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, 2001
[ ] 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 N/A
------------------------------- ----------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Suite 706 Dominion Centre, 43-59 Queen's Road East, 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, 2001 were RMB
19,411,848 (U.S. $2,338,777).
The aggregate market value of the issuer's common stock held by non-affiliates
of the issuer as of September 30, 2001 was U.S. $333,334.
The issuer had 2,684,970 shares of common stock issued and outstanding as of
September 30, 2001.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents incorporated by reference: None.
2
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
AgroCan Corporation, a Delaware corporation, was incorporated in December 1997.
We hold all of the capital stock of our subsidiary, AgroCan (China) Inc., a
British Virgin Islands corporation ("AgroCan China"). AgroCan China in turn has
interests in three subsidiary companies (the "Subsidiaries") located in the
People's Republic of China ("China" or the "PRC"), which includes two wholly
owned companies and a joint venture company in which we hold a seventy percent
(70%) interest. The chart below describes each of the subsidiaries. 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 September 30, 2001, we have 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 plan to enter markets in other provinces. We are expanding our
distribution channels, product lines and services in an attempt to provide
comprehensive fertilizer solutions to niche markets including paddy rice, fruit
trees and flowers in the agricultural growing areas 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:
3
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
PRODUCTS
We produce 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. Our compound
fertilizers are designed and formulated for the specific climate, soil and crop
requirements of each individual geographic 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 (2001), compound fertilizers have become increasingly
popular in China over the last 20 years. We believe this trend has occurred
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 and manufactured by us:
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
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16-16-16 General application
12-10-8 Eucalyptus plantation
12-12-8 Aspen plantation
10-7-8 Fruit tree
Our compound fertilizers are sold under the brand name "AgroCan Three Leaves"
(see "Marketing and Distribution").
PRODUCTION
In order to maintain consistent quality which in turn improves our corporate
image, each of our fertilizer plants are designed and built with standard
production facilities. Our plant management and employees are trained to operate
the plants with consistent operating procedures and methods in an attempt to
make sure that the quality of our products does not vary from plant to plant.
Our procedures are based on the requirements of ISO 9000 standards. The ISO 9000
standards were developed by the International Organization for Standardization,
a non-governmental private organization with membership involving 120 countries
around the world and 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 our products are made from urea, phosphate, potash and other
non-hazardous chemicals. The production process does not cause any chemical
reaction and we do not incur any additional costs for compliance with
environmental laws in China.
QUALITY CONTROL
The desired quality and level of nutrient output can be obtained which by
blending different proportions of NPK input along with water and other necessary
ingredients have a significant impact on output cost and quality. All our plants
are equipped with computer systems which monitor our production to assist in
cost and quality control. Quality assurance in our products and quality control
in our manufacturing process are priorities for our company. We believe that
continuous improvement in product quality is vital to increasing our sales and
5
enhances our competitiveness. We plan to establish and implement a comprehensive
quality-upgrading program in our plants which we hope will lead to ISO 9000
certification.
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. Our in-plant laboratories are also responsible for
testing our manufacturing 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. Our main raw materials: urea,
phosphate and potash are currently widely available and we have no reason to
believe that we will not be able to have ample supplies at reasonable prices.
Our product mix allows sales of compound fertilizers with crop rotations in
different months. However, our sales revenues are lower in the off-season as a
result of decreased sales volume and lower prices.
PRODUCT DEVELOPMENT
We attempt to place considerable emphasis on the research and development of new
products and technology. We have been very careful to cultivate good working
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. We regularly engage the various
institutes to conduct discrete research projects and testing on our behalf. Our
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. We currently retain a group of engineers and scientists as
consultants to support the research teams at each subsidiary. We have not
applied for any patents, since we believe that patent protection is not
available to protect the formulations of the Company's products as the ratios
and proportion of the different materials change in accordance with a number of
variables including 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. Our 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 are
responsible for maintaining good working relationships with our customers. We
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have also established our own provincial distribution channels in several of our
target markets. As of September 30, 2001, the Company had established a total of
250 retail points of sales in Guangxi and Jiangxi provinces. During the fiscal
year ended September 30, 2001, the Company had four customers that each
accounted for more than 10% of total sales: Jia Hua Co. Ltd. (17.5%), GuiJia
(15.3%), Jia Zhang Co. Ltd. (14.4%) and Chu Kwok Ping (12%).
As part of our marketing effort, we conduct 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.
PRICING
Market prices of fertilizers and constituent ingredients generally follow a
seasonal fluctuation worldwide as well as in China. We have adopted a purchasing
policy to order raw materials during the low price seasons so that product cost
can be minimized. The raw materials are then stored at each plant for future use
in the manufacturing process. We have recently started to source raw materials
like urea directly from the producers rather than through intermediaries. This
approach is expected to reduce our reliance on intermediates and thus reduce raw
material costs as we will not have to pay the intermediary's markup. We purchase
our raw materials from over thirty different suppliers. During the fiscal year
ended September 30, 2001, we had four suppliers that each provided more than 5%
of our raw materials: Chu Kwok Ping (13%), Gia Fa Fu Ti Agricultural Retail Spot
(7.5%), Wu Min Agricultural Capital Co. Ltd. (7.9%) and Hu Gan Agricultural
Capital Co. Ltd. (5.7%). We are not reliant on any single supplier for our raw
material supply.
Selling prices of our fertilizers are basically in line with the prevailing
market prices in the respective markets where our plants are located. However,
we are generally able to charge a slight premium (2% to 4%) over our competitors
because of the stability and high quality of our 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,
we have 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 2001
China Statistics Yearbook, in 2000, 64% of the population (about 807 million
people) lived in rural areas of China. The irrigated land per capita 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
its open-door economic policy. Arable area has been further reduced since 1978.
7
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:
CULTIVATED AREA 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% 2.80 + 164%
2000 93.0* - 2.4% 462.2 + 69% 4.97 + 78%
*Estimate cultivated area in the year 2000
Source: FAO & China Statistical Yearbook (2001)
With the reduction of agricultural land, there is a significant need in China to
increase the output of crops per hectare. One of the methods to increase crop
yield is to fertilize. China is the world's largest importer of fertilizers,
importing over 24% of its fertilizer requirements. In 2000, China imported
5,680,000 metric tons of Compound Fertilizers. The Chinese government imposes an
import quota system to control the import of various types of fertilizers.
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 40 million metric tons between 1996 and
2000. During 2000, China's consumption increased to a record high of 41.5
million metric tons, representing 27% of total worldwide consumption. 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 sponsorship of the
United Nations.
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.
8
Between 1980 and 2000, total consumption of fertilizer in China increased from
16.7 metric tons to 41.5 million metric tons, representing an average of 6.7%
per annum. The annual average growth for NPK compound fertilizers was 9.5%,
8.6%, 3.0%, 7.1% and 4.3% from 1996 to 2000, respectively. Based upon our
discussions with our customers, we believe that demand for fertilizers in the
next decade will continue to grow at the same pace as in the last decade.
However, there can be no assurance that this trend will continue.
In order to improve efficient utilization of fertilizers, the PRC Ministry of
Agriculture has opted for using more NPK compound fertilizers instead of single
nutrients, such as urea. It is therefore also expected that demand for NPK
compound fertilizers will gradually increase over the next ten 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,
we established our first NPK compound fertilizer production plant in Guangxi and
further expanded into Jiangxi in 1997. As of September 30, 2001, our total
annual production capacity is approximately 125,000 metric tons.
We believe that our prospects for additional sales will increase following the
entry of China into the World Trade Organization on November 10, 2001. We also
believe that China's entry into the WTO will accelerate the implementation of a
free market policy within the PRC. Implementation of the policy by China will
allow more imports of high quality products and services from American and the
rest of the world. At the same time China will allow foreign companies to do
business freely in China. We, being an American company already operating in
China for many years, should have significant advantages in China's trade
expansion. In anticipation of China's entry into the WTO, we have been preparing
for the opportunity and expect to identify several acquisitions that we believe
will greatly enlarge distribution network as well as add new product lines. The
president of AgroCan, Lawrence Hon, believes that should we be successful with
our acquisitions, the additional business will help us to significantly increase
our profitability in the next few years, however, there can be no assurance that
we will be successful in finding and successfully closing acquisitions or the
acquisitions, once closed, will make us profitable.
THE COMPANY'S MARKETS
In 2000, the usage of fertilizer in selected provinces and cities in the PRC was
as follows:
IRRIGATED LAND FERTILIZERS FERTILIZERS NPK
PROVINCE (MILLION CONSUMED CONSUMED CONSUMED
OR CITY HECTARES) (1,000 MT) (TONS PER HECTARE) (1,000 MT)
----------------- ------------ -------------- -------------------- ------------
Guangxi 1.5 1,570 1.05 423
Jiangxi 1.9 1,069 0.56 227
Hebei and Tianjin 4.8 2,872 0.59 667
9
Henan 4.7 4,195 0.89 799
Hubei 2.1 2,471 1.19 457
Hunan 2.7 1,822 0.68 299
Guangdong 1.5 1,762 1.19 261
Shandong 4.8 4,232 0.88 1,301
Jiangsu 3.9 3,355 0.86 787
Anhui 3.2 2,532 0.79 673
Sichuan 2.5 2,126 0.86 375
Beijing 0.3 179 0.55 61
Shanghai 0.3 193 0.68 23
SUB-TOTAL 34.2 28,378 10.77* 6,353
NATIONAL TOTAL 53.8 41,464 0.77* 9,179
--------------------------------
*Fertilizer consumed divided by Irrigated Land
Source: China Statistics Yearbook (2001)
For China's 9th Five-Year Plan (1996-2001), each of these provinces and cities
were allocated more resources for development of their agricultural sectors by
the central government. We have established one plant in Guangxi and two plants
in Jiangxi. We plan 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
accounts for more than 68.4% of the national total. Fertilizer consumption per
hectare in these provinces is also 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.
10
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 our
custom-made compound fertilizers.
INTERNATIONAL SUPPLIERS
The second group of competitors 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. We
believe our products are competitive in quality compared to the imported
fertilizers and because they are produced locally, our pricing does not include
duties or import taxes.
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 us because their plants are isolated and are
unable to supply the whole country as China's infrastructure is still under
development and physical distribution is limited. 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. The benefit of these joint venture fertilizer plants is that
they can provide a stable supply of raw materials to our plants in different
provinces.
COMPETITIVE ADVANTAGES
We specialize in producing compound fertilizers, which are custom-made to suit
local conditions, such as plant type, soil and climate. There are no more than
two competitors in our selected markets capable of producing custom fertilizer
products. We believe that we have the following competitive advantages:
- our operations are located within a 200 kilometer radius of its market,
resulting in savings in transportation costs, responsive customer services
and market intelligence
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- we emphasize quality, as our compound fertilizer is of higher consistency
and quality as compared to locally supplied compound fertilizers
- we offer a wide variety of products for different needs by local farmers
- we conduct proactive product and market development
- because our plants are local we avoid import quotas, and which allows us
to combine local and foreign expertise, and work closely with local farming
supplies bureaus and cooperatives
EXPANSION PLANS
Our current strategy in establishing operations in China is to first seek out
existing operating production facilities suitable for our product lines. Once a
potential site is located, we will endeavor to implement a consistent plant
development 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 our management personnel
are expected to actively participate in the management and operations of the
joint venture. Facilities are then updated as needed. We will provide technology
to the joint venture with the goal of developing fertilizers suitable for the
local market. Management believes that the capital outlay for this type of
expansion strategy is lower than forming a new operation from scratch.
Our short-term objective is to build annual production capacities of up to
200,000 metric tons in several provinces other than Guangxi and Jiangxi, thus
establishing standardized compound fertilizers plants in additional growing
markets. At the same time, quality control programs for ISO 9000 certification
will be implemented in our operations. Advertising and marketing programs are
scheduled to be launched starting in the second quarter to enhance the "AgroCan
Three Leaves" brand locally and nationally.
Our long-term objective is to become an influential participant in the
modernization of the agricultural industry in China. We believe that China's
agricultural industry will require high quality fertilizers, pesticides,
seedlings and other agricultural products for the next century. In order to
raise total land productivity with limited arable land, China must apply modern
technology to its agricultural industry. We are currently evaluating
opportunities to bring biotech and genetic technologies, which are already
available and used in developed countries, to China.
JOINT VENTURE
We own 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 of the Joint Venture Contract is governed by 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.
12
EMPLOYEES
As of September 30, 2001, we had 45 full-time employees. There are 3 employees
based in our corporate office in Hong Kong and 42 employees based in China. Of
the 42 employees based in our various plant locations in China, 19 employees are
involved with sales related activities and 23 employees are technical personnel
in the agricultural field.
ITEM 2. DESCRIPTION OF PROPERTIES
HONG KONG. We currently occupy office space in Wanchai, Hong Kong,
consisting of 1,000 square feet. Our lease expires April 30, 2003 and does not
require an escalation in rent during the lease term. Our rent is 219,672 RMB
per year.
NANNING, GUANGXI. Our 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 and our annual rent is 24,000 RMB.
NANCHANG, JIANGXI. Our joint venture, Jiangxi Fenglin Chemical Industry
Company Limited, leases a fertilizer manufacturing plant in Nanchang, Jiangxi,
consisting of 21,800 square feet and includes the ground rent and building. Our
annual rental for this property is 180,000 RMB.
FUZHOU, JIANGXI. Our 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 and our annual rental is 21,360 RMB per year.
ITEM 3. LEGAL PROCEEDINGS
There are no pending or threatened legal proceedings against us, including our
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
fiscal year ended September 30, 2001.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
13
Since July 14, 2000, our 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, 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
FISCAL YEAR ENDED SEPTEMBER 30, 2001
------------------------------------
Three months ended December 31, 2000 $ 1.75 $0.97
Three months ended March 31, 2001 $ 1.56 $0.75
Three months ended June 30, 2001 $ 0.95 $0.30
Three months ended September 30, 2001 $ 0.31 $0.10
(1) Not quoted during the period
As of September 30, 2001, there were 41 holders of record of our common stock.
DIVIDEND POLICY
We have never paid dividends on our common stock and do not anticipate paying
dividends on our common stock in the foreseeable future. It is the present
policy of the Board of Directors to retain all earnings to provide for future
growth. Earnings, if any, are expected to be retained to finance the expansion
of our business. The payment of dividends on our 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
discretion of the Board of Directors.
14
RECENT SALES OF UNREGISTERED SECURITIES
The following is information for all securities that the Company has sold within
the past fiscal year without registering the securities under the Securities
Act:
1. Pursuant to a board of director's resolution adopted on March 23,
2001, we adopted the "Fiscal 2000 Equity Compensation Plan". In connection with
the plan, we issued 130,000 shares of common stock to two individuals for
consulting services on the Company's behalf.
2. Subsequent to the "Fiscal 2000 Equity Compensation Plan," we issued
220,000 shares of common stock at US$0.095 (RMB 0.7885) per share to two
advisors when they decided to subscribe the Company's common stock on August 3,
2001.
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, 2001
contains "forward-looking" statements within the meaning of the Federal
securities laws. These forward-looking statements include, among others,
statements concerning our expectations regarding sales trends, gross and net
operating margin trends, political and economic matters, the availability of
equity capital to fund our 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, 2001 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 was incorporated on December 8, 1997 in the State of
Delaware. Effective December 31, 1997, we 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 the above transaction, we had no material operations. The AgroCan China
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 we had been the parent company from
inception.
15
We, through AgroCan (China) Inc., currently own 100% interest in two
wholly-owned subsidiaries, Guangxi Linmao Fertilizer Company Limited ("Guangxi
Linmao") and Jiangxi Jiali Chemical Industry Company Limited ("Jiangxi Jiali").
We, through AgroCan (China) Inc., also own 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").
We account for our interest in Jiangxi Fenglin similar to a majority-owned
subsidiary because of our 70% interest, our contractual ability to appoint four
out of six directors to the Board of Directors, which is the highest authority
for the joint venture, and our 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 our consolidated financial statements.
We produce various compound fertilizers. These ingredients used are blended in
different proportions and packed into 50 kilogram bags. As of September 30,
2001, we have 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 we intend to enter markets in other provinces in China.
Our 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,
2001 and 2000, we relied on a small number of customers for most of our sales.
During the fiscal year ended September 30, 2001, five customers accounted for
65.8% of total sales (Jia Hua Co. Ltd.: 17.5%, Gui Jia: 15.3%, Jia Zhang Co.
Ltd.: 14.4%, Chu Kwok Ping: 12%, and Liu Yin Koo: 6.6% of total 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). As of September 30, 2001
and 2000, approximately 95% and 67% of accounts receivable were generated from
trade transactions with five significant customers, of which one customer
accounted for approximately 38% and 51% of the accounts receivable balance,
respectively.
We purchase our raw material from over thirty different suppliers located in the
PRC. During the fiscal years ended September 30, 2001, five suppliers accounted
for 37.9% of total purchases: Chu Kwok Ping (13%), Gia Fa Fu Ti Agricultural
rental Spot (7.5%), Wu Min Agricultural Capital Co. Ltd. (7.9%), Hu Gan
Agricultural Capital Co. Ltd. (5.7%) and Wubei Hu Gan Co. Ltd. (3.8%) of total
purchases of raw material. In the fiscal years ended September 30, 2000, two
suppliers accounted for 54% of total purchases.
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
16
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. For all purposes in this report, unless otherwise specifically
stated, the U.S. dollar equivalent for the PRC Renminbi is the official exchange
rate of 8.277 RMB=$1.00 (U.S.).
Consolidated Results of Operations:
Fiscal Years Ended September 30, 2001 and 2000:
Revenues. Revenues for the fiscal year ended September 30, 2001 were RMB
19,411,848, as compared to revenues of RMB 51,526,030 for the fiscal year ended
September 30, 2000, a decrease of RMB 32,114,182 or 62.3%. The decrease in
revenues in 2001 as compared to 2000 was a result of the company not generating
any revenue from trading during the current year. Also, decreased revenues were
due to the bad weather and serious flooding that occurred in the Guangxi
Province resulting in the cessation of almost all planting activities earlier in
the year. During the fiscal year ended September 30, 2001, the Company had five
customers that accounted for 65.8% of revenue: Jia Hua Co. Ltd. (17.5%), GuiJia
(15.3%), Jia Zhang Co. Ltd. (14.4%), Chu Kwok Ping (12%) and Liu Yin Koo (6.6%).
Gross Profit. Gross profit for the fiscal year ended September 30, 2001 was RMB
4,595,428 or 23.6% of revenues, as compared to RMB 9,581,094 or 18.6% of
revenues for the fiscal year ended September 30, 2000, a decrease of RMB
4,985,666 or 52.0%. During the fiscal year ended September 30, 2001, we had five
suppliers that provided 37.9% of our raw materials: Chu Kwok Ping (13%), Gia Fa
Fu Ti Agricultural Retail Spot (7.5%), Wu Min Agricultural Capital Co. Ltd.
(7.9%) Hu Gan Agricultural Capital Co. Ltd (5.7%) and Wubei Hu Gan Co. Ltd.
(3.8%). The gross profit margin increased in 2001 as compared to 2000, as a
percentage of revenues, as a result of our raising 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, 2001 increased by RMB 4,535,563 or 90%, to
RMB 9,575,942 or 49.3% of revenues, as compared to RMB 5,040,379 or 9.8% of
revenues for the fiscal year ended September 30, 2000. For the fiscal year ended
September 30, 2001 and 2000, directors' remuneration of RMB 747,000 was included
in administrative and general expenses. The increase was primarily due to
allowance of uncollectible amounts receivable of approximately RMB 4,853,700,
despite a decrease 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.
17
Selling Expenses. Selling expenses for the fiscal year ended September 30,
2001 decreased by RMB 145,983 or 14.2%, to RMB 883,659 or 4.6% of revenues, as
compared to RMB 1,029,642 or 2.0% of revenues for the fiscal year ended
September 30, 2000. Selling expenses decreased in 2001 as compared to 2000 as a
result of decreased costs in office operations, salaries and travel, as well as
product promotion costs.
Other Income (Expense). We did not receive subcontracting income for the
fiscal year ended September 30, 2001 and received RMB 1,025,000 for the fiscal
year ended September 30, 2000. We also did not receive commission income for the
fiscal year ended September 30, 2001 and received RMB 251,100 for the fiscal
year ended September 30, 2000. We recorded interest income of RMB 34,797 and
RMB 31,747 for the fiscal years ended September 30, 2001 and 2000, respectively.
We also received sundry income of RMB 17,435 for the fiscal year ended September
30, 2001 and did not receive sundry income for the fiscal year ended September
30, 2000. The Company recorded amortization of loan fees of RMB 359,506 and RMB
616,283 for the fiscal years ended September 30, 2001 and 2000, respectively.
Income Taxes. We are subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdiction in which each entity is
domiciled. Our British Virgin Islands subsidiary is not liable for income taxes.
Our 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 effective rate of 33% (30% national income tax plus 3%
state income tax). As manufacturing companies, our 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 join ventures may be carried forward for five years.
We recorded income taxes of RMB 267,076 and RMB 464,966 for the fiscal years
ended September 30, 2001 and 2000, respectively.
Minority Interest. For the fiscal years ended September 30, 2001 and 2000,
the Company recorded a minority interest of RMB 9,907 and RMB (26,120),
respectively, to reflect the interest of the Company's 30% joint venture partner
-- Nanchang Organic Fertilizer Factory, in Jiangxi Fenglin.
Net Income (Loss). Net loss was RMB 6,428,616 for the fiscal year ended
September 30, 2001, as compared to net income of RMB 3,711,551 for the fiscal
year ended September 30, 2000.
Consolidated Financial Condition:
Liquidity and Capital Resources - September 30, 2001:
18
Operating. For the fiscal year ended September 30, 2001, our operations
utilized cash resources of RMB 1,839,970, as compared to a utilization of cash
resources of RMB 3,381,008 for the fiscal year ended September 30, 2000. The
decrease in the utilization of cash resources in 2001, compared to 2000 arose,
primarily as a result of a decrease in accounts receivable. We had net working
capital at September 30, 2001 of RMB 4,445,923, as compared to net working
capital of RMB 17,557,262 at September 30, 2000, reflecting a current ratio of
1.52:1 at September 30, 2001, as compared to 1.54:1 at September 30, 2000.
Accounts receivable decreased by RMB 16,991,063, to RMB 12,748,777 at September
30, 2001, from RMB 38,030,840 at September 30, 2000. Accounts receivable
decreased during the fiscal year ended September 30, 2001 as a result of the
payment of trade receivables which was generated in the previous years as well
as a result of the transfer of receivables of RMB 8,291,000 to advances
receivable.
Accounts payable decreased by RMB 18,893,230, to RMB 2,266,412 at September 30,
2001, from RMB 21,159,642 at September 30, 2000. Accounts payable decreased
during the fiscal year ended September 30, 2001 as a result of the payment of
trade payables which occurred in the previous years.
Investing. During the fiscal years ended September 30, 2001 and 2000,
additions to property, plant and equipment aggregated RMB 402,522 and RMB
445,943, respectively.
During the year ended September 30, 2001, the Company entered into an agreement
with an unrelated third party under which the Company transferred trade accounts
receivable balances of approximately RMB 8,291,000 and cash of approximately RMB
3,378,800 to the third party. These amounts, which are to be repaid quarterly
beginning March 2002 through March 2004, are unsecured and bear interest of 1.5%
per annum. In view of the extended payment terms, during the Company's fourth
quarter, management reevaluated the agreement and provided an allowance against
the transferred amounts of approximately RMB 3,501,000.
We have no material capital expenditure commitments outstanding at September 30,
2001.
Financing. During the fiscal year ended September 30, 2001, we had two
unsecured bank loans of RMB 993,000 (US $119,639) and RMB 1,000,000 (US
$120,482). The bank loans are interest bearing at 7.605% and 6.435% per annum
and are to be repaid during the year ending September 30, 2002. One of the loans
is guaranteed by one of our customers.
During the fiscal year ended September 30, 2000, we borrowed the sum of RMB
1,510,212 plus interest of RMB 75,000 from third parties. These loans are
unsecured and were due on January 6, 2001 and, therefore, are currently in
default. The loan agreement does not include default provisions and the Company
has not incurred any additional obligations as a result of the default. We also
have outstanding loans in the amount of RMB 1,900,000 which are non-interest
bearing and payable on demand.
19
During the fiscal year ended September 30, 2001, in connection with the 'Fiscal
2000 Equity Compensation Plan', we issued 350,000 shares of common stock and
received not proceeds of RMB 173,470. During the fiscal year ended September 30,
2000, we issued 164,510 shares of common stock upon exercise of common stock
purchase warrants and received net proceeds of RMB 136,541.
We anticipate, based on currently proposed plans and assumptions relating to our
existing operations, that our projected cash flows from operations, combined
with cash that we expect to generate from the issuance of securities and from
borrowings, will be sufficient to support our planned operations for the next
twelve months. However, there can be no assurance that this will occur.
Depending on our rate of growth, we may seek additional capital in the future to
support expansion of operations and acquisitions.
Inflation and Currency Matters:
In recent years, the Chinese economy has experienced periods of rapid economic
growth as well as relatively high rates of inflation, which in turn has resulted
in the periodic adoption by the Chinese government of various corrective
measures designed to regulate growth and contain inflation. Since 1993, the
Chinese government has implemented an economic program designed to control
inflation, which has resulted in the tightening of working capital available to
Chinese business enterprises. Our success depends in substantial part on the
continued growth and development of the Chinese economy. During the fiscal years
ended September 30, 2001 and 2000, inflation and changing prices have had a
minor impact on our 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. We expect 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, we do not believe that such an action would have a detrimental effect
on our operations, since we conduct virtually all of our business in China, and
the sale of our products is settled in Renminbi. However, devaluation of the
Renminbi against the United States dollar would adversely affect our financial
performance when measured in United States dollars.
20
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. Our only
current component of comprehensive income is foreign currency translation
adjustment. We have adopted SFAS No.130 for its fiscal year beginning October
1, 1998. Adoption of SFAS No. 130 did not have a material effect on our
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. We operate in only one segment, the manufacture and sale of
fertilizer products. We have adopted SFAS No. 131 for our fiscal year beginning
October 1, 1998. Adoption of SFAS No.131 did not have a material effect on our
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.
We do not have any pension or other post retirement benefit plans. We adopted
SFAS No. 132 for its fiscal year beginning October 1, 1998. Adoption of SFAS
No.132 did not have a material effect on our financial statement presentation
and disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
which, 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
21
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.
We have adopted SFAS No.133 for our fiscal year beginning October 1, 2000. We do
not have any derivative instruments nor are we engaged in any hedging
activities, thus we do not believe that implementation of SFAS No.133 will have
a material effect on our 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.
We believe that we currently comply with the accounting and disclosures
provisions described in SAB No.101. Accordingly, we do not believe that
implementation of SAB No.101 will have a material effect on its financial
statement presentation and disclosures.
In July 2001, The Financial Accounting Standards Board (FASB) issued SFAS
No.141, "Business Combinations", and SFAS no.142, "Goodwill and Other Tangible
Assets". SFAS No.141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method will be prohibited after that date. SFAS No.142
changes the accounting for goodwill and intangible assets with indefinite lives
from an amortisation method to an impairment-only approach and acquires
intangible assets with finite lives to be amortised over their useful lives.
Thus, amortisation of goodwill and intangible assets with indefinite lives will
cease upon adoption of the statement. SFAS No.142 is required to be applied in
fiscal years beginning after December 15, 2001. We do not expect that the
adoption of SFAS No.141 or SFAS No.142 will have a significant immediate impact
on our financial condition or results of operations, as we have no pending
business combinations, nor do we have any goodwill or other intangible assets
recorded as of September 30, 2001.
In August 2001, the FASB issued SFAS No.144, "Accounting for Impairment or
Disposal of Long-Lived Assets", which addresses accounting and financial
reporting for the impairment or disposal of long-lived assets. This statement is
effective for fiscal years beginning after December 15, 2001. We are currently
assessing the impact, if any, that SFAS No.144 may have on our financial
condition and results of operations.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements for the fiscal years ended September 30,
2001 and 2000 are listed at the "Index to Consolidated Financial Statements".
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
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 our directors
and executive officers as of September 30, 2001. The Board of Directors
comprises only one class. All 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 office 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 53 Chairman of the Board, President and Chief
Executive Officer
Danny Wu 41 Secretary and Director
Donald Lau 53 Director
Ngai Poon 32 Director
Haibo Li 50 Vice President, Operations
Changfa Li 53 Vice President, Business Development
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
23
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 was the Chief Financial Officer from September 2000 to March 2001. 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.
24
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.
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.
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,
2001.
25
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during fiscal years ended
September 30, 2000 and 2001 to our Chief Executive Officer and director. 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 STOCK OPTION
--------------------------- ---- ------ ------------
Lawrence Hon, President and CEO 2001 $45,000 35,000 shares*
2000 $45,000
Danny Wu, Secretary and Director 2001 $45,000 35,000 shares*
2000 $45,000
* The stock options granted to the officers noted above have a strike price of
$0.30 which was the market price for our shares on the date of the grant. The
options may be exercised in whole or in part at anytime prior to their
expiration on June 30, 2006.
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, 2001, four 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, 2001. The Board of Directors has established an audit committee consisting
of Lawrence Hon and Danny Wu.
STOCK OPTION PLAN
We adopted a stock option plan ("the 1998 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 our officers, directors, key employees,
and consultants. An aggregate of 250,000 shares of common stock have 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, 2001, stock options for 250,000 shares have been granted under the Plan at
an exercise price of US$0.30 (RMB2.50), being the market price of our shares at
the date of grant. These options expire on June 30, 2006.
26
On March 23, 2001, the Company adopted the Fiscal 2000 Equity Compensation Plan
("The 2000 Plan"). The purpose of the 2000 Plan is to enable the Company to
offer and issue to certain employees, advisors and consultants of the Company
and its affiliates, common stock of the Company in exchange for services. The
aggregate number of shares of common stock that may be issued pursuant to the
2000 Plan shall not exceed 1,000,000 shares and shares issued pursuant to the
2000 Plan shall be issued at a price per share of not less than 95% of the fair
market value per share on the date of issuance and on other such terms and
conditions as determined by the Company. In connection with the "Fiscal 2000
Equity Compensation Plan", the company issued 130,000 shares of common stock to
two advisors on March 23, 2001 and recorded compensation expense of RMB809,250.
In August 2001 the Company issued 220,000 shares for cash of RMB 173,470
pursuant to the Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 30, 2001 with
respect to the beneficial ownership of our common stock by each beneficial owner
of more than 5% of our outstanding shares of common stock, 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 our 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 Suite 706 Dominion Centre, 43-59 Queen's Road East, Hong
Kong.
The only class of equity securities that the Company has outstanding is its
common stock, $0.0001 par value, of which 2,684,970 shares were issued and
outstanding as of September 30, 2001.
PERCENT OF OUTSTANDING
NAME OF SHARES OF COMMON SHARES OF COMMON STOCK
BENEFICIAL OWNER STOCK BENEFICALLY OWNED BENEFICIALLY OWNED
--------------------------------- ----------------------- -----------------------
Lawrence Hon 102,011 3.8%
Danny Wu 102,011 3.8%
Donald Lau (1) 420,444 15.7%
Ngai Poon (2) 473,200 17.6%
Haibo Li - -
Changfa Li - -
27
All Directors and Executive
Officers as a Group (6 persons) 1,097,666 40.9%
Masterpiece Development Ltd. (1) 420,444 15.7%
c/o T. C. Lau & Co.
501, China Insurance Group Bldg.
141, Des Voeux Road Central
Hong Kong
Intermax Ltd. (2) 473,200 17.6%
811, Wing Shan Tower
73 Des Voeux Road Central
Hong Kong
Wan Wai Tak 213,200 7.9%
Poon Chung Ping 213,200 7.9%
----------------------------
(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
We are unaware of any contract or other arrangement, the operation of which may
at a subsequent date result in a change in control of the company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH RELATED PARTIES
During the years ended September 30, 2001 and 2000, AgroCan International
Holdings Inc., which is owned by the three original shareholders ie. Texon
Investments Holding Ltd. (26.3%), Masterpiece Development Ltd. (44.1%) and
Intermax Ltd. (29.6%), is a related entity. It received RMB 2,685,399 and RMB
1,577,000, respectively on our behalf. In addition, in 2001, we advanced RMB
26,550,932 to this entity and RMB 27,461,219 was repaid by this entity. Balances
due from this entity at September 30, 2001 and 2000, were RMB 3,156,606 and RMB
2,734,325, respectively, net of allowances for uncollectible amounts of RMB
1,352,800 and RMB 0, respectively.
During the year ended September 30, 2001 and 2000, we paid management fees of
RMB 38,220 and RMB 236,124, respectively, to Orient Packaging Ltd, which is
28
wholly owned by Orient Investments Ltd. and is another related company. In
addition, during the year ended September 30, 2001, we advanced RMB 293,499 and
recorded service fee income receivable of RMB 17,435 from this entity. At
September 30, 2001 and 2000, total amounts due from this entity were RMB 308,713
and RMB 0, respectively. These advances are unsecured, non-interest bearing and
are due on demand.
During the year ended September 30, 2001 and 2000, we paid expenses of RMB 2,800
and RMB 56,280, respectively, on behalf of Nanchang Organic Fertilizer Factory
-- the PRC joint venture partner of Fenglin. Repayment of RMB 5,275 and RMB 0
were received during years ended September 30, 2001 and 2000 respectively and
amounts due at September 30, 2001 and 2000 were RMB 152,854 and RMB 155,329,
respectively. These advances are unsecured, non-interest bearing and are due on
demand.
We paid factory and production facilities rental of RMB 180,000 during, each of
the years ended September 30, 2001 and 2000 to Nanchang Organic Fertilizer
Factory -- the PRC joint venture partner of Jiangxi Fenglin.
TRANSACTIONS WITH DIRECTORS
During the year ended September 30, 2000, we made advances to and paid various
expenses on behalf of officers and directors of RMB 591,339 and balances due at
September 30, 2000 were RMB 859,196. During the year ended September 30, 2001,
these advances were repaid in full.
During the year ended September 30, 2000, CEO and Director Lawrence Hon repaid
advances to him of RMB 277,961 and also paid expenses of RMB 425,487 on our
behalf. During the year ended September 30, 2001 Mr. Hon paid additional
expenses of RMB 835,676 on our behalf and RMB 216,440 was repaid. At September
30, 2001 and 2000, balances due to Mr. Hon were RMB 1,854,527 and RMB 798,987,
respectively. These balances include accrued director's remuneration of RMB
747,000 for the year 2000 and 2001.
TRANSACTIONS WITH SHAREHOLDERS
On February 6, 1998, three shareholders (Texon Investments Holding Ltd.,
Intermax Ltd. and Masterpiece Development Ltd.) made a loan of US$300,000 (RMB
2,490,614) to us (Texon: $132,206, Intermax: $88,847 and Masterpiece: $78,947).
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, we granted to these shareholders options to purchase 754,117 shares of our
common stock 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 the remaining RMB 352,690, which was
deferred at September 30, 2001, was amortized to expense during the year ended
September 30, 2001.
29
PART IV.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: none
(b) Reports on Form 8K: During the fiscal year ended September 30, 2001, we
filed a report on form 8K on May 25, 2001 and the report is incorporated herein
by reference.
30
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 11, 2002 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 11, 2002 By: /s/ LAWRENCE HON
---------------------------------
President and Chief
Executive Officer
Date: January 11, 2002 By: /s/ CARL YUEN
---------------------------------
Chief Financial Officer
Date: January 11, 2002 By: /s/ DANNY WU
---------------------------------
Secretary and Director
31
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, 2001 and 2000 and the consolidated statements
of operations, 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of AgroCan
Corporation and its subsidiaries as of September 30, 2001 and 2000 and the
results of their operations and cash flows for each of the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
HORWATH GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
17 October 2001
32
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
NOTE 2001 2001 2000
------------ ------------ ------------
US DOLLARS RMB RMB
NET SALES $ 2,338,777 19,411,848 51,526,030
COST OF SALES (1,785,111) (14,816,420) (41,944,936)
------------ ------------ ------------
GROSS PROFIT 553,666 4,595,428 9,581,094
ADMINISTRATIVE AND GENERAL EXPENSES (1,153,728) (9,575,942) (5,040,379)
SELLING EXPENSES (106,465) (883,659) (1,029,642)
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (706,527) (5,864,173) 3,511,073
OTHER INCOME (EXPENSE)
Commission income - - 251,100
Subcontracting income - - 1,025,000
Interest income 4,192 34,797 31,747
Sundry income 2,101 17,435 -
Amortization of loan fees (43,314) (359,506) (616,283)
------------ ------------ -----------
(LOSS) INCOME BEFORE INCOME TAXES (743,548) (6,171,447) 4,202,637
INCOME TAXES 3 (32,178) (267,076) (464,966)
------------ ------------ -----------
(LOSS) INCOME BEFORE MINORITY INTEREST (775,726) (6,438,523) 3,737,671
MINORITY INTEREST 1,194 9,907 (26,120)
------------ ------------ -----------
NET (LOSS) INCOME $ (774,532) (6,428,616) 3,711,551
============ ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted 2(n) 2,429,137 2,429,137 2,202,647
BASIC AND DILUTED (LOSS) EARNINGS
PER SHARE $ (0.32) (2.64) 1.68
============ ============ ===========
See notes to consolidated financial statements
33
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND 2000
NOTE 2001 2001 2000
---------- ---------- ----------
US DOLLARS RMB RMB
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 71,309 591,864 4,616,686
Accounts receivable, less allowance for
doubtful accounts
(2001: RMB3,781,000
and 2000 : RMB280,000) 4 1,535,997 12,748,777 38,030,840
Other receivables and prepayments 75,394 625,772 480,688
Inventories 2(d) 175,124 1,453,528 2,787,401
Deposits 18,771 155,801 434,521
Amounts due from related parties, net 7 435,924 3,618,173 3,748,850
---------- ---------- ----------
TOTAL CURRENT ASSETS 2,312,519 19,193,915 50,098,986
ADVANCES RECEIVABLE, NET 4 984,200 8,168,860 -
PROPERTY, PLANT AND EQUIPMENT - NET 5 740,173 6,143,437 6,297,254
DEFERRED COSTS - - 359,507
---------- ---------- ----------
TOTAL ASSETS $4,036,892 33,506,212 56,755,747
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short term loans-unsecured 6 $ 410,869 3,410,212 3,980,212
Short term bank loan 6 240,120 1,993,000 -
Accounts payable 273,062 2,266,412 21,159,642
Other payables and accruals 141,158 1,171,615 1,409,816
Deposits received 94,025 780,404 1,481,629
Amounts due to related parties 7 524,016 4,349,334 3,663,101
Income tax payable 3 93,616 777,015 847,324
---------- ---------- ----------
TOTAL LIABILITIES, ALL CURRENT 1,776,866 14,747,992 32,541,724
MINORITY INTEREST 134,894 1,119,624 1,129,531
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 2,684,970 shares
at September 30, 2001; 2,334,970 at
September 30, 2000 268 2,224 1,934
Capital in excess of par value 1,476,750 12,257,029 11,274,599
Retained earnings
Unappropriated 500,121 4,151,004 11,324,705
Appropriated 145,818 1,210,289 465,204
Other comprehensive income 2,175 18,050 18,050
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 2,125,132 17,638,596 23,084,492
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,036,892 33,506,212 56,755,747
========== ========== ==========
See notes to consolidated financial statements
34
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
Stock Unappro- Appro- Foreign
Capital in options priated priated currency Total
Common stock excess of and retained retained translation shareholders'
Shares Amount par value warrants earnings earnings adjustment equity
--------- ------ ---------- ----------- ----------- --------- ----------- -----------
RMB RMB RMB RMB RMB RMB RMB
Balances, October 1, 1999 2,170,460 1,800 8,745,884 2,392,308 7,806,456 271,902 18,964 19,237,314
Exercise of warrants 164,510 134 136,407 - - - - 136,541
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 - - 3,711,551
Other comprehensive income - - - - - - (914) (914)
--------- ------ ---------- ----------- ----------- --------- ----------- -----------
Balances, September 30, 2000 2,334,970 1,934 11,274,599 - 11,324,705 465,204 18,050 23,084,492
Issuance of common stock for
cash 220,000 182 173,288 - - - - 173,470
Issuance of common stock for
services 130,000 108 809,142 809,250
Staff welfare reserve - - - - (745,085) 745,085 - -
Net loss for the year ended
September 30, 2001 - - - - (6,428,616) - - (6,428,616)
--------- ------ ---------- ----------- ----------- --------- ----------- -----------
Balances, September 30, 2001 2,684,970 2,224 12,257,029 4,151,004 1,210,289 18,050 17,638,596
========= ====== ========== =========== =========== ========= =========== ===========
See notes to consolidated financial statements
35
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
2001 2001 2000
------------- ------------ -------------
US DOLLARS RMB RMB
OPERATING ACTIVITIES
Net (loss) income $ (774,532) (6,428,616) 3,711,551
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Compensation expenses in relation to issues of shares 97,500 809,250 -
Amortization of deferred costs 43,314 359,507 926,477
Depreciation 67,029 556,339 489,639
Increase in allowance for doubtful accounts 584,792 4,853,771
Minority interest in net (loss) income (1,194) (9,907) 26,120
Decrease (increase) in accounts receivable 2,047,116 16,991,063 (24,133,591)
Increase in other receivables, deposits
and prepayments 16,101 133,636 1,058,611
Decrease (increase) in inventories 160,708 1,333,873 (1,699,423)
(Increase) in amounts due from related parties (147,247) (1,222,154) (1,946,657)
(Decrease) increase in accounts payable (2,276,293) (18,893,230) 16,159,698
(Decrease) increase in tax payable (8,471) (70,309) 191,474
Increase in other payables and accruals (28,699) (238,201) (665,627)
(Decrease) increase in deposits received (84,485) (701,225) 1,328,233
Increase in amounts due to related parties 82,679 686,233 1,172,487
------------- ------------ -------------
Net cash provided by (used in) operating activities (221,682) (1,839,970) (3,381,008)
------------- ------------ -------------
INVESTING ACTIVITIES
Increase in advances receivable (407,084) (3,378,800) -
Additions to property, plant and equipment (48,497) (402,522) (445,943)
------------- ------------ -------------
Net cash used in investing activities (455,581) (3,781,322) (445,943)
------------- ------------ -------------
FINANCING ACTIVITIES
Short term loans - unsecured - - 4,580,212
Repayment of short term loan (68,675) (570,000) (600,000)
Repayment of short term bank loan (844) (7,000) (700,000)
Proceeds form short term bank loan 240,964 2,000,000 -
Proceeds from issuance of shares 20,900 173,470 136,541
------------- ------------ -------------
Net cash provided by financing activities 192,345 1,596,470 3,416,753
------------- ------------ -------------
Net decrease in cash and cash equivalents (484,918) (4,024,822) (410,198)
Cash and cash equivalents at beginning of year 556,227 4,616,686 5,027,798
Effect of exchange rate changes on cash - - (914)
------------- ------------ -------------
Cash and cash equivalents at end of year $ 71,309 591,864 4,616,686
============= ============ =============
Cash paid during the year for income taxes $ 40,649 337,384 273,492
============= ============ =============
Schedule of non-cash investing 2001 2001
and financial activities: US Dollars RMB
------------- ------------
Trade accounts receivable transferred
to advances receivable 998,915 8,291,000
See notes to consolidated financial statements
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
(a) AgroCan Corporation ("AgroCan"or "the Company") was incorporated on
December 8, 1997 in the State of Delaware, and has a wholly owned
subsidiary AgroCan (China) Inc. Agrocan (China) Inc. has three
operating subsidiaries, Guangxi Linmao Fertilizer Company Limited
("Linmao"), Jiangxi Jiali Chemical Industry Company Limited ("Jiali")
and Jiangxi Fenglin Chemical Industry Company Limited (Fenglin"). The
Company's ownership interest in its subsidiaries, together with the
subsidiaries locations and the nature of their operations is as
follows:
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
(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, 2001, no
shares of preferred stock had been issued.
(c) Agrocan China's interest in Fenglin resulted from the establishment of
a Sino-Foreign Equity Joint Venture with a PRC state owned enterprise.
AgroCan (China) Inc.'s share in the equity interest of Fenglin is 70%.
The joint venture has a term of 30 years from November 28, 1996, the
date of incorporation.
(d) 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(f)).
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. PRINCIPAL ACCOUNTING POLICIES
(a) The consolidated financial statements include the accounts of the
Company and it's subsidiaries. Material intercompany balances and
transactions have been eliminated on consolidation.
(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 plant and 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,
2001.
(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.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(d) Inventories (continued)
Inventory is comprised of the following as of September 30:
2001 2001 2000
---------- --------- ----------
US DOLLARS RMB RMB
Raw materials $ 122,972 1,020,669 2,238,353
Finished goods 52,152 432,859 549,048
---------- ----------- ----------
$ 175,124 1,453,528 2,787,401
========== =========== ==========
(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 amount 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 equal RMB8.30 as of September 30, 2001 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.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. 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) Deferred costs
Loan fees are deferred and amortized by equal installments over five
years or the term of the related financial instrument.
(i) Revenue recognition
Revenue from sales of goods by the Company and its subsidiaries is
recognized on the delivery of goods to customers.
(j) Income taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statements carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the consolidated
statement of income in the period that includes the enactment date.
(k) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Management makes these
estimates using the best information available at the time the
estimates are made; however actual results could differ materially
from these estimates.
(l) 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 and are included in appropriated retained
earnings at September 30, 2001 and 2000. The reserve cannot be used
for purposes other than those for which it is created and is not
distributable as cash dividends.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(m) Stock-based compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"), 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.
Accordingly, compensation cost for stock options is measured for the
excess, if any, of the quoted market price of the Company's stock at
the date of the grant over the amount an employee must pay to acquire
the stock.
(n) Earning per share
Statement of Financial Accounting Standard No. 128, Earnings per
Share, ("SFAS No. 128") requires dual presentation of basic and
diluted earning per share ("EPS") with a reconciliation of the
numerator and denominator of the EPS computations. Basic earning per
share amounts are based on the weighted average share of common stock
outstanding. Diluted earning per share assume the conversion, exercise
or issuance of all potential common stock instruments such as options,
warrants and convertible securities, unless the effect is to reduce a
loss or increase earnings per share.
Accordingly, this presentation has been adopted for all periods
presented. The basic and diluted weighted average common shares
outstanding are 2,429,137 and 2,202,647 as of September 30, 2001 and
2000, respectively.
(o) Comprehensive income
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, ("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. The Company's only current
component of comprehensive income is foreign currency translation
adjustment.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(p) Segment reporting
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS No. 131"),
established standards for the way that public companies report
information about operating segments in annual financial statements
and requires reporting of selected information about operating
segments in interim financial statements issued to the public. SFAS
No. 131 also establishes standards for disclosures by public companies
regarding information about their major customers, operating segments,
products and services, and the geographic areas in which they operate.
SFAS No. 131 defines operating segments as components of an enterprise
about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance. The Company'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.
(q) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133"), which is effective for financial
statements for all fiscal quarters of all fiscal years beginning after
June 15, 2001. 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 ("SAB") No. 101, Revenue Recognition
in Financial Statements. 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, 2000. 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; therefore, management believes that SAB No.
101 will not impact the Company's financial statements.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(q) Recent Accounting Pronouncements (continued)
In July 2001, The Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and
Other Tangible Assets. SFAS No. 141 requires that the purchase method
of accounting be used for all business combinations initiated after
June 30, 2001. Use of the pooling-of-interests method will be
prohibited on a prospective basis only. SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other
intangible assets. It changes the accounting for goodwill and
intangible assets with indefinite lives from an amortization method to
an impairment-only approach and acquires intangible assets with finite
lives to be amortised over their useful lives. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. The
Company does not expect that the adoption of SFAS No. 141 or SFAS No.
142 will have a significant immediate impact on its financial
condition or results of operations, as the Company has no pending
business combinations, nor does it have any goodwill or other
intangible assets as of September 30, 2001.
In August 2001, the FASB issued SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets, which addresses
accounting and financial reporting for the impairment or disposal of
long-lived assets. This statement is effective for fiscal years
beginning after December 15, 2001. The Company is currently assessing
the impact, if any, that SFAS No. 144 may have on its financial
condition and results of operations.
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 comprise two wholly owned foreign
enterprises and a 70% held Sino-Foreign Equity Joint Venture. PRC Companies
are generally subject to income taxes at an effective rate of 33% (30%
Chinese national income tax plus 3% Chinese state income tax). Two of the
Company's subsidiaries, Fenglin and Linmao, are manufacturing companies
operating in special economic zones, and they are entitled to a reduced
national income tax rate of 24%. All the subsidiaries are exempt from state
income tax. Further, pursuant to the approval of the relevant PRC tax
authorities, all 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 Fenglin and Linmao, subjecting them to income tax at a rate of
12%. Effective January 1, 2001, the two-year, 100% exemption expired for
Jiali and it became subject to income tax at a rate of 15%. Losses incurred
by PRC companies may be carried forward for five years. Deferred tax assets
and liabilities are not considered material at September 30, 2001 and 2000.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. TAXATION (CONTINUED)
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,
2001 2000
-------------- --------------
Computed expected income tax
(benefit) expense (34%) 34%
Difference in foreign statutory rates (1) (1)
Income tax exemption (5) (22)
Items which give rise to no tax benfit:
Net loss of the Company and BVI
subsidiary 44% -
-------------- --------------
Effective tax rate 4% 11%
============== ==============
The pro forma effect of the tax holiday on net (loss) income and (loss)
earnings per share is as follows:
September 30,
----------------------
2001 2000
----------- ---------
RMB RMB
Net (loss) income (6,737,200) 2,787,000
Basic and diluted (loss) earnings
per share (2.77) 1.26
The Company's share of undistributed earnings of the Company's foreign
subsidiaries amounted to RMB 741,359 and RMB 6,554,084 at September 30,
2001 and 2000, respectively. Because these earnings are considered to be
indefinitely invested, no provision for United States corporate income
taxes on those earnings has been provided. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be
subject to U.S. corporate income taxes. Unrecognized deferred U.S.
corporate income taxes in respect of these undistributed earnings, less the
Company's expenses available for deduction for tax purposes as at September
30, 2001 and 2000 was RMB 252,062 and RMB 2,228,389, respectively.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SIGNIFICANT CONCENTRATIONS AND ADVANCES RECEIVABLE:
The Company grants credit, generally on open account to its customers. The
Company's customers are all located in the PRC. Approximately 59% of the
Company's sales were generated from four customers during the years ended
September 30, 2001 and 2000, respectively. (2001: 18%, 15% 14% and 12% of
total sales; 2000: 18%, 15%, 15% and 11% of total sales.)
At September 30, 2001 and 2000, approximately 95% and 67%, respectively of
accounts receivable were from trade transactions with five customers, of
which one customer accounted for approximately 38% and 51%, respectively of
the accounts receivable balance.
During the year ended September 30, 2001, the Company entered into an
agreement with an unrelated third party under which the Company transferred
trade accounts receivable balances of approximately RMB 8,291,000 and cash
of approximately RMB 3,378,800 to the third party. These amounts, which are
to be repaid quarterly beginning March 2002 through March 2004, are
unsecured and bear interest of 1.5% per annum. In view of the extended
payment terms, during the Company's fourth quarter, management reevaluated
the agreement and provided an allowance against the transferred amounts of
approximately RMB 3,501,000.
5. PROPERTY, PLANT AND EQUIPMENT
2001 2001 2000
---------- ----------- ----------
US DOLLARS RMD RMD
Cost:
Land use rights $ 129,009 1,070,775 1,070,775
Buildings 531,127 4,408,359 4,362,784
Leasehold improvements 16,570 137,530 137,530
Plant and machinery 221,935 1,842,057 1,497,972
Furniture and equipment 41,168 341,692 334,745
Motor vehicles 30,095 249,792 249,792
---------- ----------- ----------
Total cost 969,904 8,050,205 7,653,598
---------- ----------- ----------
Accumulated depreciation:
Land use rights 16,294 135,343 100,927
Buildings 65,005 539,634 372,151
Leasehold improvements 4,142 34,382 6,877
Plant and machinery 92,063 764,227 550,395
Furniture and equipment 27,056 224,263 162,037
Motor vehicles 25,171 208,919 163,957
---------- ----------- ----------
229,731 1,906,768 1,356,344
---------- ----------- ----------
Net $ 740,173 6,143,437 6,297,25
=========== =========== ==========
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHORT TERM LOANS - UNSECURED
The amounts represent money borrowed from third parties. Loans in the
amount of RMB1,510,212, plus interest of RMB75,000, are unsecured and were
due on January 6, 2001. The loan agreement does not include default
provisions and the Company has not incurred any additional obligations as a
result of the default. Loans in the amount of RMB1,900,000 are non-interest
bearing and payable on demand.
At September 30, 2001 the Company had two bank loans of RMB993,000
(US$119,639) and RMB1,000,000 (US$120,482). The bank loans bear interest at
7.605% and 6.435%, respectively, per annum and are due during the year
ending September 30, 2002. One of the loans is guaranteed by a customer of
the Company.
7. RELATED PARTY BALANCES AND TRANSACTIONS
(a) Transactions with related parties
(i) During the years ended September 30, 2001 and 2000, an affiliated
entity received RMB2,685,399 and RMB 1,577,000, respectively on
behalf of the Company. In addition, in 2001, the Company advanced
RMB 26,550,932 to the affiliate and RMB27,461,219 was repaid by
the affiliate. During the Company's fourth quarter of 2001, as a
result of reduced repayments in that quarter, management provided
an allowance for uncollectible amounts of approximately RMB
1,352,800. Balances due from the affiliate at September 30, 2001
and 2000, were RMB3,156,606, net and RMB2,734,325, respectively.
(ii) During the year ended September 30, 2001 and 2000, the Company
paid management fees of RMB38,220 and RMB236,124, respectively,
to another affiliated Company. In addition, during the year ended
September 30, 2001, the Company advanced RMB293,499 and recorded
service fee income receivable of RMB17,435 from this entity. At
September 30, 2001 and 2000, total amounts due from the affiliate
were RMB308,713 and RMB0, respectively. These advances are
unsecured, non-interest bearing and are due on demand.
(iii) During the year ended September 30,2001 and 2000, the Company
paid expenses of RMB2,800 and RMB56,280, respectively, on behalf
of the PRC shareholder of Fenglin. Repayments of RMB5,275 and
RMB0 were received during the years ended September 30, 2001 and
2000 respectively and amounts due at September 30, 2001 and 2000
were RMB152,854 and RMB155,329, respectively. These advances are
unsecured, non-interest bearing and are due on demand.
(iv) The Company paid factory and production facilities rental of
RMB180,000 during, each of the years ended September 30, 2001 and
2000 to the PRC shareholder of Fenglin.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY BALANCES AND TRANSACTIONS (CONTINUED)
(b) Transactions with directors
(i) During the year ended September 30, 2000, the Company made
advances to and paid various expenses on behalf of officers and
directors of RMB591,339 and balances due at September 30, 2000
were RMB859,196. During the year ended September 30, 2001, these
advances were repaid in full.
(ii) During the year ended September 30, 2000, another director repaid
advances to him of RMB277,961 and also paid expenses of
RMB425,487 on behalf of the Company. During the year ended
September 30, 2001 the director paid additional expenses of
RMB835,676 on behalf of the Company and RMB216,440 was repaid by
the Company. At September 30, 2001 and 2000, balances due to the
director were RMB1,854,527 and RMB798,987, respectively. These
balances include accrued director's remuneration of RMB747,000.
(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 the remaining RMB352,690, which was deferred at
September 30, 2000, was amortized to expense during the year ended
September 30, 2001.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LEASE COMMITMENTS
The Company leases land, buildings and other equipment under various
contracts that expensed during the year ended September 30, 2001. Rental
expenses for each of the years ended September 30, 2001 and 2000 was RMB
180,000. Subsequent to September 30, 2001, the lease was renewed. The
Company also leases office space under a lease expiring in April 2003. Rent
expense for each of the years ended September 30, 2001 and 2000 was
approximately RMB 220,000. Future total minimum rental payments are as
follows:
RMB
Year ending September 30: 2002 180,000
=========
2003 128,300
=========
9. WARRANTS AND OPTIONS
The Company adopted a stock option plan ("the 1998 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. During the year ended
September 30, 2001, stock options for 250,000 shares have been granted to
employees under the Plan at an exercise price of US$0.30 (RMB2.50), being
the quoted market price of the Company's shares at the date of grant. These
options expire on June 30, 2006.
Had compensation expense been determined as provided in SFAS No. 123 using
the Black-Scholes option pricing model, the proforma effect of options
issued during the year ended September 30, 2001 on the Company's net loss
and per share amounts would have been as follows:
2001
----
Net loss, as reported $774,532
Net loss, proforma $849,032
Net loss per share, as reported $ (0.32)
Net loss per share, proforma $ (0.34)
The fair value of each option grant is calculated assuming an expected life of
five years, an interest rate of 5.03%, volatility of 245% and a dividend yield
of 0.
A summary of the status of the Company's stock options and warrants for the
years ended September 30, 2001 and 2000 is as follows:
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. WARRANTS AND OPTIONS (CONTINUED)
Options Warrants
----------------- ----------------------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ----- --------- ----- --------- -----
US$ US$ US$
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) 1.50 (275,000) 1.50 (35,490) 0.10
--------- ----- --------- ----- --------- -----
Outstanding at
September 30, 2000 - - - - - -
Granted 250,000 0.30 - - - -
--------- ----- --------- ----- --------- -----
Outstanding at
September 30, 2001 250,000 0.30 - - - -
========= ===== ========= ===== ========= =====
On March 23, 2001, the Company adopted the Fiscal 2000 Equity Compensation
Plan ("The 2000 Plan"). The purpose of the 2000 Plan is to enable the
Company to offer and issue to certain employees, advisors and consultants
of the Company and its affiliates, common stock of the Company in exchange
for services. The aggregate number of shares of common stock that may be
issued pursuant to the 2000 Plan shall not exceed 1,000,000 shares and
shares issued pursuant to the 2000 Plan shall be issued at a price per
share of not less than 95% of the fair market value per share on the date
of issuance and on other such terms and conditions as determined by the
Company. In connection with the "Fiscal 2000 Equity Compensation Plan", the
company issued 130,000 shares of common stock to two advisors on March 23,
2001 and recorded compensation expense of RMB809,250. In August 2001 the
Company issued 220,000 shares for cash of RMB 173,470 pursuant to the Plan.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RISK CONSIDERATIONS
As a majority of the Company's operations are conducted in the PRC, the
Company is subject to special considerations and significant risks not
typically associated with investments in equity securities of North
American and Western European companies. The Company's operations may be
adversely affected by significant political, economic and social
uncertainties in the PRC.
Although the PRC government has been pursuing economic reform policies for
the past several years, no assurance can be given that the PRC government
will continue to pursue such policies or that such policies may not be
significantly altered, especially in the event of a change in leadership,
social, or political disruption or unforeseen circumstances affecting the
PRC's political, economic and social life. There is also no guarantee that
the PRC government's pursuit of economic reforms will be consistent or
effective.
The Company expects that substantially all of its revenues will be
denominated in RMB. A portion of such revenues will need to be converted
into other currencies to meet foreign currency obligations such as payment
of any dividends declared. Both the conversion of RMB into foreign
currencies and their remittance of foreign currencies abroad require the
PRC government's approval.
50