupont Inc. 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 review of investment proposals. During her service with
Sino-Forest Corporation, she traveled extensively in China. Ms. Poon is a
graduate of Columbia University, New York, majoring in accounting.
YUANHONG CHEN. Mr. Chen has been Vice President, Marketing and Sales, of the
Company since December 1997. 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 Company Limited. 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
joint ventures in Jiangxi. Mr. Li is responsible for the operations of the
Company's production facilities. 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, and is responsible for formulating strategies and
development planning. 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 scale chemical fiber companies. Since the early 1980's, 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 received his
chemical engineering degree from Wuhan University and a law degree from Henan
Law School in 1986.
20
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers and persons who own more than 10% of
a registered class of the Company's equity securities to file various reports
with the Securities and Exchange Commission concerning their holdings of, and
transactions in, the securities of the Company. Copies of these filings must be
furnished to the Company. The Company believes that all individual filing
requirements applicable to the Company's directors and executive officers were
complied with under Section 16(a) during the fiscal year ended September 30,
2000.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during fiscal years ended
September 30, 1998, 1999 and 2000 to the Company's Chief Executive Officer. No
officer of the Company received annual compensation in excess of $100,000 per
annum during such years.
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR SALARY
--------------------------- ---- ------
Lawrence Hon, President and 2000 $45,000
Chief Executive Officer 1999 -0-
1998 -0-
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, 2000, five 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 had no nominating or compensating committees, or
committees performing similar functions, during the fiscal year ended September
30, 2000. The Board of Directors has established an audit committee consisting
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, 2000, no stock options were granted pursuant to the
1998 Stock Option Plan.
21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 30, 2000 with
respect to 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, the number of shares of common stock
owned by each such person and group and 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. The address of those persons for which an address is not
otherwise indicated is CLI Building, Suite 1003, 313 Hennessy Road, Hong Kong.
The only class of equity securities that the Company has outstanding is its
common stock, $0.0001 par value, of which 2,334,970 shares were issued and
outstanding as of September 30, 2000.
22
PERCENT OF OUTSTANDING
NAME OF SHARES OF COMMON SHARES OF COMMON STOCK
BENEFICIAL OWNER STOCK BENEFICALLY OWNED BENEFICIALLY OWNED
---------------- ----------------------- ------------------
Lawrence Hon 102,011 4.4%
Danny Wu 102,011 4.4%
Donald Lau (1) 420,444 18.0%
Ngai Poon (2) 473,200 20.3%
Yuanhong Chen - -
Haibo Li - -
Changfa Li - -
All Directors
and Executive
Officers as a
Group (7 persons) 1,097,666 47.0%
Masterpiece Development Ltd. (1) 420,444 18.0%
c/o T. C. Lau & Co.
501, China Insurance Group Bldg.
141, Des Voeux Road Central
Hong Kong
Intermax Ltd. (2) 473,200 20.3%
811, Wing Shan Tower
73 Des Voeux Road Central
Hong Kong
Shenton Development Ltd. 127,000 5.4%
Suite 901
Kee Hung Commercial Building
80 Queen's Road East
Hong Kong
Wan Wai Tak 213,200 9.1%
Poon Chung Ping 213,200 9.1%
----------------------------
(1) Mr. Lau owns a majority interest in Masterpiece Development Ltd.
(2) Ms. Poon owns all of 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.
23
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH RELATED PARTIES
During 1997, the Company paid various expenses totaling RMB 1,164,772 on behalf
of an affiliated company. The advances were reduced to RMB 740,679 at December
30, 1998, and increased to RMB 1,157,325 at September 30, 1999. During 2000,
the affiliated company received RMB 1,577,000 on behalf of the Company. Total
advances amounted to RMB 2,734,325 at September 30, 2000. The advances are
non-interest bearing and are payable on demand.
During 2000, the Company paid management fees of RMB 236,124 to another
affiliated company.
During 2000, the Company paid various expenses on behalf of the PRC shareholder
of Jiangxi Fenglin amounting to RMB 56,280, resulting in an amount due to the
Company at September 30, 2000 of RMB 155,329. Total advances amounted to RMB
99,050 at September 30, 1999.
The Company paid factory and production facilities rental of RMB 180,000 during
2000 and 1999 to the PRC shareholder of Jiangxi Fenglin.
TRANSACTIONS WITH DIRECTORS
During 1999, the Company made advances to and paid various expenses totaling RMB
634,469 on behalf of officers and directors. The advances to officers and
directors increased from RMB 267,857 at September 30, 1999 to RMB 859,196 at
September 30, 2000. The advances are non-interest bearing and are payable on
demand.
During 2000, another director repaid advances to him of RMB 277,961 as of
September 30, 1999 and has paid various expenses on behalf of the Company.
Advances from the director as of September 30, 2000 amounted to RMB 425,487,
which are non-interest bearing and are repayable on demand.
Directors' remuneration for the year ended September 30, 2000 was RMB 747,000.
TRANSACTIONS WITH SHAREHOLDERS
On February 6, 1998, certain shareholders made a loan of US$300,000 (RMB
2,490,614) to the Company. The loan is repayable at the earlier of three years
from May 1, 1998 or sixty days after demand by all and/or individual
shareholders. In consideration 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 were valued at US$241,317
(RMB 1,998,105) based upon the market value of the common stock underlying the
options resulting in deferred loan costs of that amount. Of this amount, RMB
616,283 has been recognized as an expense during each of the years ended
September 30, 2000 and 1999, and RMB 352,690 has been deferred at September 30,
2000. The deferred amount is being amortized to expense through May 1, 2001.
24
PART IV.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation as filed with the Delaware Secretary
of State, with amendment. (1)
3.2 Bylaws (1)
10.1 Agreement with Nanchang Organic Fertilizer Factory for the
establishment of Jiangxi Fenglin Chemical Industry Company
Limited (1)
10.2 Lease Agreement for Hong Kong office (1)
10.3 Land Lease Agreement for Guangxi Linmao (1)
10.4 Lease Agreement for Jiangxi Fenglin (1)
10.5 Lease Agreement for Jiangxi Jiali (1)
21 Subsidiaries of the Registrant (1)
27 Financial Data Schedule (electronic filing only)
(1) Included as an exhibit to the Company's Registration Statement on Form
10-SB filed with the Securities and Exchange Commission on May 4, 1999, and
incorporated herein by reference.
(b) Reports on Form 8-K: The Company did not file any Current Reports on Form
8-K during the three months ended September 30, 2000.
25
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AGROCAN CORPORATION
-------------------
(Registrant)
Date: January 12, 2001 By: /s/ LAWRENCE HON
-------------------
Lawrence Hon
President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: January 12, 2001 By: /s/ LAWRENCE HON
-------------------
President and Chief
Executive Officer
Date: January 12, 2001 By: /s/ DONALD LAU
-------------------
Chief Financial
Officer and
Director
Date: January 12, 2001 By: /s/ DANNY WU
-------------------
Secretary and
Director
Date: January 12, 2001 By: /s/ NGAI POON
-------------------
Director
26
AGROCAN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
Page
----
Independent Auditors' Report F-1
Consolidated Statements of Income F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Shareholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 to F-19
27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
AgroCan Corporation
We have audited the consolidated balance sheets of AgroCan Corporation and
subsidiaries as of September 30, 2000 and 1999 and the consolidated statements
of income, shareholders' equity and cash flows for each of the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AgroCan
Corporation and subsidiaries as of September 30, 2000 and 1999, and the results
of their operations and their cash flows for each of the years then ended in
conformity with generally accepted accounting principles.
HORWATH GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
December 22, 2000
F-1
AGROCAN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
Note 2000 2000 1999
------------ ----------- -----------
US DOLLARS RMB RMB
Net sales $ 6,207,955 51,526,030 40,733,729
Cost of sales 5,053,606 41,944,936 35,299,331
------------ ----------- -----------
Gross profit 1,154,349 9,581,094 5,434,398
Administrative and general expenses (607,274) (5,040,379) (3,783,228)
Selling expenses (124,054) (1,029,642) (524,525)
------------ ----------- -----------
Income from operations 423,021 3,511,073 1,126,645
Other income (expense)
Commission income 30,253 251,100 857,880
Subcontracting income 123,494 1,025,000 1,200,000
Interest income 3,825 31,747 56,325
Amortization of loan fees (74,251) (616,283) (616,283)
------------ ----------- -----------
Income before income taxes 506,342 4,202,637 2,624,567
Income taxes 3 (56,020) (464,966) (656,998)
------------ ----------- -----------
Income before minority interest 450,322 3,737,671 1,967,569
Minority interest (3,147) (26,120) (78,527)
------------ ----------- -----------
Net income $ 447,175 3,711,551 1,889,042
============ =========== ===========
Weighted average shares outstanding
Basic 2(o) 2,202,647 2,202,647 2,115,368
Diluted 2(o) 2,202,647 2,202,647 2,459,083
Basic earnings per share $ 0.20 1.68 0.89
============ =========== ===========
Diluted earnings per share $ 0.20 1.68 0.77
============ =========== ===========
See notes to consolidated financial statements.
F-2
AGROCAN CORPORATION
CONSOLIDATED BALANCE SHEETS
Note 2000 2000 1999
----------- ---------- ----------
US DOLLARS RMB RMB
ASSETS
Current assets
Cash and cash equivalents $ 556,227 4,616,686 5,027,798
Accounts receivable, less allowance for
doubtful accounts (2000 and 1999:
RMB280,000) 4,582,029 38,030,840 13,897,249
Other receivables and prepayments 57,914 480,688 519,776
Inventories 335,831 2,787,401 1,087,978
Deposits 52,353 434,521 1,454,044
Amounts due from related parties 8 451,668 3,748,850 1,802,193
----------- ---------- ----------
Total current assets 6,036,022 50,098,986 23,789,038
Property, plant and equipment - net 5 758,705 6,297,254 6,319,950
Construction in progress 6 - - 21,000
Deferred costs 43,314 359,507 1,285,984
----------- ---------- ----------
Total assets $ 6,838,041 56,755,747 31,415,972
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Advances and short-term loans-unsecured 7 $ 479,543 3,980,212 -
Short-term bank loan - - 700,000
Accounts payable 2,549,354 21,159,642 4,999,944
Other payables and accruals 169,858 1,409,816 2,075,443
Deposits received 178,510 1,481,629 153,396
Amounts due to related parties 8 441,337 3,663,101 2,490,614
Income tax payable 3 102,087 847,324 655,850
----------- ---------- ----------
Total current liabilities 3,920,689 32,541,724 11,075,247
Minority interest 136,088 1,129,531 1,103,411
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 2,334,970 shares
at September 30, 2000; 2,170,460 at
September 30, 1999 233 1,934 1,800
Capital in excess of par value 1,358,385 11,274,599 8,745,884
Stock options and warrants 10 - - 2,392,308
Retained earnings
Unappropriated 1,364,422 11,324,705 7,806,456
Appropriated 56,049 465,204 271,902
Other comprehensive income 2,175 18,050 18,964
----------- ---------- ----------
Total shareholders' equity 2,781,264 23,084,492 19,237,314
----------- ---------- ----------
Total liabilities and shareholders' equity $ 6,838,041 56,755,747 31,415,972
=========== ========== ==========
See notes to consolidated financial statements.
F-3
AGROCAN CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
Stock Unappro- Appro- Foreign
Capital in options priated priated currency
Common stock excess of and retained retained translation
Shares Amount par value warrants earnings earnings adjustment
------------ --------- ---------- ----------- ----------- ----------- -----------
RMB RMB RMB RMB RMB RMB
Balance, October 1, 1998 2,066,560 1,714 7,232,133 2,395,545 5,999,381 189,935 12,064
Issuance of common stock (net
of offering costs) (Note 1(j)) 100,000 86 1,510,514 - - - -
Exercise of warrants 3,900 - 3,237 (3,237) - - -
Staff welfare reserve - - - (81,967) 81,967 -
Comprehensive income:
Net income for the year ended
September 30, 1999 - - - 1,889,042 - -
Other comprehensive income - - - - - 6,900
------------ --------- ---------- ----------- ----------- ----------- -----------
Balance, September 30, 1999 2,170,460 1,800 8,745,884 2,392,308 7,806,456 271,902 18,964
Exercise of warrants 164,510 134 136,407 - - - -
Staff welfare reserve - - - (193,302) 193,302 -
Forfeiture of stock options
and warrants - 2,392,308 (2,392,308) - - -
Comprehensive income:
Net income for the year ended
September 30, 2000 - - - 3,711,551 - -
Other comprehensive income - - - - - (914)
------------ --------- ---------- ----------- ----------- ----------- -----------
Balance, September 30, 2000 2,334,970 1,934 11,274,599 - 11,324,705 465,204 18,050
============ ========= ========== =========== =========== =========== ===========
Total
shareholders'
equity
-----------
RMB
Balance, October 1, 1998 15,830,772
Issuance of common stock (net
of offering costs) (Note 1(j)) 1,510,600
Exercise of warrants -
Staff welfare reserve -
Comprehensive income:
Net income for the year ended
September 30, 1999 1,889,042
Other comprehensive income 6,900
-----------
Balance, September 30, 1999 19,237,314
Exercise of warrants 136,541
Staff welfare reserve -
Forfeiture of stock options
and warrants -
Comprehensive income:
Net income for the year ended
September 30, 2000 3,711,551
Other comprehensive income (914)
-----------
Balance, September 30, 2000 23,084,492
===========
See notes to consolidated financial statements.
F-4
AGROCAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
2000 2000 1999
------------ ------------ ------------
US DOLLARS RMB RMB
Operating activities
Net income $ 447,175 3,711,551 1,889,042
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Amortization of deferred costs 111,623 926,477 729,073
Depreciation 58,992 489,639 436,750
Compensation expense related to stock issuance - - 1,510,600
Minority interest in net income 3,147 26,120 78,527
(Increase) decrease in accounts receivable (2,907,662) (24,133,591) 41,095,721
Decrease (increase) in other receivables, deposits
and prepayments 127,543 1,058,611 (206,421)
(Increase) decrease in inventories (204,750) (1,699,423) 23,703
Increase in amounts due from related parties (234,536) (1,946,657) (1,061,514)
Increase (decrease) in accounts payable 1,946,952 16,159,698 (43,146,872)
Increase in income tax payable 23,069 191,474 655,850
Increase (decrease) in other payables and accruals (80,196) (665,627) 1,069,812
Increase (decrease) in deposits received 160,028 1,328,233 (180,628)
Increase (decrease) in amounts due to related parties 141,263 1,172,487 (113,264)
------------ ------------ ------------
Net cash (used in) provided by operating activities (407,352) (3,381,008) 2,780,379
------------ ------------ ------------
Investing activities
Deferred costs - - (38,704)
Additions to property, plant and equipment (53,728) (445,943) (752,228)
------------ ------------ ------------
Net cash used in investing activities (53,728) (445,943) (790,932)
------------ ------------ ------------
Financing activities
Proceeds from advances and short-term loans-unsecured 551,833 4,580,212 -
Repayment of advances and short-term loans-unsecured (72,289) (600,000) -
Repayment of short-term bank loan (84,337) (700,000) -
Proceeds from short-term bank loan - - 700,000
Minority interest capital contribution - - 138,187
Proceeds from issuance of common stock 16,452 136,541 -
------------ ------------ ------------
Net cash provided by financing activities 411,659 3,416,753 838,187
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (49,421) (410,198) 2,827,634
Cash and cash equivalents at beginning of year 605,759 5,027,798 2,193,264
Effect of exchange rate changes on cash (111) (914) 6,900
------------ ------------ ------------
Cash and cash equivalents at end of year $ 556,227 4,616,686 5,027,798
============ ============ ============
Cash paid during the year for income taxes $ 32,951 273,492 -
============ ============ ============
See notes to consolidated financial statements.
F-5
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, 2000, no
shares of preferred stock had been issued.
(c) On November 3, 1996, AgroCan (China) Inc. entered into a joint venture
agreement with FuZhou Grain and Oil Industry Corp., a state
majority-owned enterprise in the People's Republic of China ("PRC"),
for the establishment of a Sino-Foreign Equity Joint Venture, Jiangxi
Jiali Compound Fertilizer Company Limited, in the PRC. The Group's
share in the equity interest in this joint venture 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 having commenced 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 had been 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 Linmao")
on December 25, 1997. Guangxi Linmao is engaged in the manufacture and
trading of compound fertilizers.
F-6
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
recapitalization, as the shareholders of AgroCan (China) Inc. acquired
all of the stock of the Company. Accordingly, there was no revaluation
of assets or liabilities for financial statement accounting purposes.
The transaction resulted in the following subsidiaries:
Country of Percentage
incorporation of equity
Name of company and operation interest held Principal activity
------------------------- ------------------ ------------- ------------------------
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
(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) During the period ended September 30, 1998, the Company authorized a
US$750,000 (RMB6,210,000) private placement, consisting of 375,000
units at US$2.00 (RMB16.56) per unit, with each unit containing one
share of common stock and 1/10th of a two-year warrant to purchase
shares of common stock at US$0.10 (RMB0.828) per share. In connection
with the private placement, the Company also issued 150,000 two-year
warrants to purchase common stock at US$0.10 (RMB0.828) per share to
its financial advisors.
F-7
AGROCAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and basis of consolidated financial statements (continued)
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. These warrants were not exercised and expired in August 2000.
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.
(i) Pursuant to a board of directors' resolution of August 25, 1998, the
Company issued 150,000 shares of common stock to its financial advisor
for services rendered in connection with the private placement.
(j) 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.
(k) During the years ended September 30, 1999 and 2000, warrants were
exercised to acquire 3,900 shares and 164,510 shares, respectively.
(l) The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America ("US GAAP"), and are presented in Chinese Renminbi ("RMB"),
the national currency of the PRC (note 2(e)).
F-8
AGROCAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies
(a) The consolidated financial statements include the accounts of the
Company and its subsidiaries. Material intercompany balances and
transactions have been eliminated on consolidation.
(b) Cash and cash equivalents
For financial reporting purposes, the Company considers all highly
liquid investments purchased with original maturities of three months
or less to be cash equivalents.
(c) Property, plant and equipment
Property, plant and equipment are carried at cost less accumulated
depreciation. Depreciation is provided over their estimated useful
lives, using the straight line method, at the following annual rates:
Land use rights 2% - 5%
Buildings 4.5%
Furniture and equipment 18% - 33 1/3%
Machinery 9% - 20%
Motor vehicles 18%
Leasehold improvements 20%
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,
2000.
(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-9
AGROCAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies (continued)
(d) Inventories (continued)
Inventories are comprised of the following as of September 30:
2000 2000 1999
------------ ------------ ------------
US DOLLARS RMB RMB
Raw materials $ 269,681 2,238,353 731,196
Finished goods 66,150 549,048 356,782
------------ ------------ ------------
$ 335,831 2,787,401 1,087,978
============ ============ ============
(e) Fair Value of Financial Instruments
The fair value of the Company's related parties receivables and
payables are not practicable to estimate due to the related party
nature of the underlying transactions. Management believes that the
carrying amounts of the Company's other financial instruments
approximates their fair values primarily because of the short-term
maturities of these instruments.
(f) 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 dollars 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 equals RMB8.30 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 dollars at
that rate on the respective balance sheet dates or at any other date.
F-10
AGROCAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies (continued)
(g) 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.
(h) 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 is made until assets are placed in service.
(i) Deferred costs
Loan fees are deferred and amortized by equal installments over five
years or the term of the related financial instrument.
(j) Revenue recognition
Revenue from sales of goods by the Company, its subsidiaries and the
joint venture is recognized on the delivery of goods to customers.
(k) 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.
F-11
AGROCAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies (continued)
(l) 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.
(m) 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.
(n) 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.
(o) 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.
(p) Earning per share
Statement of Financial Accounting Standards No.128 ("SFAS 128"),
earnings per share, 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.
F-12
AGROCAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies (continued)
(p) Earning per share (continued)
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:
2000 1999
--------- ---------
Weighted average outstanding common share
used for basic EPS 2,202,647 2,115,368
Plus incremental common shares from assumed
issuance of stock options and warrants - 343,715
--------- ---------
Weighted average outstanding common shares
used for diluted EPS 2,202,647 2,459,083
========= =========
(q) Comprehensive income
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.
(r) Recent Accounting Pronouncements
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. 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.
F-13
AGROCAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies (continued)
(r) Recent Accounting Pronouncements (continued)
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.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), which, as amended, 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.
In December 1999, the Staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements ("SAB No. 101"). SAB No. 101, as amended by SAB
No. 101A and SAB No. 101B, is effective no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. SAB
No. 101 provides the Staff's views in applying generally accepted
accounting principles to selected revenue recognition issues.
Currently, the Company believes that it complies with the accounting
and disclosures described in SAB No. 101. Accordingly, management
believes that SAB No. 101 will not impact the Company's financial
statements.
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 consist of two wholly-owned foreign
enterprises and a 70% held Sino-Foreign Equity Joint Venture. Companies in
the PRC are generally subject to income taxes at an effective rate of 33%
(30% national income tax plus 3% state income tax). As manufacturing
companies, the Company's subsidiaries operate in special economic zones,
which entitles them to a reduced national income tax rate of 24%, and the
subsidiaries are exempt from state income tax. Further, pursuant to the
approval of the relevant PRC tax authorities, the subsidiaries have been
granted a "tax holiday", whereby the subsidiaries are fully exempt from PRC
income taxes for two years starting from the year profits are first made,
followed by a 50% exemption for the next three years. In 1999, the
two-year, 100% exemption expired for Jiangxi Fenglin and Guangxi Linmao,
subjecting them to income tax at a rate of 12%. Effective October 1, 2000,
the two-year, 100% exemption expired for Jiangxi Jiali, subjecting it to
income tax at a rate of 12%. Losses incurred by joint ventures may be
carried forward for five years.
F-14
AGROCAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Taxation (Continued)
Deferred tax assets and liabilities are not considered material at
September 30, 2000 and 1999.
The reconciliation between the effective tax rate and the statutory United
States federal income tax rate is as follows:
Year ended Year ended
September 30, September 30,
2000 1999
------------- -------------
Statutory U.S. federal tax rate 34% 34%
Difference in foreign statutory rates (1) (1)
Income tax exemption (22) (8)
------------- -------------
Effective tax rate 11% 25%
============= =============
The pro forma effect of the tax holiday on net income and earnings per
share is as follows:
September 30,
-----------------------------
2000 1999
------------- -------------
RMB RMB
Net income 2,787,000 1,680,000
Basic earnings per share 1.26 0.79
Diluted earnings per share 1.26 0.68
4. Significant concentrations
The Company grants credit to its customers, generally on an open account
basis. The Company's customers are all located in the PRC. Approximately
59% and 62% of the Company's sales were generated from four customers and
three customers, respectively, during the years ended September 30, 2000
and 1999, respectively. Sales to each of these customers were 18%, 15%, 15%
and 11% of total sales for the year ended September 30, 2000, and 29%, 17%
and 16% of total sales for the year ended September 30, 1999.
At September 30, 2000 and 1999, approximately 67% and 86%, respectively, of
accounts receivable were from trade transactions with five customers, of
which one customer accounted for approximately 51% and 57%, respectively,
of the accounts receivable balance.
F-15
AGROCAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Property, plant and equipment
2000 2000 1999
----------- --------- ---------
US DOLLARS RMB RMB
Cost:
Land use rights $ 129,009 1,070,775 1,070,775
Buildings 525,637 4,362,784 4,115,985
Leasehold improvements 16,570 137,530 -
Plant and machinery 180,479 1,497,972 1,493,600
Furniture and equipment 40,330 334,745 256,504
Motor vehicles 30,095 249,792 249,792
----------- --------- ---------
Total cost 922,120 7,653,598 7,186,656
----------- --------- ---------
Accumulated depreciation:
Land use rights 12,160 100,927 66,611
Buildings 44,838 372,151 206,288
Leasehold improvements 828 6,877 -
Plant and machinery 66,313 550,395 361,437
Furniture and equipment 19,522 162,037 113,376
Motor vehicles 19,754 163,957 118,994
----------- --------- ---------
163,415 1,356,344 866,706
----------- --------- ---------
Net $ 758,705 6,297,254 6,319,950
=========== ========= =========
6. Construction in progress
2000 2000 1999
----------- --------- ---------
US DOLLARS RMB RMB
Cost:
Factories under construction $ - - 21,000
=========== ========= =========
7. Advances and short-term loans - unsecured
The amounts represent money borrowed from third parties. Loans in the
amount of RMB1,510,212 are unsecured and are repayable within one year. The
Company is committed to pay interest of RMB75,000 (5%) on repayment of
these loans. Advances in the amount of RMB2,470,000 are non-interest
bearing and payable on demand.
At September 30, 1999, the Company had a bank loan of RMB700,000
(US$84,337), which was collateralized by a pledge of the Company's cash in
bank to a maximum amount of US$120,000 (RMB996,000). The bank loan bore
interest at 5.61% per annum and was repaid during the year ended September
30, 2000.
F-16
AGROCAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. 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 an affiliated company. The advances
were reduced to RMB740,679 at December 30, 1998, and increased to
RMB1,157,325 at September 30, 1999. During 2000, the affiliated
company received RMB1,577,000 on behalf of the Company. Total
advances amounted to RMB2,734,325 at September 30, 2000. The
advances are non-interest bearing and are payable on demand.
(ii) During 2000, the Company paid management fees of RMB236,124 to
another affiliated company.
(iii)During 2000, the Company paid various expenses on behalf of the
PRC shareholder of Jiangxi Fenglin amounting to RMB56,280,
resulting in an amount due to the Company at September 30, 2000
of RMB155,329. Total advances amounted to RMB99,050 at September
30, 1999.
(iv) The Company paid factory and production facilities rental of
RMB180,000 during 2000 and 1999 to the PRC shareholder of Jiangxi
Fenglin.
(b) Transactions with directors
(i) During 1999, the Company made advances to and paid various
expenses totaling RMB634,469 on behalf of officers and directors.
The advances to officers and directors increased from RMB267,857
at September 30, 1999 to RMB859,196 at September 30, 2000. The
advances are non-interest bearing and are payable on demand.
(ii) During 2000, another director repaid advances to him of
RMB277,961 as of September 30, 1999 and has paid various expenses
on behalf of the Company. Advances from the director as of
September 30, 2000 amounted to RMB425,487, which are non-interest
bearing and are repayable on demand. In addition, the directors'
remuneration for the year ended September 30, 2000 amounted to
RMB747,000 and was accrued at September 30, 2000.
F-17
AGROCAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Related party balances and transactions (continued)
(c) Transactions with shareholders
On February 6, 1998, certain shareholders made a loan of US$300,000
(RMB2,490,614) to the Company. The loan is repayable at the earlier of
three years from May 1, 1998 or sixty days after demand by all and/or
individual shareholders. In consideration 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 were valued at US$241,317 (RMB1,998,105) based upon
the market value of the common stock underlying the options resulting
in deferred loan costs of that amount. Of this amount, RMB616,283 has
been recognized as an expense during each of the years ended September
30, 2000 and 1999, and RMB352,690 has been deferred at September 30,
2000. The deferred amount is being amortized to expense through May 1,
2001.
9. Lease commitments
The Company leases land, buildings and other equipment under various
contracts. Rental expenses for the years ended September 30, 2000 and 1999
were RMB180,000. The future total minimum rental payments required under
operating leases that have remaining non-cancellable lease terms at
September 30, 2000 are as follows:
RMB
Year ending September 30, 2001 180,000
=======
10. Warrants and options
The Company adopted a stock option plan (the "Plan") as of February 6,
1998. The Plan allows the Board of Directors, or a committee thereof at the
Board's discretion, to grant stock options to officers, directors, key
employees, and consultants of the Company and its affiliates. An aggregate
of 250,000 shares of common stock has been reserved for issuance upon
exercise of the options granted under the Plan. Pursuant to the Plan, the
exercise price shall in no event be less than the fair market value of the
shares of common stock at the date of grant. As of September 30, 2000, no
stock options have been granted under the Plan.
F-18
AGROCAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Warrants and options (continued)
A summary of the status of the Company's stock options and warrants for the
years ended September 30, 2000 and 1999 is as follows:
Options (Note 9) Warrants (Note 1)
------------------- ----------------------------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
US$ US$ US$
Outstanding at
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
Granted - - - - - -
Exercised - - - (164,510) 0.10
Forfeited (754,117) - (275,000) - (35,490) -
--------- -------- --------- -------- --------- --------
Outstanding at
September 30, 2000 - - - - - -
========= ======== ========= ======== ========= ========
11. Risk considerations
As a majority of the Company's operations are conducted in the PRC, the
Company is subject to special considerations and significant risks not
typically associated with investments in equity securities of North
American and Western European companies. The Company's operations may be
adversely affected by significant political, economic and social
uncertainties in the PRC.
Although the PRC government has been pursuing economic reform policies for
the past several years, no assurance can be given that the PRC government
will continue to pursue such policies or that such policies may not be
significantly altered, especially in the event of a change in leadership,
social or political disruption, or unforeseen circumstances affecting the
PRC's political, economic and social life. There is also no guarantee that
the PRC government's pursuit of economic reforms will be consistent or
effective.
The Company expects that substantially all of its revenues will be
denominated in RMB. A portion of such revenues will need to be converted
into other currencies to meet foreign currency obligations such as payment
of any dividends declared. Both the conversion of RMB into foreign
currencies and the remittance of foreign currencies abroad requires the PRC
government's approval.
F-19