American Lorain Corporation - Form S-1/A - Prepared By TNT Filings Inc.
As filed with the Securities and Exchange Commission on May 15, 2008 |
Registration No. 333-145260 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM S-1/A
(Amendment No. 3)
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMERICAN LORAIN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
2068 |
87-0430320 |
(State or other jurisdiction of
incorporation or organization) |
(Primary Standard Industrial
Classification Code Number) |
(I.R.S. Employer
Identification No.) |
Beihuan Road
Junan County
Shandong, China 276600
(+86) 539-7318818
(Address, including zip code, and telephone number, including area code, of registrants principal
executive offices)
Si Chen
Chief Executive Officer
American Lorain Corporation
Beihuan Road
Junan County
Shandong, China 276600
(+86) 539-7318818
(Name, address, including zip code, and telephone number, including area code, of agent for service)
(Names, addresses and telephone numbers of agents for service)
____________________________
Approximate date of commencement of proposed sale to the public: From time to time after the effective
date of this Registration Statement as determined on market conditions and other factors.
If any of the securities being registered on this form are to be offered on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under
the Securities Act, check the following box and list the Securities Act registration statement number
of the earlier effective registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act,
check the following box and list the Securities Act registration statement number of the earlier
effective registration statement the same offering.
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Large Accelerated Filer |
o |
Accelerated Filer o |
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Non-Accelerated Filer |
o (Do not check if a smaller reporting company) |
Smaller reporting company x |
CALCULATION OF REGISTRATION FEE
Title of each class of securities
to be registered |
Amount to be
registered(1)(4) |
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Proposed maximum
offering price
per share |
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Proposed maximum
aggregate
offering price |
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Amount of
registration fee(6) |
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Common stock, $0.001 par value |
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8,595,672 |
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$ |
4.63 |
(2) |
$ |
39,797,961.36 |
(2) |
$ |
1,221.80 |
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Common stock, $0.001 par value |
|
1,875,159 |
(5) |
$ |
4.25 |
(3) |
$ |
7,969,425.75 |
(3) |
$ |
244.66 |
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Total |
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10,470,831 |
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$ |
47,767,387.11 |
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$ |
1,466.46 |
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(1) In accordance with Rule 416(a), the Registrant is also registering hereunder an indeterminate number of shares that may be issued and resold resulting from stock splits, stock dividends or similar transactions.
(2) Estimated pursuant to Rule 457(c) of the Securities Act of 1933 solely for the purpose of computing the amount of the registration fee based on the average of the bid and asked prices reported on the OTC Bulletin Board on August 8, 2007.
(3) Calculated in accordance with Rule 457(g) based upon the price at which the warrants may be exercised.
(4) Represents shares of the Registrants common stock being registered for resale that have been issued to the selling stockholders named in this registration statement.
(5) Represents shares of common stock issuable upon exercise of three-year warrants to purchase shares of common stock held by the selling stockholders named in this registration statement.
(6)
$1,466.46 has been previously paid.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.
PROSPECTUS
Subject to completion, dated May 15, 2008
AMERICAN LORAIN CORPORATION
10,470,831 Shares of Common Stock
This prospectus relates to 10,470,831 shares of common stock of American Lorain Corporation (formerly
known as Millennium Quest, Inc.) that may be sold from time to time by the selling stockholders named
in this prospectus, which includes:
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8,595,672 shares of common stock; and |
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1,875,159 shares of common stock issuable upon exercise of three-year warrants owned by the selling
stockholders named in this prospectus. |
We will not receive any proceeds from the sales of any shares of common stock by the selling stockholders,
but we will receive up to $4.25 per common share from the exercise of warrants held by selling stockholders
if and when those warrants are exercised, which will result in proceeds to us of approximately $8
million if all warrants are exercised.
Our common stock is quoted on the OTC Bulletin Board maintained by the National Association of Securities
Dealers, Inc. under the symbol ALRC.OB. The closing bid price for our common stock on May 13, 2008 was $4.50 per share, as reported
on the OTC Bulletin Board.
Any selling stockholders who are affiliates of broker-dealers and any participating broker-dealers
are deemed to be underwriters within the meaning of the Securities Act of 1933 or the
Securities Act, and any commissions or discounts given to any such selling stockholder or broker-dealer
may be regarded as underwriting commissions or discounts under the Securities Act. The selling stockholders
have informed us that they do not have any agreement or understanding, directly or indirectly, with
any person to distribute their common stock.
Investing in our common stock involves a high degree of risk. See Risk Factors beginning
on page 5 to read about factors you should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is truthful or complete. Any representation
to the contrary is a criminal offense.
The date of this Prospectus is , 2008
The information in this prospectus is not complete and may be changed. No person may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and no person named in this prospectus is soliciting offers to buy these securities in any state where the offer or sale is not permitted.
TABLE OF CONTENTS
PROSPECTUS SUMMARY
The following summary highlights some of the information contained in this prospectus, and it may not
contain all of the information that is important to you in making an investment decision. You should
read the following summary together with the more detailed information regarding our Company and
the common stock being sold by the selling stockholders in this offering, including Risk Factors
and our consolidated financial statements and related notes, included elsewhere in, or incorporated
by reference into, this prospectus.
Conventions
In this prospectus, unless indicated otherwise, references to
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American Lorain are references to American Lorain Corporation, a Delaware corporation (formerly
known as Millennium Quest, Inc.). |
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Lorain Holding are references to International Lorain Holding, Inc., a Cayman
Islands corporation that is wholly-owned by American Lorain, and Lorain Holdings direct and
indirect Chinese subsidiaries. |
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we, us or our are references to the combined business of American
Lorain Corporation, its wholly-owned subsidiary, Lorain Holding, and the direct and indirect
Chinese subsidiaries of Lorain Holding. |
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American Lorain, Lorain Holding, we, us or our do not include the selling stockholders. |
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Junan Hongrun means Junan Hongrun Foodstuff Co., Ltd. and its Chinese operating subsidiaries. |
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Luotian Lorain means Luotian Green Foodstuff Co., Ltd. and its Chinese subsidiaries. |
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Beijing Lorain means Beijing Green Foodstuff Co., Ltd. and its Chinese subsidiaries. |
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Shandong Lorain means Shandong Green Foodstuff Co., Ltd. and its Chinese subsidiaries. |
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RMB means Renminbi, the legal currency of China and the terms. |
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U.S. dollar, $ and US$ mean the legal currency of the United States. |
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References to China and PRC are references to Peoples Republic of China. |
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References to Cayman or Cayman Islands are references to the Cayman Islands. |
The Company
Overview of Our Business
We are a Delaware corporation that was incorporated on February 4, 1986 and we are headquartered in
Shandong Province, China. From our inception in 1986 until May 3, 2007, when we completed a recapitalization
transaction with Lorain Holding, we were a blank check company and did not engage in active business
operations other than our search for, and evaluation of, potential business opportunities for acquisition
or participation.
As an integrated food manufacturing company, our products mix varies by season. We develop, manufacture
and sell chestnut products, convenience foods (foods like cut fruit and premixed salads, which are
known as lightly processed -- our convenience foods include ready-to-cook (or RTC) meals, ready-to-eat
(or RTE) meals and meals ready-to-eat (or MREs)), and frozen, canned and bulk foods, in hundreds
of varieties. We operate through our indirect Chinese subsidiaries. Our production activities are
in China and we derive most of our revenue from sales in China, Japan and Korea. In 2007, we expand
our market to Europe and Middle East. Our products are sold in 19 provinces and administrative regions
in China and 41 foreign countries. We have limited operations in the United States.
American Lorain owns 100% of Lorain Holding. Lorain Holding presently has two direct, wholly-owned
Chinese operating subsidiaries, Luotian Lorain and Junan Hongrun, one indirect wholly owned
operating subsidiary, Beijing Lorain, and one majority-owned subsidiary, Shandong Lorain, which is
80.2% owned by us (with Shandong Economic Development Investment Co. Ltd. owning the remaining 19.8%
interest). We sometimes refer to these four Chinese operating subsidiaries as the Lorain Group Companies.
Below is an organizational chart showing our ownership of the Lorain Group Companies:
1
Footnotes:
1
Includes 626,397 shares of common stock owned by Halter Financial Investments, L.P. and 678,596
shares
of common stock owned by Halter Financial Group, L.P.
2
Mr. Akazawa has granted an option to our sole director and Chief Executive Officer, Mr. Chen, allowing
Mr. Chen to buy 90% of Mr. Akazawas interest in the Company at a fixed price at a future
time
in accordance with the terms of an option agreement between the two parties.
Risk Factors
Our ability to successfully operate our business and achieve our goals and strategies is subject to
numerous risks as discussed more fully in the section titled Risk Factors, including
for example:
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Potential inability to secure necessary raw materials in sufficient quantities and fluctuations in
raw material prices; |
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Potential for product liability and product recall claims and potential litigation arising from these
claims; |
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Inability or increased costs associated with increasing levels of governmental regulations; |
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Inability to effectively manage rapid growth; |
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Increased competition; |
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Increases in energy costs; |
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Potential loss of key members of our senior management; and |
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Potential failure to have complied with PRC regulations regarding our restructuring. |
2
Any of the above risks could cause materially and adversely affect our business, financial position
and results of operations. An investment in our common stock involves risks. You should read and
consider the information set forth in Risk Factors and all other information set forth
in this prospectus before investing in our common stock.
Corporate Information
The address of our principal executive office in China is Beihuan Road, Junan County, Shandong, China
276600, and our telephone number is (+86) 539-7318818. Our address for correspondence in the United States
is c/o Sheldon B. Saidman, 5912 Via Verona View Colorado Springs, CO 80919 and his telephone
number is 719-548-9963, Fax 719-548-9963. We maintain a website at www.lorainfood.com that contains
information about the Lorain Group Companies, but no information contained on our website is part
of this prospectus.
The Offering
Common stock offered by selling stockholders |
10,470,831 shares, consisting of 8,583,436 outstanding shares owned by selling stockholders and 1,887,395 shares issuable upon the exercise of certain warrants held by the selling stockholders. This number represents 42.0% of our current outstanding stock (1) |
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Common stock outstanding before the offering |
24,923,185 shares |
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Common stock outstanding after the offering |
24,935,421 shares (2) |
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Proceeds to us |
We will not receive any of the proceeds from the resale of shares by the selling stockholders, but we will receive up to $4.25 per common share from the exercise of warrants held by selling stockholders if and when those warrants are exercised, which will result in proceeds to us of approximately $8 million if all warrants are exercised. We will use any of such proceeds for general working capital purposes. |
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(1) Based on 24,935,421 shares of common stock outstanding as of May 13, 2008. |
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(2) Does not include 1,875,159 shares issuable upon the exercise of certain warrants
held by selling stockholders. |
3
Summary Consolidated Financial Information
The following tables set forth a summary of the financial data for Lorain Holding, which became our
wholly owned subsidiary on May 3, 2007 and is the holding company for our commercial operations.
This information should be read in conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and our consolidated financial statements
and related notes appearing elsewhere in this prospectus.
INCOME STATEMENT DATA |
For the Years Ended |
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(In thousands, except per share data) |
December
31 , 2007 |
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December
31, 2006 |
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December
31, 2005 |
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December
31, 2004 |
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Revenue |
$ |
82,095 |
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$ |
49,561 |
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$ |
30,195 |
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$ |
27,736 |
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Cost of Revenue |
$ |
(61,933 |
) |
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(37,533 |
) |
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(22,250 |
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(21,082 |
) |
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Gross Profit |
$ |
20,162 |
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12,028 |
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7,945 |
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6,653 |
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Total Operating Expenses |
$ |
(5,488 |
) |
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(3,303 |
) |
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(2,287 |
) |
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(2,816 |
) |
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Income from Operations |
$ |
14,674 |
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8,725 |
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5,657 |
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3,837 |
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Total Other Income (Expense) |
$ |
(2,079 |
) |
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(1,321 |
) |
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(1,095 |
) |
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(810 |
) |
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Income Before Taxes |
$ |
12,595 |
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7,333 |
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4,562 |
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3,028 |
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Provision for income taxes |
$ |
(2,135 |
) |
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(1,064 |
) |
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(325 |
) |
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(214 |
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Income before Minority Interests |
$ |
10,460 |
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6,269 |
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4,238 |
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2,813 |
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Minority Interest |
$ |
(715 |
) |
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(340 |
) |
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(404 |
) |
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Net Income |
$ |
9,745 |
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$ |
5,928 |
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$ |
3,833 |
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$ |
2,813 |
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Net Income per share, basic and diluted |
$ |
0.39 |
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$ |
0.33 |
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$ |
021 |
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$ |
0.16 |
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Weighted Average Shares
Outstanding of Common Stock |
$ |
24,923 |
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17,933 |
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17,933 |
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197,933 |
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BALANCE SHEET DATA
(in thousands) |
Year ended
December
31, 2007 |
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Year ended
December
31, 2006 |
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Year ended
December
31, 2005 |
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Year ended
December
31, 2004 |
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Current Assets |
$ |
73,390 |
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$ |
36,094 |
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$ |
42,872 |
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$ |
35,710 |
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Total Assets |
$ |
100,459 |
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$ |
52,390 |
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$ |
54,493 |
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$ |
45,839 |
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Current Liabilities |
$ |
51,927 |
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$ |
32,753 |
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$ |
33,276 |
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$ |
31,534 |
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Total Liabilities |
$ |
52,030 |
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$ |
32,858 |
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$ |
33,276 |
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$ |
31,534 |
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Minority interest |
$ |
3,887 |
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$ |
2,922 |
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$ |
2,500 |
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Stockholders Equity |
$ |
44,542 |
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$ |
16,609 |
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$ |
18,717 |
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$ |
14,304 |
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4
RISK FACTORS
The shares of our common stock being offered for resale by the selling stockholders are highly speculative
in nature, involve a high degree of risk and should be purchased only by persons who can afford to
lose the entire amount invested in the common stock. Before purchasing any of the shares of common
stock, you should carefully consider the following factors relating to our business and prospects.
If any of the following risks actually occur, our business, financial condition or operating results
will suffer, the trading price of our common stock could decline, and you may lose all or part of
your investment. You should also refer to the other information about us contained in this prospectus,
including our consolidated financial statements and related notes.
BUSINESS RISKS
We may not be able to obtain sufficient raw materials to satisfy our production requirements and any
decline in the amount or quality of raw materials could reduce our sales and negatively affect our
financial prospects.
Our business depends on obtaining a reliable supply of various agricultural products, including fresh
produce, red meat, fish, eggs, rice, flour and chestnuts. We self-supplied less than 16.45% of our
total raw material needs in 2007 (by value). In 2007, we procured approximately 39,630 metric tons
of chestnuts and approximately 28,034 metric tons of vegetables and other raw materials from a number
of third party suppliers and produced approximately 265 metric tons of chestnuts and approximately
2,752 metric tons of vegetables and other raw materials from our own agricultural operations. We
may have to increase the number of our suppliers of raw materials and expand our own agricultural
operations in the future to meet growing production demands. We may not be able to locate new suppliers
who could provide us with sufficient materials to meet our needs and we may not be able to expand
our own agricultural operations in a timely manner to satisfy our needs. Any interruptions to or
decline in the amount or quality of our raw materials supply could materially disrupt our production
and adversely affect our business and financial condition and financial prospects.
The average price we paid for our raw materials experienced significant fluctuation during the three
years ended December 31, 2005, 2006 and 2007. These price fluctuations could result in fluctuations
in our profit margins and could materially adversely affect our financial condition.
The average prices we paid for chestnuts in 2005, 2006 and 2007 were approximately $884 per metric
ton, $713 per metric ton and $787 per metric ton respectively, excluding any value added tax assessed
on the purchased chestnuts. The prices that we pay for our raw materials may not be stable in the
future. Price changes may result in unexpected increases in production costs, and we may be unable
to increase the prices of our products to offset these increased costs and therefore may suffer a
reduction to our profit margins. Due to the financing in May of 2007, we have been able to manage
the price changes to raw materials. We have been able to enter contracts in advance to secure stable
price with our suppliers to minimize the risk of price fluctuation of raw materials. We have also
procured more of our own planting base and sought vertical integration with our suppliers to reduce
cost of raw materials and the possible risks from the increase of prices. We do not currently hedge
against changes in our raw material prices. If the costs of raw materials or other costs of production
and distribution of our products increase further, and we may not be able to entirely offset these
increases by raising the prices of our products, our profit margins and financial condition could
be adversely affected.
Our sales and reputation may be affected by product liability claims, litigation, product recalls,
or adverse publicity in relation to our products.
The sale of products for human consumption involves an inherent risk of injury to consumers. We face
risks associated with product liability claims, litigation, or product recalls, if our products cause
injury, or become adulterated or misbranded. Our products are subject to product tampering, and to
contamination risks, such as mold, bacteria, insects, and other pests, shell fragments and off-flavor
contamination during the various stages of the procurement, production, transportation and storage
processes. If any of our products were to be tampered with, or become tainted in any of these respects
and we were unable to detect this, our products could be subject to product liability claims or product
recalls. Our ability to sell products could be reduced if certain pesticides, herbicides or other
chemicals used by growers have left harmful residues on portions of the crop or that the crop has
been contaminated by other agents.
5
We have never had a product recall in the past but we have experienced product liability claims that
were made by our customers. On average, we experience and expect to continue to experience product
liability claims in the amount of approximately $30,000 to $40,000 per year. However, we have no
control over the amount of claims made in any year and larger claims of product defect or product
liability may be made in the future.
We would be liable for the full amount of any damages awarded against us in any product liability claim.
As the insurance industry in China is still in an early stage of development, business insurance
is not readily available in China. To the extent that we suffer a loss of a type which would normally
be covered by insurance in the United States, such as product liability and general liability insurance,
we would incur significant expenses in both defending any action and in paying any claims that result
from a settlement or judgment. Product liability claims and product recalls could have a material
adverse effect on the demand for our products and on our business goodwill and reputation. Adverse
publicity could result in a loss of consumer confidence in our products.
We may be unable to manage future rapid growth.
We have grown rapidly over the last few years. Our sales increased by 77% from $27,735,833 in 2004
to $49,560,957 in 2006. The number of product types we sold increased from approximately 100 in 2004
to approximately 192 in early 2007. We intend to continue to expand the volume and variety of products
we offer, as well as the geographical scope of our sales and production facilities. Our business
growth could place a significant strain on our managerial, operational and financial resources. Our
ability to manage future growth will depend on our ability to continue to implement and improve operational,
financial and management information systems on a timely basis and to expand, train, motivate and
manage our workforce. Our personnel, systems, procedures and controls may not adequate to support
our future growth. Failure to effectively manage our expansion may lead to increased costs, a decline
in sales and reduced profitability.
Our expansion strategy may not prove successful and could adversely affect our existing business.
Our growth strategy includes the expansion of our manufacturing operations including new production
lines and agricultural operations. In the past few years, we have expanded rapidly. In 2003, Luotian
Lorain set up one production line with a production of 600 metric tons per year, and in 2004, a second
production line with a production of 9,912 metric tons per year. In 2003, Beijing Lorain set up one
production line with a production of 9,912 metric tons per year, and in 2004, three additional production
lines with a production of 1,425 metric tons per year per line. In both 2005 and 2006, Shandong Lorain
established chestnut planting bases. Beijing Lorain established a chestnut planting base in 2005,
a sticky corn and sweet corn planting base in 2004 and pumpkin planting base in 2005. In 2008, we
plan to construct another new production facility addition at a new facility in Luotian county, China
with three production lines for the production of our convenience food products and deep freezing
at an approximate cost of $17,525,000. We also plan to expand our agricultural operations in 2008, including development of an 824 acre Korean-type
chestnut farm, located in China at an approximate cost of $2 million.
We also plan to expand our sales in China and internationally. We will need to engage in various forms
of promotional and marketing activities in order to develop branding of our products and increase
our market share in new and existing markets. We plan to commence a branding and advertising strategy
in 2008. We are planning to expend approximately US$1 million for marketing activities that focus
mainly on China from the second quarter of 2008.
The implementation of this strategy may involve large transactions and present financial, managerial
and operational challenges. We could also experience financial or other setbacks if any of our growth
strategies incur problems of which we are not presently aware. We may have difficulty in successfully
expanding the sale of our products in areas that have not traditionally experienced high levels chestnut
consumption due to lack of chestnut familiarity. If we fail to generate sufficient sales in new markets
or increase our sales in existing markets, we may not be able to recover the production, distribution,
promotional and marketing expenses, as well as administrative costs, we have incurred in developing
such markets.
The acquisition of other businesses could pose risks to our profitability.
We may try to grow through acquisitions in the future. Any proposed acquisition could result in accounting
charges, potentially dilutive issuances of equity securities, and increased debt and contingent liabilities,
any of which could have a material adverse effect on our existing business and the market price of our common stock. Acquisitions,
in general, entail many risks, including risks relating to the failed integration of the acquired
operations, diversion of managements attention, and the potential loss of key employees of
the acquired organizations. We may be unable to integrate successfully businesses or the personnel
of any business that might be acquired in the future, and our failure to do so could have a material
adverse effect on our business and on the market price of our common stock.
6
We are subject to risks of doing business internationally. If the international market does not grow
as we expect, our business and financial condition may be adversely affected.
We conduct a substantial amount of business with overseas distributors primarily from Japan, Korea,
countries in Asia and western countries. During the year ended 2005, 2006, and 2007, sales outside
China accounted for 44%, 52%, and 39.08% of our total sales, respectively. Our international operations
are subject to a number of inherent risks, including:
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chestnut products may not be widely recognized internationally, especially in western countries; |
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local economic and political conditions, including disruptions in trading markets; |
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restrictive foreign governmental actions, including restrictions on transfers of funds and trade; |
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protection measures, including export duties and quotas and customs duties and tariffs; |
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currency exchange rate fluctuations; |
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earthquakes, tsunamis, floods or other major disasters may limit the imported food products; and |
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unexpected incidents related to food safety. |
Any of the foregoing risks could have a material and adverse effect on our operating results. As a
result, our products and our revenues would be decreased and we may need to adjust our market strategy.
We mainly rely on distributors to sell our products. Any delays in delivery or poor handling by distributors
and third-party transport operators may affect our sales and damage our reputation.
In 2007, we sold over 93% of our products through over 715 distributors. We rely on these distributors
for the distribution of our products. A significant portion of our revenues historically have been
derived from a limited number of domestic supermarkets and international distributors, particularly
in our chestnut processing business. The sales to our five largest customers and overseas retailers
accounted for approximately 37%, 43%, and 30.76% of our total revenue in 2005, 2006 and 2007 respectively.
The loss of any of these customers and international distributors or a material decrease in purchases
could result in decreased sales and adversely impact our revenues.
Additionally, the distribution service provided by these distributors could be suspended and could
cause interruption to the supply of our products to overseas retailers in the case of unforeseen
events. Delivery disruptions may occur for various reasons beyond our control, including poor handling
by distributors or third party transport operators, transportation bottlenecks, natural disasters
and labor strikes, and could lead to delayed or lost deliveries. Poor handling by distributors and
third-party transport operators could also result in damage to our products. If our products are
not delivered to retailers on time, or are delivered damaged, or our products are contaminated during
the stage of transportation or storage, we would be liable for the compensation, and we could lose
business and our reputation could be harmed.
The development and introduction of new products is key to our expansion strategy. Failure to do so
may cause us to lose our competitiveness in the food industry and may cause our profits to decline.
If we are unable to gain market acceptance or significant market share for the new products we introduce,
then we will incur development, production and marketing costs which we would not be able to recover.
We constantly introduce new packaging and new flavors for our products. We produced 192 products
in 2007. We have introduced 15 new products in 2006, and we have introduced 20 new products in 2007.
We plan to introduce about 25 products in 2008. The success of the new products we introduce depends
on our ability to anticipate the tastes and dietary habits of consumers and to offer products that
appeal to their preferences. We intend to introduce new product lines including different flavors,
different sizes and packaging. We may not be able to gain market acceptance or significant market
share for our new products. Consumer preferences change, and any new products that we introduce may
fail to meet the particular tastes or requirements of consumers, or may be unable to replace their existing preferences. Our failure to anticipate, identify or react to these particular tastes or changes
could result in reduced demand for our products, which could in turn cause us to be unable to recover
our development, production and marketing costs, thereby leading to a decline in our profitability.
7
In addition, we only have regulatory approvals for products that are currently in production at our
facilities. If we wish to produce other products, we would have to obtain additional regulatory approvals.
If we are unable to obtain regulatory approval to produce a particular product in a timely manner,
if at all, then we would not be able to generate revenues to offset any expenses related to R&D
to produce such product and any acquisitions of equipment to produce such product. We do not believe
that any such expenses related to any particular product is material to the company as a whole. In
addition, we do not believe that our inability to produce any particular product is material to the
business as a whole because we can replace such product with other products. However, if we were
unable to obtain regulatory approvals to produce a broad class of products or several products at
one time, our ability to generate revenues my be harmed, which could materially and adversely effect
our operations and financial condition.
We are dependent on certain key personnel and loss of these key personnel could have a material adverse
effect on our research and development, operations and revenue.
The Lorain Group Companies were founded in 1995 by Mr. Si Chen, our chairman and chief executive officer.
Since then, Mr. Chen and our senior management team have developed us into a leading food production
company. Mr. Chen, together with other senior management, has been the key driver of our strategy
and has been fundamental to our achievements to date. The successful management of our business is,
to a considerable extent, dependent on the services of Mr. Chen and other senior management. The
loss of the services of any key management employee or failure to recruit a suitable or comparable
replacement could have a significant impact upon our ability to manage our business effectively and
our business and future growth may be adversely affected.
We compete for qualified personnel with other food processing companies, food retailers and research
institutions. Intense competition for these personnel could cause our compensation costs to increase
significantly, which could have a material adverse effect on our results of operations. Our future
success and ability to grow our business will depend in part on the continued service of these individuals
and our ability to identify, hire and retain additional qualified personnel. If we are unable to
attract and retain qualified employees, we may be unable to meet our business and financial goals.
We face increasing competition from both domestic and foreign companies, which may affect our market
share and profit margins.
The food industry in China is fragmented. Our ability to compete against other national and international
enterprises is, to a significant extent, dependent on our ability to distinguish our products from
those of our competitors by providing large volumes and high quality products at reasonable prices
that appeal to consumers tastes and preferences. Some of our competitors may have been in business
longer than we have, may be better established in their markets. Our current or future competitors
may provide products comparable or superior to those we provide or adapt more quickly than we do
to evolving industry trends or changing market requirements. Increased competition may result in
price reductions, higher raw materials prices, reduced margins and loss of market share, any of which
could materially adversely affect our profit margins. We may not be able to compete effectively against
current and future competitors.
We may be adversely affected by a change in consumer preferences, which may result in decreased demand
for our products.
Consumer tastes can change rapidly due to many factors, including shifting consumer preferences, and
spending habits. A general decline in the consumption of our chestnuts products and other products
could occur as a result of a change in consumer preferences, perceptions and spending habits at any
time and future success will depend partly on our ability to anticipate or adapt to such changes
and to offer, on a timely basis, new products that meet consumer preferences. Our failure to adapt
our products offering to respond to such changes may result in reduced demand and lower prices for
our products and a decline in the market share of our products. Any changes in consumer preferences
could result in lower sales of our products, put pressure on pricing or lead to increased levels
of selling and promotional expenses, resulting in a material adverse effect on our sales volumes,
sales and profits.
8
An increase in the cost of energy could affect our profitability.
Recently, we have experienced significant increases in energy costs, and energy costs could continue
to rise, which would result in higher distribution, freight and other operating costs. Our future
operating expenses and margins will be dependent on our ability to manage the impact of cost increases.
Our chestnut products and brand names may be subject to counterfeiting or imitation, which could impact
upon our reputation and brand name as well as lead to higher administrative costs.
While we sell our products both under our brand name and under private labels, we regard brand positioning
as the core of our competitive strategy, and intend to position our Lorain and Yimeng
Lorain brand to promote the consumption of green foods by our customers. We believe our advanced
processing technology makes it difficult for illegal manufacturers to counterfeit our products. To
date, we have experienced limited counterfeiting and imitation of our chestnut products, it is possible
that counterfeiting or imitation of our products may occur in the future and that we may not be able
to detect it and deal with it effectively. Any occurrence of counterfeiting or imitation could impact
negatively upon our corporate and brand image, particularly if the counterfeit or imitation products
cause sickness, or injury to consumers. In addition, counterfeit or imitation products could result
in a reduction in our market share, a loss of revenues or an increase in our administrative expenses
in respect of detection or prosecution.
We rely on an outside contractor to provide a majority of our labor.
We hire Linyi Zhifu Labor Service Company to provide employees to our production facilities. During
normal production times Linyi Zhifu Labor Service Company provides about 5 out of every 6 of our
production line personnel. During times of peak production Linyi Zhifu Labor Service Company usually
provides the additional personnel needed to meet the additional production demands which increase
the ratio of Linyi Zhifu Labor Service Company employees to our employees above the 5 out of every
6 mark. Under our arrangement with Linyi Zhifu Labor Service Company we pay their employees directly
for services rendered to our Company and we pay Linyi Zhifu Labor Service Company a fee for their
services related to providing employees to our business. Linyi Zhifu Labor Service Company pays for
state pension contribution and social insurance for its employees.
Should Linyi Zhifu Labor Service Company be unable continue to provide the number of employees we need
for our facilities our production could be disrupted. Linyi Zhifu Labor Service Company could raise
their service fees or terminate their relationship with us in the future which may result in increased
production costs which we may not be able to pass on to our customers.
REGULATORY RISKS
Government regulation could increase our costs of production and increase our legal and regulatory
expenditures.
The food industry is subject to extensive regulations by Chinese government agencies. Among other things,
these regulations govern the manufacturing, importation, processing, packaging, storage, exportation,
distribution and labeling of our products. New or amended statutes and regulations, increased production
at our existing facilities, and our expansion into new operations and jurisdictions may require us
to obtain new licenses and permits and could require us to change our methods of operations at costs
that could be substantial. If the relevant regulatory authorities set standards with which we are
unable to comply or which increase our production costs, our ability to sell products may be limited.
Changes in the existing laws and regulations or additional or stricter laws and regulations on environmental
protection in China may cause us to incur capital expenditures.
We carry on our business in an industry that is subject to PRC environmental protection laws and regulations.
These laws and regulations require enterprises engaged in manufacturing and construction that may
cause environmental waste to adopt effective measures to control and properly dispose of waste gases,
waste water, industrial waste, dust and other environmental waste materials, as well as fee payments
from producers discharging waste substances. Fines may be levied against producers causing pollution.
If failure to comply with such laws or regulations results in environmental pollution, the administrative department for environmental protection can levy fines.
If the circumstances of the breach are serious, it is at the discretion of the central government
of the PRC including all governmental subdivisions to cease or close any operation failing to comply
with such laws or regulations. The Chinese government may also change the existing laws or regulations
or impose additional or stricter laws or regulations, compliance with which may cause us to incur
significant capital expenditures, which we may be unable to pass on to our customers through higher
prices for our products.
9
Changes in existing PRC food hygiene laws may cause us to incur additional costs to comply with the
more stringent laws and regulations, which could have an adverse impact on our financial position.
Manufacturers in food industry operating in China are subject to compliance with PRC food hygiene laws
and regulations. These food hygiene laws require all enterprises engaged in the production of chestnut
and other various vegetables and fruits to obtain a hygiene license for each of their production
facilities. They also set out hygiene standards with respect to food and food additives, packaging
and containers, information to be disclosed on packaging as well as hygiene requirements for food
production and sites, facilities and equipment used for the transportation and sale of food. Failure
to comply with PRC food hygiene laws may result in fines, suspension of operations, loss of hygiene
licenses and, in more extreme cases, criminal proceedings against an enterprise and its management.
While we are in compliance with current food hygiene laws, in the event that the PRC government increases
the stringency of such laws, our production and distribution costs may increase, and we may be unable
to pass these additional costs on to our customers.
FINANCIAL RISKS
We are subject to credit risk in respect of account receivables.
We offer credit terms of between 30 to 55 days to most of our international and domestic distributors.
However, the distributors sometimes may delay their payments to between 60 to 90 days. For each of
the three years ended December 31, 2005, 2006 and 2007, our third party trade receivables outstanding
were $7,992,923, $11,805,231 and $6,322,476, which accounted for 14.7%, 24.8%, and 6.384% of our
total assets, respectively. Our third party trade receivables increased materially during year 2007
to $6,322,476 compared to $11,805,231 during 2006 due to increased sales. Should a significant number
of our customers fail to settle the account receivables in full for any reasons, our financial conditions
and profitability could be adversely affected.
Our operations are cash intensive, and our business could be adversely affected if we fail to maintain
sufficient levels of working capital.
We spent a significant amount of cash in our operations, principally to fund our raw material procurement.
Our suppliers, in particular farmers of chestnuts, vegetables and fruits, and suppliers of packaging
materials usually grant us a credit period. In turn, we require our customers and distributors to
make payment either prior to or shortly after delivery, although we offer some of our long-standing
customers credit terms. We generally fund a substantial portion of our working capital requirements
out of cash flow generated from operations. If we fail to generate sufficient sales, or if we suffer
decreasing sales to customers as a result of failing to offer credit terms, if our suppliers stop
to offer us credit terms, or if we were to experience difficulties in collecting our accounts receivables,
we may not have sufficient cash flow to fund our operating costs and our business could be adversely affected.
Our borrowing levels and significant interest payment obligations could limit the funds we have available
for various business purposes.
We have relied mainly on a high level of short-term borrowings to fund a portion of our capital requirements,
and may continue to do so in the future. As of December 31, 2007, we had total borrowings of $24,180,046.
Our ratio of total indebtedness to total assets stood at 52.52% as at December 31, 2007. As of December
31, 2007, 93.88% of such borrowings were due within one year, primarily from our use of short-term
loans from Chinese banks to satisfy our working capital needs. Historically, we have repaid a significant
portion of such short-term loans by rolling over the loans on an annual basis. In addition, we may
not have sufficient funds available to pay all of our borrowings upon maturity. Failure to roll over
our short-term borrowings at maturity or to service our debt could result in the imposition of penalties,
including increases in rates of interest that we pay on our debt and legal actions against us by
our creditors, or even insolvency. We currently plan to finance or refinance US$40 million over the
next 12 months. We can provide no assurances that we will be able to enter into any loan or refinancing agreements on terms favorable to the Company, if at all. We also have no current credit facilities or other lines
of credit. If we are unable to complete any such financing or refinancing efforts, our net income
may not be sufficient to satisfy our working capital and operating expansion needs in 2008 and our
operations and financial condition may be negatively impacted.
10
The discontinuation of any preferential tax treatment or other incentives currently available to us
in the PRC could materially and adversely affect our business, financial condition and results of
operations.
Our subsidiaries enjoy certain special or preferential tax treatments regarding foreign enterprise
income tax in accordance with the Income Tax Law of the PRC for Enterprises with Foreign Investment
and Foreign Enterprises and its implementing rules. Accordingly, they have been entitled to
tax concessions whereby the profit for the first two financial years beginning with the first profit-making
year (after setting off tax losses carried forward from prior years) is exempt from income tax in
the PRC and the profit for each of the subsequent three financial years is taxed at 50% of the prevailing
tax rates set by the relevant tax authorities. However, on March 16, 2007, the PRCs National
Peoples Congress passed a new corporate income tax law, which was effective on January 1, 2008.
This new corporate income tax unifies the corporate income tax rate, cost deduction and tax incentive
policies for both domestic and foreign-invested enterprises. According to the new corporate income
tax law, the applicable corporate income tax rate of our operating subsidiary will be moved up to
a rate of 25% over a five-year grandfather period. We expect the measures to implement this grandfather
period to be enacted by the PRC government in the coming months and we will make an assessment of
what the impact of the new unified tax law is expected to be in the grandfather period. The discontinuation
of any such special or preferential tax treatment or other incentives could have an adverse affect
our business, financial condition and results of operations.
Under current PRC tax law, regulations and rulings, dividends from our operations in China paid to
us (as a foreign legal person) are not currently subject to PRC income tax. If these distributions
become subject to tax in the future, our net income would be adversely affected.
RISKS RELATING TO OUR CORPORATE GOVERNANCE STRUCTURE
The concentration of ownership of our securities by our controlling stockholder who does not participate
in the management of our business and who may have conflicting interests can result in stockholder
votes that are not in our best interests or the best interests of our minority stockholders.
Hisashi Akazawa is the record owner of approximately 65.43% of our outstanding voting securities, giving
him a controlling interest in the Company. However, Mr. Akazawa is not an executive officer or director
of the Company and is not a participant in any way in the day to day affairs of the Company. Mr.
Akazawa may have little knowledge of the details of the Companys operations and does not participate
in the corporate governance of the Company. To the extent that Mr. Akazawa does participate as a
stockholder in the governance of the Companys affairs, his interests may be conflicted since
he is an affiliate of one of our largest customers and he may act in his best interests or in our
customers best interest instead of our best interests. Additionally, Mr. Akazawa may act as
if he has little or no economic interest in the Company in his role as stockholder since he has granted
an option to our sole director and Chief Executive Officer, Mr. Chen, allowing Mr. Chen to buy 90%
of Mr. Akazawas interest in the Company at a fixed price at a future time in accordance with
the terms of an option agreement between the two parties. The result of this option agreement is
that Mr. Akazawa has only limited economic benefit if our financial performance excels as he will
have only limited benefit from any upward movement in our stock price since most of the stock that
he currently owns is subject to the option in favor of Mr. Chen.
We do not have any independent directors and may not be able to appoint any in the short term.
We currently do not have any independent directors. In fact, Mr. Chen, our founder, chairman and chief
executive officer, is currently our sole director. We plan to appoint a number of independent directors
which will constitute a majority of our board of directors. We have started to look for qualified
candidates. However, we will not be able to appoint independent directors for at least a few months
because of limited number of qualified candidates available to us.
Due to the lack of independent directors we do not have independent oversight over our management and
internal controls. Therefore, we are exposed to the risk that misstatements caused by errors or fraud
in amounts that would be material in relation to financial statements or other disclosures or non-disclosures
may occur and not be detected in a timely manner or at all. In the event there are deficiencies or weaknesses in our internal controls
we may misreport our financial results or lose significant amounts due to the misstatements caused
by errors and/or fraud. Investors may lose confidence in our company due to the misstatement or fraud
or the value of our company may decline due to the financial losses from the misstatement or fraud.
We plan to form three committees represented by at least one independent director on each committee
to alleviate the risk of misstatement or fraud which would harm our value of common stock or our
company. In addition, we do not have independent directors available to consider or approve interested
party transactions involving Mr. Chen. In some cases, Mr. Chen may be able to approve such transactions
as the sole director, and where he is required in such cases by state law to obtain proxy voting,
if at all, we would have to seek approval for such transactions from our stockholders. This may result
in some proxy transactions being more readily approved.
11
In addition, we do not have independent directors available to consider or approve interested party
transactions involving Mr. Chen or his affiliates. As a result, Mr. Chen may in some cases be able
to approve such transactions as the sole director without shareholder approval. Where he is required
in such cases by state law to obtain shareholder approval, Mr. Chen may nevertheless be able to approve
such transactions as a material shareholder of the company. This may result in interested party transactions
involving Mr. Chen being more readily approved.
In addition, since related party transactions can be easily approved as described above, action of
our board may be more likely to be challenged by shareholders, such as in actions for breaches of
fiduciary duties . Such action would act to distract the attention of our board, might hurt the reputation
of our company generally, and might make it difficult for us to attract directors in the future.
We may be exposed to potential risks relating to our internal controls over financial reporting and
our ability to have those controls attested to by our independent auditors.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC adopted rules
requiring public companies to include a report of management on the companys internal controls
over financial reporting in their annual reports, including Form 10-K. We are subject to this requirement
commencing with our fiscal year ending December 31, 2007 and a report of our management is included
under Item 9A of this Annual Report on Form 10-K. In addition, SOX 404 requires the independent registered
public accounting firm auditing a companys financial statements to also attest to and report
on the operating effectiveness of such companys internal controls. However, this annual report
does not include an attestation report because under current law, we will not be subject to these
requirements until our annual report for the fiscal year ending December 31, 2008. We can provide
no assurance that we will comply with all of the requirements imposed thereby. There can be no assurance
that we will receive a positive attestation from our independent auditors. In the event we identify
significant deficiencies or material weaknesses in our internal controls that we cannot remediate
in a timely manner or we are unable to receive a positive attestation from our independent auditors
with respect to our internal controls, investors and others may lose confidence in the reliability
of our financial statements.
RISKS RELATED TO DOING BUSINESS IN CHINA
Changes in Chinas political or economic situation could harm us and our operating results.
Economic reforms adopted by the Chinese government have had a positive effect on the economic development
of the country, but the government could change these economic reforms or any of the legal systems
at any time. This could either benefit or damage our operations and profitability. Some of the things
that could have this effect are:
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Level of government involvement in the economy; |
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Control of foreign exchange; |
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Methods of allocating resources; |
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Balance of payments position; |
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International trade restrictions; and |
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International conflict. |
The Chinese economy differs from the economies of most countries belonging to the Organization for
Economic Cooperation and Development, or OECD, in many ways. For example, state-owned enterprises
still constitute a large portion of the Chinese economy, and weak corporate governance traditions
and a lack of flexible currency exchange policy continue to persist. As a result of these differences, we may not develop in the same
way or at the same rate as might be expected if the Chinese economy were similar to those of the
OECD member countries.
12
Our business is largely subject to the uncertain legal environment in China and your legal protection
could be limited.
The Chinese legal system is a civil law system based on written statutes. Unlike common law systems,
it is a system in which precedents set in earlier legal cases are not generally used. The overall
effect of legislation enacted over the past 20 years has been to enhance the protections afforded
to foreign invested enterprises in China. However, these laws, regulations and legal requirements
are relatively recent and are evolving rapidly, and their interpretation and enforcement involve
uncertainties. These uncertainties could limit the legal protections available to foreign investors,
such as the right of foreign invested enterprises to hold licenses and permits such as requisite
business licenses. In addition, all of our executive officers and our directors are residents of
China and not of the U.S., and substantially all the assets of these persons are located outside
the U.S. As a result, it could be difficult for investors to affect service of process in the U.S.,
or to enforce a judgment obtained in the U.S. against our Chinese operations and subsidiaries.
The Chinese government exerts substantial influence over the manner in which we must conduct our business
activities.
Only recently has China permitted provincial and local economic autonomy and private economic activities.
The Chinese government has exercised and continues to exercise substantial control over virtually
every sector of the Chinese economy through regulation and state ownership. Our ability to operate
in China may be harmed by changes in its laws and regulations, including those relating to taxation,
import and export tariffs, environmental regulations, land use rights, property and other matters.
We believe that our operations in China are in material compliance with all applicable legal and
regulatory requirements. However, the central or local governments of the jurisdictions in which
we operate may impose new, stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance with such regulations
or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent
economic reforms and to return to a more centrally planned economy or regional or local variations
in the implementation of economic policies, could have a significant effect on economic conditions
in China or particular regions thereof, and could require us to divest ourselves of any interest
we then hold in Chinese properties or joint ventures.
Future inflation in China may inhibit our ability to conduct business profitably in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating
rates of inflation. During the past ten years, the rate of inflation in China has been as high as
20.7% and as low as -2.2%. These factors have led to the adoption by the Chinese government, from
time to time, of various corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. High inflation in the future may cause the Chinese government to impose
controls on credit and/or prices, or to take other action, which could inhibit economic activity
in China, and thereby harm the market for our products. Likewise, negative inflation could have an
unfavorable effect on our business profitability in China. Negative inflation may cause a period
where consumers are reluctant to spend, as consumers anticipate lower prices for products in the
future. In the event of negative inflation, the Chinese government may impose controls on credit
and/or prices, or take other actions, which could inhibit economic activity, harming the market for our products.
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
The majority of our revenues will be settled in Renminbi and U.S. Dollars, and any future restrictions
on currency exchanges may limit our ability to use revenue generated in Renminbi to fund any future
business activities outside China or to make dividend or other payments in U.S. dollars. Although
the Chinese government introduced regulations in 1996 to allow greater convertibility of the Renminbi
for current account transactions, significant restrictions still remain, including primarily the
restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after
providing valid commercial documents at those banks in China authorized to conduct foreign exchange
business. In addition, conversion of Renminbi for capital account items, including direct investment
and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. The Chinese regulatory authorities
may impose more stringent restrictions on the convertibility of the Renminbi in the future.
13
Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies
by PRC residents may subject our PRC resident stockholders to personal liability, limit our
ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries
ability to distribute profits to us or otherwise materially adversely affect us.
In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant
Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose
Companies by Residents Inside China, generally referred to as Circular 75, which required PRC residents
to register with the competent local SAFE branch before establishing or acquiring control over an
offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside
of China on the strength of domestic PRC assets originally held by those residents. Internal implementing
guidelines issued by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach
of Circular 75 by (i)purporting to cover the establishment or acquisition of control by PRC residents
of offshore entities which merely acquire control over domestic companies or assets,
even in the absence of legal ownership; (ii)adding requirements relating to the source of the PRC
residents funds used to establish or acquire the offshore entity; (iii)covering the use of
existing offshore entities for offshore financings; (iv)purporting to cover situations in which an
offshore SPV establishes a new subsidiary in China or acquires an unrelated company or unrelated
assets in China; and (v)making the domestic affiliate of the SPV responsible for the accuracy of
certain documents which must be filed in connection with any such registration, notably, the business
plan which describes the overseas financing and the use of proceeds. Amendments to registrations
made under Circular 75 are required in connection with any increase or decrease of capital, transfer
of shares, mergers and acquisitions, equity investment or creation of any security interest in any
assets located in China to guarantee offshore obligations, and Notice 106 makes the offshore SPV
jointly responsible for these filings. In the case of an SPV which was established, and which acquired
a related domestic company or assets, before the implementation date of Circular 75, a retroactive
SAFE registration was required to have been completed before March 31, 2006; this date was subsequently
extended indefinitely by Notice 106, which also required that the registrant establish that all foreign
exchange transactions undertaken by the SPV and its affiliates were in compliance with applicable
laws and regulations. Failure to comply with the requirements of Circular 75, as applied by SAFE
in accordance with Notice 106, may result in fines and other penalties under PRC laws for evasion
of applicable foreign exchange restrictions. Any such failure could also result in the SPVs
affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction
in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.
Lorain Holding acquired certain interests in the Lorain Group Companies from a British Virgin Islands
company controlled by Si Chen, our Chairman and sole director. Pursuant to Notice No. 75 and Notice
106, if a PRC resident has completed a round-trip investment through its established SPV but has
not yet completed the required procedures of SAFE registration for offshore investment of the SPV,
he must retroactively register the SPV with SAFE.
In order to avoid such SAFE registration requirements, a Japanese individual, Hisashi Kazawn, was designated
as a nominee holder of Lorain Holding when Lorain Holding was established. Mr. Akazawa has granted
an option to our sole director and Chief Executive Officer, Mr. Chen, allowing Mr. Chen to buy 90%
of Mr. Akazawas interest in the Company at a fixed price at a future time in accordance with
the terms of an option agreement between the two parties. As a result, Mr. Chen may be deemed to
be the actual beneficiary of Lorain Holding, regardless of the nominee. If Mr. Chen is deemed to
be the beneficiary of Lorain Holding, he may be required to register with and obtain approvals from
SAFE or its agency in connection with respect to the direct offshore investment activities related
to the acquisition of the Lorain Group Companies.
If Mr. Chen is required to register with the relevant authorities to disclose the offshore investment
of the SPV, according to the Notice No. 75, the PRC subsidiaries of Mr. Chens SPV may be prohibited
from making distributions of their profit and dividends and from paying proceeds from any of their
reduction in capital, share transfer or liquidation to the SPV. In case the PRC subsidiaries had
already distributed the above-mentioned profit and dividends or paid the aforesaid proceeds to the
SPV before the date for application for retroactive SAFE registration with regard to the SPV, according
to the Notice 106, the behavior of such distribution or payment may constitute evasion of foreign
exchange rules in the PRC. In such case, according to the PRC Regulation on Administration of Foreign
Exchange, the PRC subsidiaries and the actual controlling beneficiary of the SPV may have liability
for evasion of foreign exchange rules, including, being ordered by the competent SAFE authorities to recall their foreign exchanges within specified time limit, fined of an amount of more than 30% and
below five times the foreign exchange they had evaded. Criminal liabilities may also be possible
if the violations are deemed particularly aggregious. Moreover, according to the Notice 106, the
application for retroactive SAFE registration for the SPV will not be granted until the liabilities
for evasion of foreign exchange have been fully pursued. Further, if the retroactive SAFE registration
for the SPV has not been granted, the SAFE registration for acquisition of the PRC subsidiaries by
the SPV will not be granted, which, in return, will affect our acquisition of interests in Lorain
Group Companies from this British Virgin Islands company and cause potential action against British
Virgin Islands company, Lorain Holding and the Lorain Group Companies. We have little control over
either our present or prospective direct or indirect stockholders or the outcome of such registration
procedures. We cannot provide any assurances that their existing registrations have fully complied
with, and they have made all necessary amendments to their registration to fully comply with, all
applicable registrations or approvals required by Circular 75 or that any required future registrations,
or amendments thereto, will comply with applicable registrations or approvals required by Circular 75.
14
In addition, if the failure to identify and characterize Mr. Chen as a beneficial owner of Lorain
Holdings is determined by the PRC authorities to be a serious violation of the requirements of the
PRC Company Law and the PRC Regulation of Registration of Companies, the Lorain Group Companies may
be ordered by the company registration authority in the PRC to make corrections on its filed registration,
to be fined an amount no less than RMB 5,000 and no more than RMB 50,000 or, in the worse scenario,
to have its company registration certificate revoked or its business licenses canceled.
Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how
or whether SAFE will apply it to us, we cannot predict how it will affect our business operations
or future strategies. For example, our present and prospective PRC subsidiaries ability to
conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders.
In addition, such PRC residents may not always be able to complete the necessary registration procedures
required by Circular 75.
The value of our securities will be affected by the foreign exchange rate between U.S. dollars and
Renminbi.
The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and
Renminbi, and between those currencies and other currencies in which our sales may be denominated.
For example, to the extent that we need to convert U.S. dollars into Renminbi for our operational
needs and should the Renminbi appreciate against the U.S. dollar at that time, our financial position,
the business of the Company, and the price of our common stock may be harmed. Conversely, if we decide
to convert our Renminbi into U.S. dollars for the purpose of declaring dividends on our common stock
or for other business purposes and the U.S. dollar appreciates against the Renminbi; the U.S. dollar
equivalent of our earnings from our subsidiaries in China would be reduced.
Our strategy to procure raw ingredients supply is to diversify our suppliers both in the PRC and overseas.
Currently, some of our raw materials and major equipment are imported. In the event that the U.S.
dollars appreciate against Renminbi, our costs will increase. If we cannot pass the resulting cost
increase on to our customers our profitability and operating results will suffer. In addition, since
our sales to international customers grew rapidly, we are subject to the risk of foreign currency
depreciation.
Our licenses are subject to governmental control and renewal, failure to obtain renewal will cause
all or part of our operations to be suspended or terminated.
In accordance with PRC laws and regulations, we are required to maintain various licenses and permits
in order to operate our business at each of our production facilities including, without limitation,
hygiene permits, and industrial products production permits. We are required to comply with applicable
hygiene and food safety standards in relation to our production processes. Our premises and transportation
vehicles are subject to regular inspections by the regulatory authorities for compliance with the
Detailed Rules for Administration and Supervision of Quality and Safety in Food Producing and Processing
Enterprises. Failure to pass these inspections, or the loss of or failure to renew our licenses and
permits, could require us to temporarily or permanently suspend some or all of our production activities,
which could disrupt our operations and adversely affect our business.
15
RISKS RELATED TO THE MARKET FOR OUR STOCK
Certain of our stockholders may delay or prevent adoption of important business decisions by their
ownership of significant percentage of outstanding voting securities.
Mr. Akazawa is the record owner of approximately 65.43% of our outstanding voting securities. As a
result, he possesses significant influence and can elect a majority of our board of directors and
authorize or prevent proposed significant corporate transactions. His ownership and control may also
have the effect of delaying or preventing a future change in control, impeding a merger, consolidation,
takeover or other business combination or discourage a potential acquirer from making a tender offer.
Our common stock is quoted on the OTC Bulletin Board which may have an unfavorable impact on our stock
price and liquidity.
Our common stock is quoted on the OTC Bulletin Board. The OTC Bulletin Board is a significantly more
limited market than the New York Stock Exchange or NASDAQ system. The quotation of our shares on
the OTC Bulletin Board may result in a less liquid market available for existing and potential stockholders
to trade shares of our common stock, could depress the trading price of our common stock and could
have a long-term adverse impact on our ability to raise capital in the future.
We are subject to penny stock regulations and restrictions.
The SEC has adopted regulations which generally define so-called penny stocks to be an
equity security that has a market price less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exemptions. As of May 13, 2008, the closing price for our common
stock was $4.50 per share, but our recent trading history has also shown prices below $5.00 per share
and, therefore, our stock could be designated a penny stock. As a penny stock,
our common stock may become subject to Rule 15g-9 under the Exchange Act of 1934, or the Penny
Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that
sell such securities to persons other than established customers and accredited investors
(generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000,
or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer
must make a special suitability determination for the purchaser and have received the purchasers
written consent to the transaction prior to sale. As a result, this rule may affect the ability of
broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our
securities in the secondary market.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any
transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny
stock market. Disclosure is also required to be made about sales commissions payable to both the
broker-dealer and the registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stock.
Our common stock may not qualify for exemption from the Penny Stock Rule at all times. In any event,
even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section
15(b) (6) of the Securities Exchange Act of 1934, or Exchange Act, which gives the SEC
the authority to restrict any person from participating in a distribution of penny stock, if the
SEC finds that such a restriction would be in the public interest.
Certain provisions of our Certificate of Incorporation may make it more difficult for a third party
to effect a change- in-control.
Our Certificate of Incorporation authorizes our board of directors to issue up to 5,000,000 shares
of preferred stock without stockholder approval. The preferred stock may be issued in one or more
series, the terms of which may be determined at the time of issuance by the board of directors without
further action by the stockholders. These terms may include voting rights including the right to
vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights
and redemption rights provisions. The issuance of any preferred stock could diminish the rights of
holders of our common stock, and therefore could reduce the value of such common stock. In addition,
specific rights granted to future holders of preferred stock could be used to restrict our ability
to merge with, or sell assets to, a third party. The ability of the board of directors to issue preferred
stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire
or effect a change-in-control, which in turn could prevent the stockholders from recognizing a gain
in the event that a favorable offer is extended and could materially and negatively affect the market
price of our common stock.
16
SECTION 144 RISK
Certain stockholders may be able to sell their securities pursuant to Rule 144 due to our corporate
history as a shell company.
Historically, the SEC staff has taken the position that Rule 144 is not available for the resale
of securities initially issued by companies that are, or previously were, blank check companies like we
were prior to the reverse merger, to their promoters or affiliates despite technical compliance with
the requirements of Rule 144. The SEC has codified and expanded this position in the amendments
discussed above by prohibiting the use of Rule 144 for resale of securities issued by any shell
companies (other than business combination related shell companies) or any issuer that has been at
any time previously a shell company. The SEC has provided an important exception to this prohibition,
however, if the following conditions are met:
|
|
the issuer of the securities that was formerly a shell company has ceased to be a shell company; |
|
|
|
|
|
the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act; |
|
|
|
|
|
the issuer of the securities has filed all Exchange Act reports and material required to be filed,
as applicable, during the preceding 12 months (or such shorter period that the issuer was required
to file such reports and materials), other than Form 8-K reports; and |
|
|
|
|
|
at least one year has elapsed from the time that the issuer filed current Form 10 type information
with the SEC reflecting its status as an entity that is not a shell company. |
As a result, if all of these conditions are met, the selling stockholders and any subsequent stockholders
will be able to sell their securities pursuant to Rule 144 without registration one year following
the date when the Form 10 information was filed.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking statements are contained principally
in the sections entitled Summary, Risk Factors, Managements Discussion
and Analysis of Financial Condition and Results of Operations and Business. These
statements involve known and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future results, performances
or achievements expressed or implied by the forward-looking statements. These risks and uncertainties
include, but are not limited to, the factors described in the section captioned Risk Factors
above.
In some cases, you can identify forward-looking statements by terms such as anticipates,
believes, could, estimates, expects, intends,
may, plans, potential, predicts, projects,
should, would and similar expressions intended to identify forward-looking
statements. Forward-looking statements reflect our current views with respect to future events and
are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should
not place undue reliance on these forward-looking statements.
Also, forward-looking statements represent our estimates and assumptions only as of the date of this
prospectus. You should read this prospectus and the documents that we reference in this prospectus,
or that we filed as exhibits to the registration statement of which this prospectus is a part, completely
and with the understanding that our actual future results may be materially different from what we
expect.
Except as required by law, we assume no obligation to update any forward-looking statements publicly,
or to update the reasons actual results could differ materially from those anticipated in any forward-looking
statements, even if new information becomes available in the future.
USE OF PROCEEDS
We will not receive any proceeds from the sales of any shares of common stock by the selling stockholders,
but we will receive up to $4.25 per common share from the exercise of warrants held by selling stockholders
if and when those warrants are exercised, which will result in proceeds to us of approximately $8
million if all warrants are exercised. Any such proceeds will be used for general working capital.
17
DIVIDEND POLICY
Pursuant to a Preferred Stock Purchase Agreement with Halter Financial Investments, L.P. or HFI, dated
April 5, 2007, we paid a special cash dividend in the aggregate amount of $415,000, or $0.18 per
share, to holders of common stock outstanding on April 16, 2007.
Other than the cash dividend described above, we have never declared or paid any cash dividends. Any
future decisions regarding dividends will be made by our board of directors. We currently intend
to retain and use any future earnings for the development and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future.
MARKET FOR OUR COMMON STOCK
Our common stock is quoted on the Electronic Bulletin Board maintained by the National Association
of Securities Dealers, Inc. under the symbol ALRC.OB, but has not been traded in the
Over-The-Counter market except on a limited and sporadic basis. The CUSIP number is 027297100.
The following table sets forth, for the periods indicated, the high and low bid prices of our common
stock. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.
|
|
Bid Prices (1)* |
|
|
|
High |
Low |
|
|
|
Fiscal Year Ended December 31, 2008 |
|
|
|
|
|
1st Fiscal Quarter (1/1/08-3/31/08) |
24* |
2.3* |
|
|
2nd Fiscal Quarter (4/1/08-05/14/08) |
N/A |
N/A |
|
|
|
Fiscal Year Ended December 31, 2007 |
|
|
|
|
|
1st Fiscal Quarter (1/1/07-3/31/07) |
N/A |
N/A |
|
|
2nd Fiscal Quarter (4/1/07-06/30/07) |
35.20* |
8.00* |
|
|
3rd Fiscal Quarter (7/1/07- 9/30/07) |
10.24* |
4.00* |
|
|
4th Fiscal Quarter (10/1/07- 12/31/07) |
8.00* |
3.00* |
|
|
|
Fiscal Year Ended December 31, 2006 |
|
|
|
|
|
1st Fiscal Quarter (1/1/06-3/31/06) |
33.60* |
33.60* |
|
|
2nd Fiscal Quarter (4/1/06-6/30/06) |
N/A |
N/A |
|
|
3rd Fiscal Quarter (7/1/06-9/30/06) |
N/A |
N/A |
|
|
4th Fiscal Quarter (10/1/06-12/31/06) |
35.20* |
35.20* |
|
|
|
Year Ended December 31, 2005 |
|
|
|
|
|
1st Fiscal Quarter (1/1/05-3/31/05) |
N/A |
N/A |
|
|
2nd Fiscal Quarter (4/1/05-6/30/05) |
N/A |
N/A |
|
|
3rd Fiscal Quarter (7/1/05-9/30/05) |
N/A |
N/A |
|
|
4th Fiscal Quarter (10/1/05-12/31/05) |
N/A |
N/A |
|
________________________
(1) |
The above tables set forth the range of high and low bid prices per share of our common stock as reported
by www.quotemedia.com for the periods indicated. |
|
|
* All prices reflected herein have been adjusted for the one-for-32.84 reverse split which occurred
on July 17, 2007. |
Reports to Stockholders
We plan to furnish our stockholders with an annual report for each fiscal year ending December 31 containing
financial statements audited by our independent certified public accountants. We intend to comply
with the periodic reporting requirements of the Exchange Act.
18
Approximate Number of Holders of Our Common Stock
On May 12, 2008, there were approximately 205 stockholders of record of our common stock.
DILUTION
Our net tangible book value as of December 31, 2007 was $2.69 per share of common stock. Net tangible
book value is determined by dividing our tangible book value (total assets less intangible assets
including know-how, trademarks and patents and less total liabilities) by the number of outstanding
shares of our common stock. Since this offering is being made solely by the selling stockholders
and none of the proceeds will be paid to us, our net tangible book value will be unaffected by this
offering. However, we have issued 1,875,672 warrants which can be exercised at $4.25 per common share.
The warrants may have a dilutive effect depending on our tangible book value at the time of their exercise.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data relates to Lorain Holding, which became our wholly
owned subsidiary on May 3, 2007, and is the holding company of our commercial operations. It should
be read in conjunction with our consolidated financial statements and the related notes, and with
Managements Discussion and Analysis of Financial Condition and Results of Operations,
included elsewhere in this registration statement. The statement of operations data and the balance
sheet data for the years ended December 31, 2003, 2004, 2005, 2006 and 2007, are derived from, and
are qualified by reference to, our audited consolidated financial statements that have been audited
by Samuel H. Wong & Co., LLP, independent auditors, and that are included in this Prospectus.
The unaudited consolidated financial statements include all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for the fair presentation of our financial position
and results of operations for these periods. Historical results are not necessarily indicative of
the results to be expected in the future.
(All amounts, other than percentages, in
thousands of U.S. dollars) |
For the Year Ending on December 31, |
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
82,094 |
|
$ |
49,561 |
|
$ |
30,195 |
|
$ |
27,735 |
|
$ |
19,958 |
|
Cost of Revenues |
|
61,932 |
|
|
(37,533 |
) |
|
(22,250 |
) |
|
(21,082 |
) |
|
(15,116 |
) |
Gross profit |
|
20,162 |
|
|
12,028 |
|
|
7,945 |
|
|
6,653 |
|
|
4,842 |
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
(2,623 |
) |
|
(1,441 |
) |
|
(1,089 |
) |
|
(1,663 |
) |
|
(1,129 |
) |
|
General and administrative |
|
(2,865 |
) |
|
(1,933 |
) |
|
(1,198 |
) |
|
(1,154 |
) |
|
(757 |
) |
|
Income from continuing operations |
|
14,674 |
|
|
8,654 |
|
|
5,657 |
|
|
3,837 |
|
|
2,955 |
|
Non-operating Income(Expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant |
|
1373 |
|
|
481 |
|
|
320 |
|
|
487 |
|
|
166 |
|
Other income |
|
156 |
|
|
89 |
|
|
112 |
|
|
126 |
|
|
3,612 |
|
Other expense |
|
(1,446 |
) |
|
(134 |
) |
|
(18 |
) |
|
(44 |
) |
|
3,513 |
|
Interest Expense |
|
(2,376 |
) |
|
(1,834 |
) |
|
(1,519 |
) |
|
(1,378 |
) |
|
(942 |
) |
|
Income before taxes |
|
12,595 |
|
|
7,333 |
|
|
4,562 |
|
|
3,028 |
|
|
2,278 |
|
Income Taxes |
|
(2,135 |
) |
|
(1,064 |
) |
|
(325 |
) |
|
(214 |
) |
|
(297 |
) |
Net Income before Minority Interest |
|
10,460 |
|
|
6,269 |
|
|
4,238 |
|
|
2,813 |
|
|
|
|
Minority interest |
|
(715 |
) |
|
(340 |
) |
|
(404 |
) |
|
|
|
|
|
|
|
Net Income |
|
9,745 |
|
|
5,929 |
|
|
3,833 |
|
|
2,813 |
|
|
1,981 |
|
19
Cash Flows Data:
(in thousands of U.S. dollars) |
For year ended December 31, |
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in)
operating activities |
|
(3,585 |
) |
|
7,970 |
|
|
(441 |
) |
|
65 |
|
|
(1,513 |
) |
Net cash flows provided by (used in)
investing
activities |
|
(12,440 |
) |
|
(12,326 |
) |
|
(3,015 |
) |
|
(4,654 |
) |
|
(3,588 |
) |
Net cash flows provided by (used in)
financing
activities |
|
19,664 |
|
|
(921 |
) |
|
5,933 |
|
|
4,056 |
|
|
7,115 |
|
(in thousands of U.S. Dollars) |
As of the fiscal year ended December 31, |
|
|
|
|
Balance Sheet Data |
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
73,390 |
|
$ |
36,094 |
|
$ |
42,872 |
|
$ |
35,710 |
|
$ |
29,540 |
|
Total Assets |
|
100,459 |
|
|
52,390 |
|
|
54,493 |
|
|
45,839 |
|
|
35,677 |
|
Current Liabilities |
|
51,927 |
|
|
32,752 |
|
|
33,276 |
|
|
31,534 |
|
|
24,287 |
|
Long-Term Obligations |
|
103 |
|
|
106 |
|
|
0 |
|
|
0 |
|
|
0 |
|
Total Liabilities |
|
52,030 |
|
|
32,858 |
|
|
33,276 |
|
|
31,534 |
|
|
24,287 |
|
Minority Interest |
|
3,887 |
|
|
2,922 |
|
|
2,500 |
|
|
|
|
|
|
|
Stockholders Equity |
|
44,542 |
|
|
16,609 |
|
|
18,717 |
|
|
14,304 |
|
|
11,390 |
|
Cash Dividends |
|
|
|
|
185 |
|
|
25 |
|
|
|
|
|
|
|
The following tables set forth key components of our results of operations for the periods indicated
as a percentage of net revenues:
|
Year
Ended on
12/31/07 |
|
Year
Ended on
12/31/06 |
|
Year
Ended on
12/31/05 |
|
Year
Ended on
12/31/04 |
|
Year
Ended on
12/31/03 |
|
Net Revenues |
|
100.00 |
% |
|
100.00 |
% |
|
100.00 |
% |
|
100.00 |
% |
|
100.00 |
% |
Cost of Revenues |
|
75.44 |
% |
|
75.73 |
% |
|
73.69 |
% |
|
76.01 |
% |
|
75.74 |
% |
|
Gross profit |
|
24.56 |
% |
|
24.27 |
% |
|
26.31 |
% |
|
23.99 |
% |
|
24.26 |
% |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
3.20 |
% |
|
2.91 |
% |
|
3.61 |
% |
|
6.00 |
% |
|
5.66 |
% |
General and administrative |
|
3.49 |
% |
|
3.90 |
% |
|
3.97 |
% |
|
4.06 |
% |
|
3.79 |
% |
|
Income from continuing operations |
|
17.87 |
% |
|
17.46 |
% |
|
18.74 |
% |
|
13.94 |
% |
|
14.81 |
% |
Non-operating Income(Expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
0.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Government grant |
|
1.67 |
% |
|
0.97 |
% |
|
1.06 |
% |
|
1.76 |
% |
|
0.83 |
% |
Interest income |
|
0.25 |
% |
|
0.33 |
% |
|
0.40 |
% |
|
|
|
|
|
|
Other income |
|
0.19 |
% |
|
|
|
|
|
|
|
0.43 |
% |
|
3 |
% |
Other expense |
|
1.76 |
% |
|
0.27 |
% |
|
0.06 |
% |
|
-0.18 |
% |
|
2.6 |
% |
Finance costs, net |
|
|
|
|
|
|
|
|
|
|
-4.97 |
% |
|
4.72 |
% |
Interest Expense |
|
2.89 |
% |
|
3.70 |
% |
|
5.03 |
% |
|
|
|
|
|
|
|
Income before taxes |
|
15.35 |
% |
|
14.80 |
% |
|
15.11 |
% |
|
10.99 |
% |
|
11.41 |
% |
|
Income Taxes |
|
2.60 |
% |
|
2.15 |
% |
|
1.07 |
% |
|
0.77 |
% |
|
1.49 |
% |
Income before Minority Interest |
|
12.74 |
% |
|
12.65 |
% |
|
14.03 |
% |
|
10 |
% |
|
|
|
Minority interest |
|
-0.87 |
% |
|
-0.69 |
% |
|
-0.08 |
% |
|
0.00 |
% |
|
0.00 |
% |
|
Net Income |
|
11.87 |
% |
|
11.96 |
% |
|
13.96 |
% |
|
10.1 |
% |
|
9.93 |
% |
20
(unaudited)
(in thousands of U.S. Dollars) |
For the Year
Ended on
12/31/07 |
|
For the Year
Ended on
12/31/06 |
|
For the Year
Ended on
12/31/05 |
|
For the Year
Ended on
12/31/04 |
|
|
Total Revenue |
|
82,094 |
|
|
49,561 |
|
$ |
30,195 |
|
$ |
27,736 |
|
|
Net Income |
$ |
9,745 |
|
$ |
5,926 |
|
$ |
3,833 |
|
$ |
2,813 |
|
|
Total Assets |
$ |
100,459 |
|
$ |
52,390 |
|
$ |
54,493 |
|
$ |
45,839 |
|
The following table presents the percentage of revenues derived from each products and main geographic
segment for the period ended December 31, 2007.
Products/Geographic |
Revenue |
|
China |
|
Japan |
|
Korea |
|
US |
|
Chestnut Products |
|
53.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Bottom-open Chestnut in Shells |
|
17.62 |
% |
|
81.98 |
% |
|
13.65 |
% |
|
0.74 |
% |
|
|
|
Chestnut Pulp |
|
16.35 |
% |
|
78.48 |
% |
|
16.22 |
% |
|
1.04 |
% |
|
0.14 |
% |
Fresh Chestnut |
|
10.53 |
% |
|
77.58 |
% |
|
|
|
|
12.30 |
% |
|
|
|
Sugar Coated Chestnut Pulp |
|
9.01 |
% |
|
46.52 |
% |
|
49.98 |
% |
|
1.56 |
% |
|
|
|
Boiled Chestnut Pulp |
|
7.49 |
% |
|
66.30 |
% |
|
5.76 |
% |
|
19.08 |
% |
|
|
|
Syrup Chestnut Pulp |
|
7.62 |
% |
|
67.39 |
% |
|
21.76 |
% |
|
8.04 |
% |
|
|
|
Roasted Chestnut with Sugar |
|
6.25 |
% |
|
72.54 |
% |
|
11.50 |
% |
|
8.78 |
% |
|
1.55 |
% |
Golden Chestnut Pulp |
|
5.19 |
% |
|
64.66 |
% |
|
18.31 |
% |
|
4.29 |
% |
|
5.36 |
% |
Aerated Chestnut Kernel |
|
6.71 |
% |
|
43.10 |
% |
|
40.53 |
% |
|
10.12 |
% |
|
4.46 |
% |
Processing Products |
|
41.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Asparagus Series |
|
26.96 |
% |
|
71.27 |
% |
|
5.93 |
% |
|
1.67 |
% |
|
4.44 |
% |
French Fries |
|
19.33 |
% |
|
96.01 |
% |
|
|
|
|
|
|
|
|
|
Sweet Corn Series |
|
8.33 |
% |
|
96.01 |
% |
|
|
|
|
|
|
|
|
|
Strawberry Series |
|
4.97 |
% |
|
35.54 |
% |
|
62.99 |
% |
|
|
|
|
|
|
Sweet Pea Series |
|
4.50 |
% |
|
96.01 |
% |
|
|
|
|
|
|
|
|
|
Vegetables Series |
|
4.29 |
% |
|
90.88 |
% |
|
5.16 |
% |
|
0.18 |
% |
|
|
|
Yellow Peach Series |
|
4.29 |
% |
|
94.98 |
% |
|
|
|
|
|
|
|
1.07 |
% |
Frozen Sweet Potato Chunk |
|
3.03 |
% |
|
96.01 |
% |
|
|
|
|
|
|
|
|
|
Fresh Onion |
|
2.84 |
% |
|
89.89 |
% |
|
|
|
|
|
|
|
6.38 |
% |
Convenience Products |
|
5.332 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Beef, mutton and pork |
|
63 |
% |
|
96.01 |
% |
|
|
|
|
|
|
|
|
|
Oden Eggs |
|
29.24 |
% |
|
3.61 |
% |
|
96.24 |
% |
|
|
|
|
|
|
Total |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
21
SELECTED QUARTERLY FINANCIAL INFORMATION
The following table sets forth certain unaudited financial information for each of the eight quarters
ended December 31, 2006 and the first, second and third quarters through September 30, 2007. The
consolidated financial statements for each of these quarters have been prepared on the same basis
as the audited consolidated financial statements included herein and, in the opinion of management,
include all adjustments necessary for the fair presentation of the results of operations for these
periods. You should read this information together with our audited consolidated financial statements
and the related notes included elsewhere herein.
(in thousands of U.S. dollars,
except data
per share) |
Three Months Ended |
|
|
|
|
|
March 31,
2005 |
|
June 30,
2005 |
|
September 30,
2005 |
|
December 31,
2005 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
$ |
3,388 |
|
$ |
3,069 |
|
$ |
5,001 |
|
$ |
18,737 |
|
$ |
30,195 |
|
Gross Profit |
$ |
759 |
|
$ |
649 |
|
$ |
1392 |
|
$ |
5145 |
|
$ |
7,945 |
|
Income (loss) before extraordinary items and
cumulative effect of a change in accounting |
$ |
5 |
|
|
($ 102 |
) |
$ |
628 |
|
$ |
3271 |
|
$ |
3,802 |
|
Net Income |
$ |
5 |
|
|
($ 102 |
) |
$ |
628 |
|
$ |
3271 |
|
$ |
3,802 |
|
Earnings per Share Basic and Diluted |
|
0.05 |
|
|
(1.02 |
) |
|
6.28 |
|
|
32.71 |
|
|
38.02 |
|
|
March 31,
2006 |
|
June 30,
2006 |
|
September 30,
2006 |
|
December 31,
2006 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
$ |
5,588 |
|
$ |
8,891 |
|
$ |
12,180 |
|
$ |
22,902 |
|
$ |
49,561 |
|
Gross profit |
$ |
1,301 |
|
$ |
2,014 |
|
$ |
2,960 |
|
$ |
5,863 |
|
$ |
12,138 |
|
Income (loss) before extraordinary items and
cumulative effect of a change in accounting |
$ |
245 |
|
$ |
814 |
|
$ |
1,478 |
|
$ |
3,422 |
|
$ |
5,959 |
|
Net income |
$ |
245 |
|
$ |
814 |
|
$ |
1,478 |
|
$ |
3,422 |
|
$ |
5,959 |
|
Earnings per Share Basic and Diluted: |
$ |
2.45 |
|
$ |
8.14 |
|
$ |
14.78 |
|
$ |
34.22 |
|
$ |
59.59 |
|
|
March 31,
2007 |
|
June 30,
2007 |
|
September 30,
2007 |
|
December 31,
2007 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
$ |
11,899 |
|
$ |
13,343 |
|
$ |
22,834 |
|
$ |
34,018 |
|
|
82,094 |
|
Gross profit |
$ |
2,946 |
|
$ |
2,955 |
|
$ |
4,712 |
|
$ |
9,549 |
|
|
20,162 |
|
Income (loss) before extraordinary items and
cumulative effect of a change in accounting |
$ |
1,528 |
|
$ |
(210 |
) |
$ |
2,443 |
|
$ |
5,984 |
|
|
9,744 |
|
Net income |
$ |
1,528 |
|
$ |
(210 |
) |
$ |
2,443 |
|
$ |
5,984 |
|
|
9,744 |
|
Earnings per Share Basic and Diluted: |
$ |
15.28 |
|
$ |
0.01 |
|
$ |
0.17 |
|
$ |
0.24 |
|
|
0.39 |
|
22
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a Delaware corporation that was incorporated on February 4, 1986 and we are headquartered in
Shandong Province, China. From our inception in 1986 until May 3, 2007, when we completed a reverse
acquisition transaction with Lorain Holding, we were a blank check company and did not engage in
active business operations other than our search for, and evaluation of, potential business opportunities
for acquisition or participation.
We develop, manufacture and sell convenience foods, chestnut products, and frozen, canned and bulk
foods, in hundreds of varieties. We operate through our indirect Chinese subsidiaries: Junan Hongrun,
Shandong Lorain, Luotian Lorain, and Beijing Lorain.
Our convenient food include Ready-to-cook (RTC), Ready-to-eat (RTE) and Meals
ready-to-eat (MRE), which are seasoned food and can be served after a couple of easy
cooking procedure like RTCs or immediately like RTEs, or meal kits with self heating devices like
MREs. They fit the modern food demand trend of safe, wholesome, and tasty food, as well as the culinary
short-cut needs. We manufacture RTCs, such as Oden eggs and Pork Bone Soup etc. Our RTCs are
merely a simple cooking procedure away from serving. Customers only need to heat the food in microwaves,
or boil it for several minutes before enjoying delicious and totally wholesome food. We also produce
RTEs, such as Smoked Fish, Stewed Beef with Source, Mini Sausages, Soured and Spicy Cucumber, Sour
and Sweet White Gourd etc.
For easily crushable convenient food, we utilize advanced Nitrogen preservation technology instead
of vacuum packaging, which is called the food processing technology for the 21st century in Japan. Food are multi-phrase sterilized in a mild way with shorter heating time and
lower heating temperature than common sterilization process, and packaged with Nitrogen filled in.
The Nitrogen preserved foods are able to keep fresh for six to twelve months without refrigeration
and any preservatives or chemicals. In addition, owing to the mild sterilization and processing procedure,
the foods appearance, taste and nutrition are optimally reserved.
Contrary to the common image of MRE in the US, our MREs are meal kits with self-heating devices. We
produce various Chinese cuisine MREs, including fried rice, fried noodle, etc. and Italian cuisine
MREs, including pasta etc. They are safe, delicious, healthy and ready-to-eat. Our MREs are not only
the favorable choice of army, but also presenting in many civilian uses, such as camping food, traveling
take-along, train meals, and suitable for any people who do not have access to traditional cooking.
23
Convenience foods like cut fruit and premixed salads, which are known as lightly processed -- our convenience
foods include ready-to-cook (or RTC) meals, ready-to-eat (or RTE) meals and meals ready-to-eat (or
MREs).
Ameliorating the traditional cooking method, we produce high value-added processed chestnut products,
such as Steamed Chestnut in Shell with original flavor which was called the revolution of traditional
cooking method of chestnut in Japan, Sweet Heart chestnut which is sweet preserved chestnut
produced by our know-how technology, chestnut in syrup which is very popular in Japan and Korea and
so on. In addition, we are going to add a new variety -- the Sugar Extracted from Chestnuts
Inner Skin. It is produced from chestnuts inner skin which was normally recognized as scrape.
Some initial research indicates that the extracted sugar from a chestnuts inner skin is effective
in preventing diabetes.
The high quality and diverse varieties of our chestnut products are supported by our know-how technology,
several of which are applying for patent protection. Many varieties are not replicable by our Chinese
industrial peels. Our chestnut products have already been popular and profitable in Japan, Korea,
Southeastern Asia and China. We believe they are able to gain larger markets in other parts of the
world in the near future. We expect a steady growth in the future.
We produce various frozen and canned food, including frozen vegetables, frozen fruits, frozen fillets
etc. The frozen/canned products gross margins are lower than chestnut products and convenient
foods. However this business sector is able to mitigate the significant production seasonality of
chestnut products and increase the utilization rate of the production capacity.
Our products are sold in 19 provinces and administrative regions in China and 41 foreign countries.
Industry Wide Factors that are Relevant to Our Business
Management believes that the rapid growth of Chinas economy will drive demand for our products.
We believe the growth of Chinas economy will cause an increased demand for our products as
consumers become busier and busier and increasingly demand prepared foods which fit into their active
lifestyle. With the continuing growth of the economy, the upcoming Beijing Olympic Games in 2008
and the Shanghai World Exposition in 2010, management believes that there will be a large packaged
food market in China during the next few years.
According to the USDA, as incomes have risen in many countries during the past few decades, consumers
have begun purchasing fewer staples (like rice and wheat) and more high-value food items (such as
meat, dairy, pasta, and frozen vegetables). According to the USDA, global sales of high-value products
have been growing, with sales increasing by 25% since 1998. Food manufactures and suppliers responding
to the trend have increased their investment in processing facilities or purchase of high-value foods.
The decision of whether locally producing or purchasing often depends on the nature of products,
regulation environment and transaction cost comparison. Our products have been developed and are
being developed to cater to this market.
According to the USDA, packaged foods account for a large share of total food expenditures among customers
in high-income countries and the demand for convenience is growing. The United States, European Union
and Japan account for over 50% of global sales of packaged foods. In developing countries, market
retail trends also indicate strong growth in sales of packaged foods and demand for convenience.
We hope to increase our production in the future as the demand for our product grows.
As incomes rise and urbanization increases within China, Chinese consumers are changing their diets
and increasing demand for greater quality, convenience and safety in food. Chinas food market
is becoming segmented. The demand for quality food by high-income households has fueled recent growth
in the availability of such foods for the Chinese retail market. Chinas urban per capita food
expenditure in 2004 was RMB2,710 (approximately $327), up 12% from that of 2003 (USDA, Economic Research
Report No. ERR-32).
The chestnut market is $2.1 billion industry worldwide and an $800 million industry within China.
Regulatory Factors that Affect our Production
Although our production lines are multi-functional, we only have regulatory approvals for products
that are currently in production at our facilities. If we wish to produce other products at these
facilities in the future, we would have to obtain additional regulatory approvals. If we are unable to obtain regulatory approval
to produce a particular product in a timely manner, if at all, then we would not be able to generate
revenues to offset any expenses related to R&D to produce such product and any acquisitions of
equipment to produce such product. We do not believe that any such expenses related to any particular
product is material to the Company as a whole. In addition, we do not believe that our inability
to produce any particular product is material to the business as a whole because we can replace such
product with other products. However, if we were unable to obtain regulatory approvals to produce
a broad class of products or several products at one time, our ability to generate revenues may be
harmed, which could materially and adversely affect our operations and financial condition.
24
We have consistently successfully obtained required approvals in the past we produced 192 products
in 2007 and we believe that we will not face material problems obtaining required approvals
for new product offerings during 2008 for the following reasons:
|
1. Our production lines and facilities have been designed to satisfy the standards and requirements
set by health authorities in Japan, Korea, the United States and the European Union, which are the
primary markets for our export products. We employ advanced quality control mechanism, including
obtaining ISO 9001 and BRC certifications, which distinguish our products from other products in
both domestic and international markets. In particular, the fact that we have successfully obtained
import approvals for our chestnut products and other convenience foods from the Japanese government
has helped us strengthen our position in applying for approvals regarding our new products from the
Chinese government. In addition, we have been able to obtain approvals for our new products because
we have established good record of compliance with existing regulations with respect to the management
of production facility. Based on the aforementioned reasons, we anticipate no difficulty in obtaining
governmental approvals for new food products in the future. |
|
|
|
2. Due to our long-term contribution to the local economy, the local government has been supportive
of our business operation. This well-established relationship with the local government has resulted
in a more efficient application process. We have been using domestic suppliers for raw materials
and we have created significant job opportunities for local workers, which efforts have advanced
the economic interests of our community. In 2007, we paid RMB 903,918.91 in tax to the local government,
accounting for 3.39% of the total tax income (RMB26, 613,648.43) the government received in 2007.
Our chestnut production accounts for 25% of the total production of chestnuts nationwide and has
been recognized by the government as being sufficiently significant so that governmental supports
are available, allowing us to enjoy the benefits of a preferential development program. For instance,
the local government has provided several aid programs to assist us to expand our manufacturing facilities,
to secure the planting of raw materials, and to provide resources that support us financially and/or
operationally. |
Production Factors that Affect our Financial and Operation Condition
Production Capacity
Earlier in our Companys history some of our production lines were occasionally run at less than
full capacity because our production focused almost solely on chestnut products. More recently, we
have produced various different types of food products, mainly in three categories: chestnut products,
processed food and convenience food. Increasing market demand has caused us to expect all our production
lines to be running at their full capacity throughout the year of 2008. Our newer facilities have
a multiple-function design to adjust production seasonally to avoid periods of less than full capacity
production.
Currently, most of our processed and convenience foods are produced at our Beijing Lorain plant. We
have expanded those facilities when we reconstructed that factory after a fire in May of 2007. The
new facilities are projected to satisfy existing and increasing market demand for convenience food.
In addition, our new production line for processed food is expected to launch by May, 2008 and hopefully
will significantly enhance our capacity to sufficiently satisfy the existing and projected demand
for convenience food.
Overall, we expect to be able to meet our demand for our products; however, we have had adopted alternate
plans for the short-term periods that we anticipate that our capacity will not be enough to satisfy
existing or future demand for our convenience food products. In the future, we plan to look into
seeking a possible OEM partner to assist in producing some of our convenience food products while
our new facilities are still under construction. We do not see any material impact on our financial
results when we do not have full capacity to satisfy existing or increasing demand for our convenience
food products.
25
Cost of Raw Materials
While we have begun our own agricultural operations to supply a portion of the raw materials we require
for our operations we are still dependent on our suppliers to supply a majority of the raw materials
we require. Our suppliers generally charge us a price based on the existing commodities market price
for the raw materials. We do not have any control over the raw materials commodity market and prices
for raw materials may increase with or without notice for a variety of reasons, including weather
patterns, crop failures and natural disasters. Raw material price increases may result in increases
in the costs of our operations. While we may be able to pass the higher costs onto our customers
in the form of higher prices for our finished products, the higher price for our finished products
could reduce the volume of our sales.
In order to secure the qualities and quantities of the raw materials, to reduce the purchase costs
of materials, avoid the impacts on our operations due to the price fluctuation of materials from
the market, we have also developed our own planting areas to ensure we are able to get raw materials
of sufficient quality and in sufficient quantity to supply our operations. We have successfully developed
a 483-acre chestnut farm which is focused primarily on cultivating chestnuts that we would normally
import from Korean, Japan and/or Australia. We are expecting a large harvest in next Chestnut season
which will lower our dependence on imports. Additionally, we also have developed a 329-acre sweet
corn farm, an 82-acre Pumpkin farm, and a 297-acre green bean farm that will help supply the production
of frozen and canned products next year. The farms we own will not only secure the supply of raw
materials to meet increased demand from the market, but will also reduce the cost of materials purchased
and the reduce the impact of market price fluctuation of raw material prices on our operational costs.
In 2007, the Chinese government implemented various programs to encourage businesses to advance agricultural
industrialization. Under the recently implemented governmental policies for agricultural development,
we are planning to expand the farm we own to 2,500 acres gradually over the next 2 years which should
make us able to self-supply most of the raw materials we anticipate we will need for our future production.
We have also established cooperation with agricultural associations by signing supply agreements
with those associations to ensure our supply. We have also invested in several agricultural product
companies to expand our supply networks to ensure we have appropriate access for purchasing sufficient
supplies for our production requirements.
Uncertainties that Affect our Financial Condition
The rising level of consumer prices in China may cause a decrease of our sales and exports which will
lower our revenues and profits.
It is expected that the cost of the raw materials we must purchase to make our finished products may
increase in light of a general increase in prices in China. We expect decreased export sales as we
raise our sale prices to our exports customers to pass along the increased price of raw materials.
We expect the decreased sales may lead to lower revenues than if the price increase had not occurred
and that our profits may suffer as well.
The anticipated appreciation of RMB may harm our financial condition
Our government has been facing increasing pressure to allow the RMB to appreciate from the world marketplace
recently. In 2007, RMB appreciated more than 6.14%. Since July of 2005, the RMB has appreciated 10.24%.
The expected appreciation will definitely have a significant impact on our exports and our financial
conditions since exports account for about 50% of our revenue. Due to the unpredictability of RMBs
appreciation, we have planned efforts to advance our domestic sales and revenues. In 2008, we plan
to expend RMB 20 million (approximately U.S. $3 million) to adjust and expand our sales and marketing
channels. We are also targeting to establish additional 1000 Food Kiosks at different wholesalers
and supermarkets and open 100 of our own food retail stores nationally to increase our domestic sales.
Further, we have also planned to expend RMB 10 million (approximately U.S. $1.5 million) to further
the marketing of our brand and products through different types of media such as TV commercials,
newspaper advertising, internet advertising, and marketing campaigns. Whether or not RMB appreciates
as impacted the increased domestic spending will increase our costs and may not lead to any additional
revenues. Additionally, the appreciation of the RMB, if it occurs, could lower our international sales.
Tight monetary policy to be implemented by the Chinese government in 2008 may impede our ability to
obtain credit for working capital in a timely manner.
26
On December 5, 2007, the central economic work conference determined that a tight monetary policy will
be implemented in 2008 to respond to inflationary forces and the excessive growth of monetary credits
in China. On December 8, 2007, the Peoples Bank of China announced it will increase its RMB
deposit reserve rate by one percentage point for financial institutions making deposits, resulting
in a record high interest rate of 14.5%. After that, on January 25, 2008 and March 8, 2008, the RMB
deposit reserve rate was increased twice by 0.5% and reached the rate of 15% and 15.5%. Due to this
new policy, financial institutions have started to tighten the money supply, reduced credit amounts,
delayed loan approvals and restricted credit requirements. Traditionally, our Company has relied
on short-term credits as a vehicle to purchase raw materials for our production. This tightened credit
policy will impact on our cash management and our financial condition. We have adopted new policy
and informed our customers that we will shorten our payment period from 55 days to 30 days. We may
be unable to obtain the credit we need to purchase raw materials in the future which may slow our
production and ultimately our revenues.
Results of Operations
The
following tables set forth key components of our results of operations for the periods indicated,
both in dollars and as a percentage of net revenues.
(in thousands of U.S. dollars) |
For the Year
Ended on
12/31/07 |
|
For the Year
Ended on
12/31/06 |
|
For the Year
Ended on
12/31/05 |
|
Revenue |
|
82,094 |
|
$ |
49,561 |
|
$ |
30,195 |
|
Cost of Revenue |
|
(61,932 |
) |
|
(37,533 |
) |
|
(22,250 |
) |
|
Gross profit |
|
20,162 |
|
|
12,028 |
|
|
7,945 |
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
Selling and Marketing |
|
(2,623 |
) |
|
(1,441 |
) |
|
(1,089 |
) |
General and administrative |
|
(2,865 |
) |
|
(1,933 |
) |
|
(1,198 |
) |
|
Income from continuing operations |
|
14,674 |
|
|
8654 |
|
|
5,657 |
|
|
Non-operating Income(Expenses): |
|
|
|
|
|
|
|
|
|
Government grant |
|
1,373 |
|
|
481 |
|
|
320 |
|
Other income |
|
156 |
|
|
89 |
|
|
112 |
|
Other expense |
|
(1,446 |
) |
|
(134 |
) |
|
(18 |
) |
Interest Expense |
|
(2,376 |
) |
|
(1,834 |
) |
|
(1,518 |
) |
|
Income before taxes |
|
12,595 |
|
|
7,333 |
|
|
4,562 |
|
Income Taxes |
|
(2,135 |
) |
|
(1,064 |
) |
|
(325 |
) |
Income before Minority Interest |
|
10,460 |
|
|
6,269 |
|
|
4,238 |
|
Minority interest |
|
(715 |
) |
|
(340 |
) |
|
(23 |
) |
|
Net Income |
|
9,745 |
|
|
5,928 |
|
|
4215 |
|
27
|
For the Year
Ended on
12/31/07 |
|
For the Year
Ended on
12/31/06 |
|
For the Year
Ended on
12/31/05 |
|
Net Revenue |
|
100.00 |
% |
|
100.00 |
% |
|
100.00 |
% |
Cost of Revenue |
|
75.44 |
% |
|
75.73 |
% |
|
73.69 |
% |
|
Gross profit |
|
24.56 |
% |
|
24.27 |
% |
|
26.31 |
% |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
Selling and Marketing |
|
3.20 |
% |
|
2.91 |
% |
|
3.61 |
% |
General and administrative |
|
3.49 |
% |
|
3.90 |
% |
|
3.97 |
% |
Income from continuing operations |
|
17.87 |
% |
|
17.46 |
% |
|
18.73 |
% |
Non-operating Income(Expenses): |
|
|
|
|
|
|
|
|
|
Government grant |
|
1.67 |
% |
|
0.97 |
% |
|
1.06 |
% |
Other income |
|
0.19 |
% |
|
0.20 |
% |
|
1.02 |
% |
Other expense |
|
1.76 |
% |
|
0.27 |
% |
|
0.06 |
% |
Interest Expense |
|
2.8 |
% |
|
3.7 |
% |
|
5 |
% |
|
Income before taxes |
|
15.35 |
% |
|
14.80 |
% |
|
15.11 |
% |
Income Taxes |
|
2.60 |
% |
|
2.15 |
% |
|
1.08 |
% |
Net Income before Minority Interest |
|
12.74 |
% |
|
12.8 |
% |
|
14 |
% |
Minority interest |
|
0.87 |
% |
|
0.68 |
% |
|
0.08 |
% |
|
Net Income |
|
11.87 |
% |
|
11.96 |
% |
|
13.96 |
% |
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net Revenue. Net revenues increased $32.5 million, or approximately 65.52% to $82.1million in 2007 from $49.6
million in 2006. This increase was mainly attributable to the increased market demand for our products
domestically. We put more effort on marketing our products in our domestic market in 2007, resulting
in a dramatic increase in domestic sales. Net revenues from the domestic market increased $24.3 million,
or approximately 104% to $47.7 million in 2007 from $23.4 million in 2006. As a percentage of the
total revenue, the net revenue derived from the domestic market increased to 59% in 2007 from 48%
in 2006.
Cost of Revenues. Our cost of revenue increased $24.4 million to $61.9 million in fiscal year 2007 from $37.5
million in fiscal year 2006. The increased cost of revenue is mainly due to the increase in our sales
volume in 2007 compared to 2006. As a percentage of revenues, the cost of revenue decreased to 75.44%
in fiscal year 2007 from 75.73% in fiscal year 2006. The increase of gross margin was mainly
due to: 1) we can get raw material much cheaper than other companies. In 2007, we processed
more 39,000 tons of raw chestnut. As we can purchase so much raw materials, the price of our chestnut
raw material is nearly about 3% lower than the market prices. 2) We developed new products in 2007, such as chestnut paste, we can multipurpose use of the material
and can get more profit from the manufacturing procedure.
28
Gross Profit. Our gross profit increased $8.13 million, or 67.58%, to $20.16 million in fiscal year 2007
from $12.03 million in fiscal year 2006. Gross margin was 24.56% in fiscal year 2007, as compared
to 24.27% in fiscal year 2006. The gross margin increase was due to the increased cost of revenues
described above.
Selling and Marketing Expenses. Our selling and marketing expenses increased $1.2 million, or 85.71%, to $2.6 million in fiscal year
2007 from $1.4 million in fiscal year 2006. The increase in selling and marketing expenses was primarily
attributable to additional marketing efforts for our products in domestic market in 2007. As a percentage
of revenues, our selling and marketing expenses increased to 3.2% in fiscal year 2007 from 2.9% in
fiscal year 2006. Another reason was the increased repairs and miscellaneous fees in fiscal year
2007, as compared to fiscal year 2006.
General and Administrative Expenses. Our general and administrative expenses increased $1 million, or 52.63%, to $2.9 million in fiscal
year 2007 from $1.9 million in fiscal year 2006. As a percentage of revenues, the general and administrative
expenses decreased to 3.49% in fiscal year 2007 from 3.9% in fiscal year 2006. This percentage decrease
was primarily attributable to more efficient control of our general and administrative expenses,
for example, we adopted some new guidelines for employees on travel expenses and transportation expenses.
Financial Costs. Our financial cost mainly refers to our interest expenses, net of the interest income. Our financial
costs increased $0.6 million to $2.4 million in fiscal year 2007 from $1.8 million in fiscal year
2006. As a percentage of revenue, the financial cost decreased to 2.93% of total revenue for fiscal
year 2007 from 3.7% of total revenue for fiscal year 2006. The main reason for this change was improved
domestic lending rates in fiscal year 2007. The dollar increase in financing cost is mainly attributable
to an increase of short term bank loan balances in the fiscal year 2007 as compared to fiscal year 2006.
Income before Tax. Income before taxation increased $5.3million, or 72.6%, to $12.6 million in fiscal year 2007
from $7.3 million in fiscal year 2006. Income before taxation as a percentage of revenues decreased
to 15.35% in fiscal year 2007 from 14.8% in fiscal year 2006. The increase was mainly attributable
to the increase of percentage in selling expenses and marketing expenses in 2007, as compared to
the year of 2006.
Income taxes. We incurred income taxes of $2.1 million in fiscal year 2007, an increase of $1.0 million,
compared to $1.1 million in fiscal year 2006. We operate through our three directly or indirectly
wholly-owned subsidiaries Junan Hongrun, Luotian Lorain, and Beijing Lorain and one majority-owned
subsidiary Shandong Lorain of which we own 80.2% of the equity (directly and indirectly). As approved
by local tax authority in the PRC, all the four companies were granted a tax holiday
that allows them to be exempt from both the national and local income taxes for the first two profitable
years followed by a 50% tax exemption in the next three years. The four companies started to enjoy
the preferential tax policy from 2001, 2004, 2006 and 2007 respectively. The table below shows the
detailed income tax rate for the four companies.
Income Tax Rate |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junan Hongrun |
|
0 |
% |
0 |
% |
15 |
% |
15 |
% |
15 |
% |
25 |
% |
Luotian Lorain |
|
33 |
% |
33 |
% |
0 |
% |
0 |
% |
15 |
% |
15 |
% |
Beijing Lorain |
|
33 |
% |
33 |
% |
33 |
% |
0 |
%(1) |
0 |
%(1) |
15 |
%(1) |
Shandong Lorain |
|
15 |
% |
15 |
% |
30 |
% |
30 |
% |
25 |
% |
25 |
% |
(1) We are attempting to get a tax holiday on Beijing Lorain that would bring our tax rate
to 0%, 0% and 15% for Beijing Lorain for the tax years to end December 31, 2007, 2008 and 2009 respectively
Minority Interest. The Company holds 80.2% of the equity of its subsidiary Shandong Lorain. Therefore, in calculating
minority interest according to this proportion against the Shandong Lorains historical financial
data, the minority interest of the Company was $0.4 million in 2005 and $0.41 million in 2006.
29
Net income. Net income increased $3.8 million, or 64.41%,, to $9.7 million in fiscal year 2007 from
$5.9 million in fiscal year 2006, as a result of the factors described above.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Net Revenue. Net revenues increased $19.4 million, or approximately 64.1% to $49.6 million in fiscal year 2006
from $30.2 million in fiscal year 2005. This increase was mainly attributable to the increased market
demand for our products domestically. We put more effort on marketing our products in our domestic
market in fiscal year 2006, resulting in a dramatic increase in domestic sales. In addition, we increased
our attention to selling convenience foods in 2006, which had a positive impact on revenues.
Cost of Revenues. Our cost of revenue increased $15.2 million to $37.4 million in fiscal year 2006 from $22.3
million in fiscal year 2005. The increased cost of revenue is mainly due to the increased sales volume
in 2006 compared to 2005. As a percentage of revenues, the cost of revenue increased to 75.51% of
revenues in fiscal year 2006 from 73.69% of revenues in fiscal year 2005. The decrease of gross margin
was mainly due to the increased sales in domestic market and the diversification of our products
(the gross margin of our products sold in domestic market was much lower than our exported products).
In addition, as our products diversification development strategy was implemented in 2006, our sales
in convenience food and frozen, canned and bulk food, which have relatively lower gross margin as
compared our chestnut products, has increased dramatically.
Gross Profit. Our gross profit increased $4.09 million, or 51.5%, to $12.03 million in fiscal year 2006 from
$7.94 million in fiscal year 2005. Gross margin was 24.27% in fiscal year 2006, as compared to 26.31%
in fiscal year 2005. The gross margin decrease was due to the increased cost of revenues described
above.
Selling and Marketing Expenses. Our selling and marketing expenses increased $0.36 million, or 33.5%, to $1.4 million in fiscal year
2006 from $1.1 million in fiscal year 2005. The increase in selling and marketing expenses was primarily
attributable to additional marketing efforts for our products in domestic market in 2006. As a percentage
of revenues, our selling and marketing expenses decreased to 2.9% in fiscal year 2006 from 3.6% in
fiscal year 2005. The percentage decrease is mainly due to the decreased transportation costs as
a percentage of revenues in 2006 as transportation costs as a percentage of revenues for the domestic
sales are typically lower than for export sales.
General and Administrative Expenses. Our general and administrative expenses increased $0.68 million, or 55.5%, to $1.9 million in fiscal
year 2006 from $1.2 million in fiscal year 2005. As a percentage of revenues, the general and administrative
expenses decreased to 3.9% in fiscal year 2006 from 4% in fiscal year 2005. This percentage decrease
was primarily attributable to more efficient controls of our general and administrative expenses.
Financial Costs. Our financial cost mainly refers to our interest expenses, net of the interest income. Our financial
costs increased $0.33 million to $1.8 million in fiscal year 2006 from $1.5 million in fiscal year
2005. As a percentage of revenue, the financial cost decreased to 3.7% of total revenue for fiscal
year 2006 from 5.03% of total revenue for fiscal year 2005. The dollar increase in financing cost
is mainly attributable to an increase of short term bank loan balances in the fiscal year 2006 as
compared to fiscal year 2005.
Income before Tax. Income before taxation increased $2.9 million, or 64.4%, to $7.4 million in fiscal year 2006
from $4.6 million in fiscal year 2005. Income before taxation as a percentage of revenues increased
to 15.03% in fiscal year 2006 from 15.01% in fiscal year 2005. The increase was mainly attributable
to the percentage decreases of financial expenses, selling expenses and general and administrative
expenses in 2006, as compared to the year of 2005.
Income taxes. We incurred income taxes of $1.1 million in fiscal year 2006, an increase of $0.75 million,
compared to $0.3 million in fiscal year 2005. We operate through our three directly or indirectly
wholly-owned subsidiaries Junan Hongrun, Luotian Lorain, and Beijing Lorain and one majority-owned
subsidiary Shandong Lorain of which we own 80.2% of the equity (directly and indirectly). As approved
by local tax authority in the PRC, all the four companies were granted a tax holiday
that allows them to be exempt from both the national and local income taxes for the first two profitable
years followed by a 50% tax exemption in the next three years. The four companies started to enjoy
the preferential tax policy from 2001, 2004, 2006 and 2007 respectively. The table below shows the
detailed income tax rate for the four companies.
30
Income Tax Rate |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
Junan Hongrun |
|
0 |
% |
0 |
% |
15 |
% |
15 |
% |
15 |
% |
25 |
% |
Luotian Lorain |
|
33 |
% |
33 |
% |
0 |
% |
0 |
% |
15 |
% |
15 |
% |
Beijing Lorain |
|
33 |
% |
33 |
% |
33 |
% |
0 |
%(1) |
0 |
%(1) |
15 |
%(1) |
Shandong Lorain |
|
15 |
% |
15 |
% |
30 |
% |
30 |
% |
25 |
% |
25 |
% |
(1) We are attempting to get a tax holiday on Beijing Lorain that would bring our tax rate
to 0%, 0% and 15% for Beijing Lorain for the tax years to end December 31, 2007, 2008 and 2009, respectively.
Minority Interest. The Company holds 80.2% of the equity of its subsidiary Shandong Lorain. Therefore, in calculating
minority interest according to this proportion against the Shandong Lorains historical financial
data, the minority interest of the Company was $0.4 million in 2005 and $0.41 million in 2006.
Net income. Net income increased $2.1 million, or 54.8%, to $5.93 million in fiscal year 2006 from
$3.83 million in fiscal year 2005, as a result of the factors described above.
Liquidity and Capital Resources
General
We had approximately US$7.35 million (or approximately RMB 55 million) cash and cash equivalents as
of May 3, 2007. We received proceeds of approximately $18 million from the private placement completed
on May 3, 2007. We used most of the proceeds of the private placement to build infrastructure at
several of our facilities, which allowed us to obtain preferential terms on the construction contracts
to complete our expansion plans. Specifically, the proceeds were used for the second-phase of construction
at our Luotian facility, a sewage system at our Shandong Lorain facility, and an egg-processing facility
at our Junan Lorain plant. The total amount expended on the above items was approximately US$12 million.
We also allocated US$11 million including US$4 million from the proceeds and US$7 million from the
cash balance as of June 30, 2007 as the working capital to purchase raw materials needed due to the
expansion of production. In 2008, we plan to receive proceeds of approximately $40 million from the
private placement or through the offering of Convertible Bonds.
We plan to have the following expenditures paid through the proceeds from the 2008 debt financing as
follows:
|
Purpose |
|
Amounts |
|
|
Expand your sales and marketing channels |
|
$2.78 million |
|
|
Open 1,000 food kiosks |
|
$10 million |
|
|
Open 100 retail stores |
|
$10 million |
|
|
Commence a branding and advertising strategy |
|
$5 million |
|
|
|
|
Marketing |
|
$1.5million |
|
|
|
|
Construct or acquire new production facilities |
|
$1.39 million |
|
|
|
|
Expand agricultural operations |
|
$19.5 million |
|
|
|
|
Expand your sales and marketing channels |
|
$1million |
|
As of December 31, 2007, we had cash and cash equivalents (including restricted cash) of $879
million.
Cash Flows Data:
(in thousands of U.S. dollars) |
|
For year ended December 31, |
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
Net cash flows provided by
(used in) operating activities |
|
3,585 |
|
7,970 |
|
(441 |
) |
Net cash flows provided by
(used in) investing activities |
|
(12,440 |
) |
(12,326 |
) |
(3,015 |
) |
Net cash flows provided by
(used in) financing activities |
|
19,664 |
|
(922 |
) |
5,933 |
|
31
Operating Activities
Net cash used in operating activities was $3.6 million for 2007, which is a decrease of $4.4 million
from net cash provided by operating activities of $8.0 million for 2006. Due to increased marketing
efforts and our ability to fund increased purchases of raw materials and inventory as a result of
our private financing in May 2007, we generated a substantial increase in sales 2007, compared to
2006. As our sales increased, our accounts receivable balance increased significantly. The increase
was attributed to our shortened credit terms for many of our international and domestic distributors
from between 30 to 180 days to between 30 to 55 days. Although we have informed the distributors
of the shortened credit terms, many of them delayed their payments 30 days or longer. Another reason
for the increase of account receivable balance was procrastinated payments by some of our large customers.
Some of our main supermarket customers, such as global retailers Carrefour and Metro Supermarket,
did not make their payments for 2 to 3 months after the delivery of our products. As a result, our
cash flow suffered while waiting for such payments because we must pay for raw materials and labor
related to such sales before receiving payment for goods sold. Accordingly, our cash provided by
operating activities decreased because accounts receivable increased significantly.
Net cash provided by operating activities was approximately $8 million in 2006, which was an increase
of $8.4 million from the $(0.4) million net cash used in operating activities for the same period
in 2005. The increase of net cash provided by operating activities was mainly attributable to the
decrease of payable and less inventory at year end resulting in greater operating cash flows as compared
to 2006. The decrease of the payable in 2006 was mainly due to the substantial increase of sales
revenues which enabled us to have more cash to pay off the payable in a quicker manner. In addition,
our business partners have granted us longer payment terms which reduced our payables to some extent.
Investing Activities
Our main uses of cash for investment activities are payments for the acquisition of property, plants
and equipment.
Net cash used by investing activities for 2007 was $12.4 million, which is an increase of $0.1 million
from net cash used in investing activities of $12.3million for 2006. The increase was primarily due
to the increase of acquisition of plants and equipments and more facility constructions have been
undertaken in 2007 compared to 2006. The payments for acquiring plants and equipments purchase was
7.65 million in 2007, an increase of 3.43 million from 4.22 million in 2006.
Net cash used in investing activities in fiscal year 2006 was $12.33 million, which is an increase
of $9.33 million from net cash provided by investing activities of $3 million in fiscal year 2005
due to acquisition of more equipment to expand our production.
Financing Activities
Net cash provided by financing activities for 2007 was $19.7million, which is an increase of $18.8
million from $0.9 million net cash used in financing activities during 2006. The increase of the
cash provided by financing activities was primarily a result of the increase of additional paid-in
capital, resulting from the private placement transaction that closed in May, 2007.
Net cash provided by financing activities in fiscal year 2006 was $(0.92) million, which is a decrease
of $6.85 million from $5.93 million net cash used in financing activities in fiscal year 2005. The
decrease of the cash provided by financing activities was mainly attributable to new borrowings to
fund working capital for expanded production and sales.
Loan Facilities
32
As of March 31, 2008, the amounts and maturity dates for our bank loans were as follows:
All amounts, other than percentages, in thousands of U.S. dollars.
Banks |
|
Amounts |
|
Beginning |
|
Ending |
|
Interest
Rate |
|
Duration |
|
Junan County Construction Bank |
|
410.17 |
|
08/31/2006 |
|
08/31/2007 |
1 |
6.2600 |
% |
12 months |
|
Junan County Construction Bank |
|
343.17 |
|
09/08/2006 |
|
09/07/2007 |
1 |
6.2600 |
% |
12 months |
|
Junan County Industrial and Commercial Bank |
|
604.3 |
|
12/13/2007 |
|
05/31/2008 |
|
6.9500 |
% |
5 months |
|
Junan County Industrial and Commercial Bank |
|
706.77 |
|
12/06/2007 |
|
06/30/2008 |
|
6.1200 |
% |
6 months |
|
Junan County Industrial and Commercial Bank |
|
232.43 |
|
12/12/2007 |
|
06/30/2008 |
|
7.2900 |
% |
6 months |
|
Junan County Agriculture Bank |
|
347.27 |
|
06/30/2007 |
|
06/29/2008 |
|
11.1700 |
% |
12 months |
|
Junan County Agriculture Bank |
|
109.38 |
|
06/30/2007 |
|
06/29/2008 |
|
11.1700 |
% |
12 months |
|
Linyi Commercial Bank |
|
497.22 |
|
02/10/2007 |
|
02/09/2008 |
|
10.7100 |
% |
12 months |
|
Jinan, China Merchants Bank |
|
1367.22 |
|
09/13/2007 |
|
03/13/2008 |
|
6.2100 |
% |
6 months |
|
Junan County Industrial and Commercial Bank |
|
546.89 |
|
06/08/2007 |
|
02/08/2008 |
|
6.5700 |
% |
8 months |
|
Rural Credit Cooperatives |
|
25.98 |
|
11/20/2007 |
|
05/20/2008 |
|
9.7500 |
% |
6 months |
|
Junan County Agriculture Bank |
|
191.41 |
|
08/02/2007 |
|
07/25/2008 |
|
11.6300 |
% |
11 months |
|
China Agricultural Bank, Luotian Square Branch |
|
1039.09 |
|
08/30/2007 |
|
08/28/2008 |
|
7.7220 |
% |
12 months |
|
Rural Credit Cooperatives |
|
68.36 |
|
12/20/2007 |
|
06/20/2008 |
|
12.4200 |
% |
6 months |
|
Bank of China, Junan Branch |
|
9.81 |
|
09/19/2006 |
|
09/30/2008 |
|
7.5000 |
% |
8 months |
|
Junan County Construction Bank |
|
328.13 |
|
07/24/2007 |
|
07/23/2008 |
|
8.8920 |
% |
12 months |
|
Linyi Commercial Bank |
|
615.25 |
|
02/07/2007 |
|
02/06/2008 |
|
10.7100 |
% |
12 months |
|
Junan County Agriculture Bank |
|
410.17 |
|
10/31/2007 |
|
10/30/2008 |
|
12.3900 |
% |
12 months |
|
Junan Agricultural Development Bank |
|
1367.22 |
|
09/28/2007 |
|
09/26/2008 |
|
7.2900 |
% |
12 months |
|
Junan County Agriculture Bank |
|
287.12 |
|
11/30/2007 |
|
11/29/2008 |
|
12.3900 |
% |
12 months |
|
China Agricultural Bank, Miyun Branch |
|
273.44 |
|
07/18/2007 |
|
07/18/2008 |
|
7.8840 |
% |
12 months |
|
Junan County Industrial and Commercial Bank |
|
1278.35 |
|
12/07/2007 |
|
03/07/2008 |
|
8.0730 |
% |
3 months |
|
Junan County Industrial and Commercial Bank |
|
806.66 |
|
11/13/2007 |
|
03/07/2008 |
|
8.4240 |
% |
4 months |
|
Junan County Industrial and Commercial Bank |
|
410.17 |
|
08/16/2007 |
|
03/07/2008 |
|
8.8920 |
% |
7 months |
|
International Trust & Investment Co., Ltd. |
|
1367.22 |
|
06/13/2005 |
|
06/13/2008 |
|
7.8400 |
% |
36 months |
|
Linyi Commercial Bank |
|
136.72 |
|
12/25/2007 |
|
12/25/2008 |
|
13.0730 |
% |
12 months |
|
Junan County Agriculture Bank |
|
410.17 |
|
11/23/2007 |
|
11/22/2008 |
|
12.3900 |
% |
12 months |
|
Junan County Construction Bank |
|
256.7 |
|
09/18/2007 |
|
09/17/2008 |
|
6.3140 |
% |
12 months |
|
Junan County Industrial and Commercial Bank |
|
1367.22 |
|
03/06/2007 |
|
03/05/2008 |
|
7.2900 |
% |
12 months |
|
Junan County Construction Bank |
|
355.48 |
|
06/06/2007 |
|
03/05/2008 |
|
8.5410 |
% |
9 months |
|
Junan County Construction Bank |
|
261.14 |
|
09/27/2007 |
|
12/18/2007 |
|
7.7760 |
% |
3 months |
|
Junan County Construction Bank |
|
355.48 |
|
09/27/2007 |
|
12/18/2007 |
|
7.7760 |
% |
3 months |
|
Junan County Agriculture Bank |
|
205.08 |
|
11/15/2007 |
|
11/14/2008 |
|
12.3900 |
% |
12 months |
|
Junan County Agriculture Bank |
|
199.61 |
|
11/15/2007 |
|
11/14/2008 |
|
12.3900 |
% |
12 months |
|
Junan County Agriculture Bank |
|
123.05 |
|
06/14/2007 |
|
06/07/2008 |
|
11.1700 |
% |
12 months |
|
Junan County Agriculture Bank |
|
41.02 |
|
06/14/2007 |
|
06/07/2008 |
|
11.1700 |
% |
12 months |
|
Junan County Agriculture Bank |
|
410.17 |
|
12/14/2007 |
|
12/13/2008 |
|
12.3900 |
% |
12 months |
|
Junan County Agriculture Bank |
|
239.26 |
|
11/12/2007 |
|
11/11/2008 |
|
12.3900 |
% |
12 months |
|
Junan County Agriculture Bank |
|
505.87 |
|
07/04/2007 |
|
07/03/2008 |
|
11.1700 |
% |
12 months |
|
Junan County Agriculture Bank |
|
410.17 |
|
12/05/2007 |
|
12/04/2008 |
|
12.3900 |
% |
12 months |
|
Junan County Agriculture Bank |
|
82.03 |
|
08/02/2007 |
|
08/01/2008 |
|
11.6300 |
% |
12 months |
|
Beijing rural credit cooperatives |
|
2597.72 |
|
10/01/2007 |
|
10/01/2008 |
|
10.9350 |
% |
12 months |
|
Total |
|
21,600.9 |
|
|
|
|
|
|
|
|
|
33
1 Two of the loans listed in the table above have stated expirations prior to September 30, 2007. These
loans were disbursed under a special aid development program and were not required to be repaid
by their stated expiration date. We are not in default on these loans. We intend to repay the loans in accordance
with the special aid development programs terms and conditions.
As shown in the above table, we have $21.6 million in loans maturing on or before the end of March
31, 2008.
In past years, including 2007, we financed our operations through net income and bank loans. We have
maintained a good relationship with four major national banks in China (International Trust &
Investment Co., Ltd., Junan County Construction Bank, Junan County Industrial and Commercial Bank
and Junan Agricultural Development Bank) that have provided us with sufficient support of funding
through short-term and long-term loan historically. Beginning in 2007, we utilized other national
and local banks because of our increased demand for working capital resulting from our substantial
growth of business. For instance, we established business relationships with Jinan Commercial Bank
and Linyi Commercial Bank that provided US$2.7 million in loans for working capital to purchase raw
materials in 2007, which was sufficient to meet our remaining capital needs in 2007.
We expect to finance our operations and working capital need in 2008 through net income and additional
bank loans. We anticipate that sales will continue to increase in 2008 and that net income will provide
a greater contribution to operating cash needs than in past years. We currently plan to finance or
refinance US$40 million over the next 12 months in order to support the projected expansion of our
production in 2008. Currently, we have negotiated loan agreements with Linyi Commercial Bank and
some banks in Junan County for a total of US$3.5 million. We have had negotiations with a few other
financial institutions (local and national), which have agreed to provide us short-term working capital
loans throughout 2008, however no such loan arrangements have been finalized or funded. We can provide
no assurances that we will be able to enter into any loan or refinancing agreements on terms favorable
to the Company, if at all. We also have no current credit facilities or other lines of credit. If
we are unable to complete any such financing or refinancing efforts, our net income may not be sufficient
to satisfy our working capital and operating expansion needs in 2008 and our operations and financial
condition may be negatively impacted.
Obligations under Material Contracts
We do not have any material contractual obligations as of December 31, 2008.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires our management to make assumptions, estimates and judgments that affect
the amounts reported in the financial statements, including the notes thereto, and related disclosures
of commitments and contingencies, if any. We consider our critical accounting policies to be those
that require the more significant judgments and estimates in the preparation of financial statements,
including the following:
|
|
Method of Accounting -- We maintain our general ledger and journals with the accrual method accounting for financial reporting
purposes. The financial statements and notes are representations of management. Accounting policies
adopted by us conform to generally accepted accounting principles in the United States of America
and have been consistently applied in the presentation of financial statements, which are compiled
on the accrual basis of accounting. |
|
|
|
|
|
Use of estimates -- The preparation of the financial statements in conformity with generally accepted accounting principles
in the United States of America 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 those estimates. |
|
|
|
|
|
Principles of consolidation -- The consolidated financial statements are presented in US Dollars and
include the accounts of the Company and its commonly controlled entity. All
significant inter-company balances and transactions are eliminated in
combination |
34
As
of March 31, 2008, the particulars of the commonly controlled entities are as follows:
Name of Company |
|
Place of
incorporation |
|
Attributable
equity
interest % |
|
|
Registered
capital |
|
|
|
|
Shandong Green Foodstuff Co., Ltd |
|
PRC |
|
80.2 |
|
$ |
12,901,823 |
|
(RMB 100,860,000) |
|
Luotian Green Foodstuff Co., Ltd |
|
PRC |
|
100 |
|
$ |
1,279,181 |
|
(RMB 10,000,000) |
|
Junan Hongrun Foodstuff Co., Ltd |
|
PRC |
|
100 |
|
$ |
2,430,445 |
|
(RMB 19,000,000) |
|
Beijing Green Foodstuff Co., Ltd |
|
PRC |
|
100 |
|
$ |
1,279,181 |
|
(RMB 10,000,000) |
|
|
|
|
Accounting for the Impairment of Long-Lived Assets -- The long-lived assets held and used by the Company are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It
is reasonably possible that these assets could become impaired as a result of technology or other
industry changes. Determination of recoverability of assets to be held and used is by comparing the
carrying amount of an asset to future net undiscounted cash flows to be generated by the assets. |
|
|
|
If such assets are considered to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to sell. |
|
|
|
During the reporting periods, there was no impairment loss. |
|
|
|
Revenue recognition-- The Companys revenue recognition policies are in compliance with Staff accounting bulletin (SAB)
104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists,
the price is fixed or determinable, the delivery is completed, no other significant obligations of
the Company exist and collectability is reasonably assured. Payments received before all of the relevant
criteria for revenue recognition are satisfied are recorded as unearned revenue. |
|
|
|
The Companys revenue consists of invoiced value of goods, net of a value-added tax (VAT). No
product return or sales discount allowance is made as products delivered and accepted by customers
are normally not returnable and sales discount is normally not granted after products are delivered. |
Recent accounting pronouncements
In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxesan Interpretation
of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that the Company recognizes in its consolidated financial statements the
impact of a tax position if that position is more likely than not of being sustained on audit, based
on the technical merits of the position. The provisions of FIN 48 are effective for the Company on
January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded
as an adjustment to opening retained earnings. The Companys adoption of FIN 48 did not have
a material impact on its financial condition or results of operations.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair value, establishes
a framework for measuring fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. SFAS 157 applies under other accounting pronouncements that require
or permit fair value measurements, where fair value is the relevant measurement attribute. The standard
does not require any new fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal year beginning after November 15, 2007, and interim periods within that fiscal year.
In September 2006, the SEC issued SAB No. 108, which provides guidance on the process of quantifying
financial statement misstatements. In SAB No. 108, the SEC staff establishes an approach that requires
quantification of financial statement errors, under both the iron-curtain and the roll-over methods,
based on the effects of the error on each of the Companys financial statements and the related
financial statement disclosures. SAB No.108 is generally effective for annual financial statements
in the first fiscal year ending after November 15, 2006. The transition provisions of SAB No. 108
permits existing public companies to record the cumulative effect in the first year ending after
November 15, 2006 by recording correcting adjustments to the carrying values of assets and liabilities
as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings.
The Companys adoption of SAB 108 did not have a material impact on its financial condition
or results of operations.
35
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an Amendment of SFAS 115 (SFAS No. 159), which allows
for the option to measure financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected are reported in earnings.
The objective of SFAS 159 is to provide opportunities to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to apply hedge accounting
provisions. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for similar types of assets
and liabilities. This statement is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the impact of SFAS No. 159 on our consolidated
financial statements.
The Company does not anticipate that the adoption of the above standards will have a material impact
on these consolidated financial statements.
Seasonality
Our operating results and operating cash flows historically have been subject to seasonal variations.
Our raw materials are mostly fresh agricultural products. Therefore, we are subject to production
seasonality by product, though we are able to maintain overall year-round production. Specifically,
the main processing season for chestnut products is from the latter half of August to the next January.
During the busy season, our chestnut production lines are running with full capacity. Other than
this period, we still maintain a small amount of chestnut production by using frozen chestnuts. However,
this pattern may change, as a result of new market opportunities or new product introductions.
Off-Balance Sheet Arrangements
We do not have any off-balance arrangements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
We are exposed to interest rate risk primarily with respect to our short-term bank loans. Although
the interest rates are fixed for the terms of the loans, the terms are typically 12 months and interest
rates are subject to change upon renewal. Since September 16, 2007 China Peoples Bank has increased
the interest rate of RMB bank loans with a term of 6 months or less by 0.27%, and loans with a term
of 6 to 12 months by 0.27%. The new interest rates are 6.48% and 7.29% for RMB bank loans with a
term 6 months or less and loans with a term of 6-12 months, respectively. The change in interest
rates has no impact on our bank loans that were made before September 15, 2007. There was an increase
of interest expense of approximate $10,587 from the loan we contracted after September 15, 2007.
Management monitors the banks interest rates in conjunction with our cash requirements to determine
the appropriate level of debt balances relative to other sources of funds. We have not entered into
any hedging transactions in an effort to reduce our exposure to interest rate risk.
Foreign Exchange Risk
While our reporting currency is the U.S. Dollar, all of our consolidated revenues and consolidated
costs and expenses are denominated in Renminbi. All of our assets are denominated in RMB except for
cash. As a result, we are exposed to foreign exchange risk as our revenues and results of operations
may be affected by fluctuations in the exchange rate between U.S. Dollars and RMB. If the RMB depreciates
against the U.S. Dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S.
Dollar financial statements will decline. We have not entered into any hedging transactions in an
effort to reduce our exposure to foreign exchange risk.
Inflation
Inflationary factors such as increases in the cost of our product and overhead costs may adversely
affect our operating results. Although we do not believe that inflation has had a material impact
on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on
our ability to maintain current levels of gross margin and selling, general and administrative expenses
as a percentage of net revenues, if the selling prices of our products do not increase with these
increased costs.
36
CORPORATE STRUCTURE AND HISTORY
Our Corporate Structure
We are a Delaware corporation that was incorporated on February 4, 1986. From our inception in 1986
until May 3, 2007, when we completed a recapitalization transaction with Lorain Holding, we were
a blank check company and did not engage in active business operations other than our search for,
and evaluation of, potential business opportunities for acquisition or participation.
Lorain Holding was incorporated in the Cayman Islands in August 2006. Lorain Holding presently has
two direct, wholly-owned Chinese operating subsidiaries: Luotian Lorain and Junan Hongrun, one
indirect wholly owned operating subsidiary: Beijing Lorain, and one majority-owned subsidiary, Shandong
Lorain, which is 80.2% owned by us (with Shandong Economic Development Investment Co. Ltd. owning
the remaining 19.8% interest). We sometimes refer to these four Chinese operating subsidiaries as
the Lorain Group Companies.
Shandong Lorain was formed in 1995; Junan Hongrun was formed in 2002, and Luotian Lorain and Beijing
Lorain were both formed in 2003.
Acquisition of Lorain Holding and Our Related Equity Financing Transaction.
On May 3, 2007, we completed a recapitalization of Lorain Holding through a share exchange with Lorain
Holdings former stockholders. Upon completion of the recapitalization, Lorain Holding
became our wholly-owned direct subsidiary and we have assumed the business operations and strategy
of Lorain Holding and its Chinese subsidiaries. On July 17, 2007, we changed our name from Millennium
Quest, Inc. to American Lorain Corporation to better reflect our new business plan
and strategy.
On April 10, 2007, Millennium Quest, Inc. (who would later become our corporate parent and change its
name to American Lorain Corporation) completed the sale of an aggregate of 100,000 restricted shares
of its Series A Preferred Stock to HFI for a cash purchase price of $455,000 pursuant to a Stock
Purchase Agreement entered into between Millennium Quest, Inc. and HFI dated as of April 5, 2007.
The Series A Preferred Stock issued was entitled to 428.56 votes per share and represented approximately
90% of the capital stock and voting control of the Company as of the date of such acquisition. The
transaction resulted in a change in control of the Company. HFI used its own funds to acquire the
Series A Preferred Stock which is convertible into Common Stock at the option of the holder at any
time on or after the earliest to occur of: (a) September 30, 2007; (b) the date on which we complete
a business combination with a corporation or business entity with current business operations; or
(c) the date such conversion is approved by our board of directors. The Preferred Stock is also convertible
at our option upon five days advance notice to the holder.
Through the recapitalization of Lorain Holding we acquired all of the issued and outstanding capital
stock of Lorain Holding, which became our wholly-owned subsidiary, and in exchange for that capital
stock we issued to the former stockholders of Lorain Holding 697,663 shares of our Series B Voting
Convertible Preferred Stock, which were subsequently converted into 16,307,872 shares of our common
stock on July 17, 2007, immediately following the effectiveness of an amendment to our charter that,
among other things, increased the number of our authorized shares of common stock from 20,000,000
to 200,000,000. Upon the consummation of the recapitalization, the former stockholders of Lorain Holding became our
controlling stockholders.
Upon the closing of the recapitalization, Timothy P. Halter, our former sole director and officer,
submitted his resignation letter pursuant to which he resigned from all offices of American Lorain
that he held effective immediately and from his position as our director that became effective on
May 13, 2007, the tenth day following the mailing by us of an information statement to our stockholders
that complies with the requirements of Section 14f-1 of the Securities Exchange Act of 1934. Si Chen,
our Chairman, was appointed as our director and Chairman at the closing of the recapitalization of
Lorain Holding and Mr. Chen became the sole director on the board of the directors on May 13, 2007,
when Mr. Halters resignation from the board became effective.
Contemporaneous with the recapitalization, we also completed a private placement transaction in which
we issued and sold to accredited investors 604,674 shares of our Series B Voting Convertible Preferred
Stock for gross proceeds of approximately $19.8 million. These shares of Series B Voting Convertible Preferred Stock
were converted into 6,990,401 shares of our common stock. The conversion took place at the effective
time of an amendment to our certificate of incorporation that, among other things, increased the
number of shares of our authorized common stock from 20,000,000 to 200,000,000. We had to increase
our authorized common stock so that there would be enough shares of authorized common stock available
for issuance upon conversion of our Series B Voting Convertible Preferred Stock.
37
In connection with the private placement mentioned above, our majority stockholder, Mr. Akazawa, entered
into an escrow agreement with the private placement investors. Pursuant to the escrow agreement,
Mr. Akazawa agreed to certain make good provisions. In the make good escrow agreement,
we established minimum after tax net income thresholds of $9.266 million for the fiscal year ending
December 31, 2007 and $12.956 million for the fiscal year ending December 31, 2008. If the minimum
after tax net income thresholds for the fiscal year 2007 or for the fiscal year 2008 are not achieved,
then the investors will be entitled to receive additional shares of our common stock based upon a
pre-defined formula agreed to between the investors and Mr. Akazawa. Mr. Akazawa deposited a total
of 302,365 shares of our Series B Voting Convertible Preferred Stock, which have subsequently been
converted into 14,134,254 shares of our common stock, into escrow with Securities Transfer Corporation
under the escrow agreement.
38
Our corporate structure is as follows:
Footnotes:
1
Includes 626,397 shares of common stock owned by Halter Financial Investments, L.P. and 678,596
shares
of common stock owned by Halter Financial Group, L.P.
2
Mr. Akazawa has granted an option to our sole director and Chief Executive Officer, Mr. Chen, allowing
Mr. Chen to buy 90% of Mr. Akazawas interest in the Company at a fixed price at a future
time
in accordance with the terms of an option agreement between the two parties.
OUR BUSINESS
Overview of Our Business
As an integrated food manufacturing company, our products mix varies by season. We develop, manufacture
and sell chestnut products, convenience foods (foods like cut fruit and premixed salads, which are
known as lightly processed our convenience foods include ready-to-cook (or RTC) meals, ready-to-eat
(or RTE) meals and meals ready-to-eat (or MREs)), and frozen, canned and bulk foods, in hundreds
of varieties. We operate through our indirect Chinese subsidiaries. Our production activities are
in China and we derive most of our revenue from sales in China, Japan and Korea. In 2007, we expanded
our sales in Europe and Middle East, and continued to have robust development in these markets. Our products are sold in 19 provinces and administrative regions in China
and 41 foreign countries.
39
Our Industry
General
According to the USDA Economic Research Service, global food retail sales exceed $2 trillion annually,
with supermarkets and hypermarkets (combination supermarket and department store) accounting for
53% of sales in 2003. The global food industry is fragmented with the worlds top 50 food manufacturers
share of packaged food retail sales at less than 30% of the total market as of 2003 according to
the Euromonitor (2004).
Global Food Market Trend
As disposable income of consumers has increased in many countries during the past few decades, consumers
have begun to purchase fewer staples and more high-value food items, which are products such as meat,
dairy, pasta, and frozen vegetables (as opposed to lower value items like rice or wheat). According
to the USDA, global sales of high-value products have been growing, with sales increasing by 25%
since 1998. Food manufactures and suppliers responding to the trend have increased their investment
in processing facilities or purchase of high-value foods. The decision of whether locally producing
or purchasing often depends on the nature of products, regulation, environment and transaction cost
comparison. Our products have been developed and are being developed to cater to the growing high-value
food market.
Global Consumption Trend
According to the USDA, packaged foods account for a large share of total food expenditures among customers
in high-income countries and the demand for convenience is growing. The United States, European Union
and Japan account for over 50% of global sales of packaged foods. In developing countries, market
retail trends also indicate strong growth in sales of packaged foods and demand for convenience.
We hope to capitalize on the increasing sales of convenience foods and other high-value foods by
increasing our production as the demand grows.
Chinas Food Market
As incomes rise and urbanization increases within China, Chinese consumers are changing their diets
and increasing demand for greater quality, convenience and safety in food. Chinas food market
is becoming segmented and demand for quality food by high-income households has fueled recent growth
in the availability of such foods within the Chinese retail market. Chinas urban per capita
food expenditure in 2004 was RMB 2,710 (approximately $327), up 12% from that of 2003 (USDA, Economic
Research Report No. ERR-32).
Convenience Food Industry
There is an increasing demand for convenience foods in developed countries, as well as among wealthy
segments in developing countries. According to the USDA, the changes in food consumption patterns
are largely driven by income growth and demographic factors, particularly lifestyle changes brought
about by urbanization and similar forces.
According to a global online AC Nielsen Consumer Survey of 22,000 internet users around the world conducted
in June 2006:
20% of all respondents frequently buy convenience food while 45% of all respondents buy convenience
food occasionally;
56% of all respondents do not have enough time to cook (55% of respondents in the Asia Pacific region
did not have enough time to cook);
25% of consumers who eat convenience food prefer all-in-one meals; and
44% of consumers make their purchases at a supermarket.
40
Chestnut Industry
The chestnut belongs to the Fagaceae family, along with oaks and beech trees. The chestnut, in contrast
to many other tree nuts, contains small quantities of oil and is very high in complex carbohydrates.
This makes them useful for a wider food range than other common oily type nuts. They
are a very wholesome and nutritive food.
The following table compares the nutritional composition of chestnuts to apples:
|
Nutritional composition of Chestnut compared with Apple (per
100 g fresh fruit) |
|
|
Constituent |
|
Chestnut |
|
Apple |
|
|
Water (%) |
|
52.5 |
|
84.8 |
|
|
Protein (g) |
|
2.9 |
|
0.2 |
|
|
Fat (g) |
|
1.5 |
|
0.6 |
|
|
Carbohydrate, total (g) |
|
42.1 |
|
14.1 |
|
|
Thiamine (mg) |
|
0.22 |
|
0.03 |
|
|
Riboflavin (mg) |
|
0.22 |
|
0.02 |
|
|
Niacin (mg) |
|
0.6 |
|
0.1 |
|
|
Calcium (mg) |
|
27 |
|
7 |
|
|
Phosphorus (mg) |
|
88 |
|
10 |
|
|
Iron (mg) |
|
1.7 |
|
0.3 |
|
|
Sodium (mg) |
|
6 |
|
1 |
|
|
Potassium (mg) |
|
454 |
|
110 |
|
|
Source: USDA 1964, Handbook No. 8 |
|
According to the United Nation FAO Statistics Division (2006), China is the largest grower of chestnuts
followed by Korea and Japan. In 2004, Chinas production accounted for approximately 72% of
the worlds total chestnut production. Japan, Korea, China and the European Union are also large
consumers of chestnuts. The total consumption in these areas accounted for 89.8% of the worlds
total consumption in 2004. The compound annual growth rate of world consumption of chestnuts is approximately
equal to the compound annual growth rate of world production of chestnuts in the period of 2000 to
2004, which was 3.6%.
In recent years, the chestnut production in Korea and Japan has declined. This has been attributed
to the increasing labor costs and operational costs incurred in growing chestnuts. Because of the
declining domestic production, Korean and Japanese customers have grown to rely more on imported
chestnut products.
Chestnuts are harvested in the fall. Traditionally, people eat chestnuts in the fall and winter. Chestnuts
are commonly steamed, boiled, sugar stir-fried, roasted or added into dishes or desserts as an ingredient.
Chestnut fruit is covered in a red inner skin and an outer hard shell. Chestnuts are typically peeled
after being processed by traditional approaches.
Frozen, Canned and Bulk Food Industry
Frozen, canned and bulk foods are a large portion of the food industry. In 2006, China exported 4.42
million metric tons of frozen vegetables, an increase of 8.55% over 2005 levels. From 1997 to 2003
the value of canned good sales in the China rose by 59.27 per cent. In volume terms, the market grew
to 2.2 million tons by the year 2003, an increase of 45.39 per cent over 1997. Generally, Chinas
agricultural exports rose from $15.4 billion to $19 billion from 2003 to 2005.
Our Products, Production Processes and Services
Our products are mainly categorized into the following three types: convenience food, chestnut products,
and frozen, canned and bulk food.
Convenience Foods
41
Our convenience food products are: ready-to-cook or RTC food products, ready-to-eat or RTE food products
and meals ready-to-eat or MRE food products. Our convenience food products are seasoned foods. RTCs
can be served after a couple of easy preparatory steps. RTEs can be consumed immediately and MREs
are basically meal kits with self heating devices. Our convenience food products fit the modern food
demands of consumers who require safe, wholesome, and tasty food that requires very little time or
preparation.
Our best selling RTCs are Oden eggs, Cattle Bone Soup, beef, and lamb. Typically, when preparing an
RTC, customers only need to heat the food in microwaves, or boil it for several minutes before enjoying
the meal.
We also produce RTEs, the best selling of which is Smoked Fish and Stewed Beef with Sauce. Other RTEs
include spiced belt fish, cherry tomato, spicy pork fillet, pork and egg roll, pears and pineapples.
Our MREs are meal kits with self-heating devices (thus differing from the MRE food products which US
customers associate with the phrase MRE). We produce various MREs focused on Chinese cuisine, the
best sellers of which are our stir fried rice and stir fried noodles. Other MREs are based on other
styles of food, such as Italian cuisine.
Our MREs are used in both military and civilian uses, such as camping, traveling, meals on trains,
and other situations where a person does not have access to traditional cooking supplies and equipment,
such as a stove or microwave.
Chestnut Products
We produce approximately 50 high value-added processed chestnut products, the best selling of which
are our aerated open-bottom chestnuts (chestnuts packaged with nitrogen), sweet heart chestnuts (which
are sweet preserved chestnuts), chestnuts in syrup (which is very popular in Japan and Korea), and
chopped chestnut kernels. In addition, we have begun preliminary production of a chestnut extract
that is produced from the chestnuts inner skin (the extract had previously been discarded in
the production process). We plan to sell this extract to Japanese food processors who sell the extract
for use as an additive to foods and beverages.
Frozen, Canned and Bulk Food
We produce various frozen, canned and bulk foods, including frozen vegetables, frozen fruits, frozen
fish, and frozen meats. The best selling frozen, canned and bulk foods are our chestnuts in syrup,
frozen peas, and frozen chestnuts. Although they contributed 40.5% of the total revenue in 2006,
the frozen, canned and bulk products gross margins are lower than the margins for chestnut
products and convenience foods. However, the frozen, canned and bulk food portion of our business
is able to mitigate the significant production seasonality of chestnut products and increase the
utilization rate of our production capacity.
Our Manufacturing Facilities
General
We are presently operating four facilities, two of which are located in Junan County, Shandong Province,
one in Luotian county, Hubei Province, and one in Miyun county, Beijing. The following table provides
the name of our facilities, the year that operations commenced at the facilities and the size of
the facilities.
|
Facility |
|
Year Operations
Commenced |
|
Construction Size
(square meter) |
|
|
Junan Hongrun |
|
2002 |
|
25,665 |
|
|
Shandong Lorain |
|
1995 |
|
15,392 |
|
|
Luotian Lorain |
|
2003 |
|
9,558 |
|
|
Beijing Lorain |
|
2003 |
|
21,000 |
|
Current Production Lines
We currently manufacture our products using 13 production lines, including deep-freezing lines (which
are used to freeze raw materials for year-round production and to produce frozen food), canning lines
(which are used to produce canned food and canned chestnut products) and convenience food lines (which are used for producing
RTCs, RTEs and MREs, all of which have nitrogen preservation capacity).
42
The following table shows the types of production lines, the types of products produced and the production
capacity at each facility:
Facility |
|
Production Lines |
|
Amount |
|
Capacity (metric tons per line per year) |
|
Product |
|
|
Shandong Lorain |
|
Deep-freezing line |
|
1 |
|
9912 |
|
Chestnut products Canned and frozen food Convenience food |
|
Convenience food line |
|
1 |
|
1425 |
|
Junan Hongrun |
|
Deep-freezing line |
|
1 |
|
9912 |
|
Chestnut products Canned and frozen food |
|
Canning line |
|
4 |
|
5767 |
|
Beijing Lorain |
|
Convenience food line |
|
2 |
|
1500 |
|
Chestnut products Frozen and canned food Convenience food |
|
Deep-freezing line |
|
1 |
|
9912 |
|
Luotian Lorain |
|
Convenience food line |
|
6 |
|
1425 |
|
Chestnut products Frozen and canned food RTC & RTE (mainly fish) |
|
Deep-freezing line |
|
1 |
|
9912 |
|
We allocate the production lines for our various products among our facilities based upon the location
of the facilities to take advantage of efficiencies in transportation of required raw materials.
For example, all of our fish products are manufactured by Luotian Lorain, because the Luotian region
is an area that has an abundance of the fish that we use as a raw material.
Although our production lines are multi-functional, we only have regulatory approvals for products
that are currently in production at our facilities. We produced 192 products in 2007. If we wish
to produce other products at these facilities in the future, we would have to obtain additional regulatory
approvals. If we are unable to obtain regulatory approval to produce a particular product in a timely
manner, if at all, then we would not be able to generate revenues to offset any expenses related
to R&D to produce such product and any acquisitions of equipment to produce such product. We
do not believe that any such expenses related to any particular product is material to the Company
as a whole. In addition, we do not believe that our inability to produce any particular product is
material to the business as a whole because we can replace such product with other products. However,
if we were unable to obtain regulatory approvals to produce a broad class of products or several
products at one time, our ability to generate revenues may be harmed, which could materially and
adversely effect our operations and financial condition.
We have consistently successfully obtained required approvals in the past we produced 192 products
in 2007 and we believe that we will not face material problems obtaining required approvals
for new product offerings during 2008.
Our production lines and facilities have all been designed to meet the standards and requirements of
Japan, Korea, the United States, and the European Union, which are our main export markets. We employ
advanced methods of quality control, including obtaining ISO 9001 and BRC certifications that distinguish
our products both in domestic and international markets. In particular, the approvals from Japanese
government of our chestnuts and other convenience foods to be imported to Japan have been helpful
in allowing us to advocate our government to grant approvals for our new products.
Due to our long-term involvement in our local economy, the local government has shown support of our
business development objects. For instance, the government has provided several aid programs to assist
us to expand our manufacturing facilities, to secure the planting of raw materials, or to provide
resources that support us financially and/or operationally. Our Company has followed the governmental
regulations and has met their requirements to obtain continuing aid. Because of this relationship,
we have successfully obtained approval for our new products as we have requested that and accordingly we have not had any impact on our financial condition due to
the lack of regulatory approval.
43
With limited exception, we produce our products all year round. Earlier in our Companys history
some of our production lines experienced times when they ran at less than full capacity due to the
fact that our production focused almost solely on chestnut products. More recently, we have produced
various different types of food products, mainly in three categories: chestnut products, processed
food and convenience food. Increasing market demand has caused us to expect all our production lines
to be running at their full capacity throughout the year. Our newer facilities have a multiple-function
design to adjust production seasonally to avoid periods of less than full capacity production.
Currently, most of our processed and convenience foods are produced at our Beijing Lorain plant. We
have expanded those facilities when we reconstructed that factory after a fire in May of 2007. The
new facilities are projected to satisfy existing and increasing market demand for convenience food.
In addition, our new production line for processed food is expected to launch production by May,
2008 and hopefully will significantly enhance our capacity to sufficiently support the existing and
projected demand for convenience food.
Overall, we expect to be able meet our demand for our products; however, we have had adopted alternate
plans for the short-term periods that we project that our capacity will not be enough to satisfy
existing or future demand for our convenience food products. In the future, we plan to look into
seeking a possible OEM partner to assist in producing some of our convenience food products while
our new facilities are still under construction. We do not see any material impact on our financial
results when wed do not have full capacity to satisfy existing or increasing demand for our convenience
food products.
Proposed Production Lines
Our convenience food and chestnut products were our main profit centers in 2007. Convenience food is
the fastest growing portion of our business and one of the main catalysts of our growth. Currently,
most of our processed and convenience foods are produced at our Beijing Lorain plant. We have expanded
those facilities when we reconstructed that factory after a fire in May of 2007. The new facilities
are projected to satisfy existing and increasing market demand for convenience food. In addition,
our new production line for processed food is expected to launch production by May, 2008 and hopefully
will significantly enhance our capacity to sufficiently support the existing and projected demand
for convenience food.
Therefore, in 2007, we have constructed three new production facility additions to existing plants,
some with multiple production lines (for a total of six new lines) for the production of our convenience
food products. In 2008, we plan to construct another new production facility addition at a new facility
in Luotian County, China with three production lines for the production of our convenience food products
and deep freezing. Each new facility addition in 2007 will contain a convenience food line that that
also allows for nitrogen preservation of products. Finally, we plan to add additional frozen storage
to complement the additional production lines. We estimate that the cost of constructing these new
facility additions will be approximately $17,525,000.
In 2008, we plan to build two new facilities, including 1 deep freezing line with capacity of 9912.5
metric ton per line and 2 convenience food lines with capacity of 1500 metric ton per line. Because
we used the funds received from the May 3, 2007 private placement to fund infrastructure improvements
and the purchase of raw materials, we must obtain loans from commercial banks to finance the construction
of new production facility additions. Currently, we have negotiated loan agreements with Linyi Commercial
Bank as well as banks in Junan County for a total of US$3.5 million. If we require additional funds
for this production, we will have to seek additional loans or other financing. We can provide no
assurances that we will be able to obtain such loans on terms favorable to the Company, if at all.
We may not be able to obtain adequate levels of additional financing, whether through equity financing,
debt financing or other sources. Additional financings could result in significant dilution to our
earnings per share or the issuance of securities with rights superior to our current outstanding
securities. In addition, we may grant registration rights to investors purchasing our equity or debt
securities in the future. If we are unable to raise additional financing, we may be unable to implement
our long-term business plan, develop or enhance our products and services, take advantage of future
opportunities or respond to competitive pressures on a timely basis, if at all. In addition, a lack
of additional financing could force us to substantially curtail or cease operations.
44
Current Storage Capacity
Storage of our raw materials and inventory is a critical element of our business. Our raw materials,
half-done and partially finished products need to be preserved in frozen storages (-18ºC to
-20ºC) or constant temperature storages (-5ºC to 5ºC).
The following table illustrates on a facility by facility basis the type and capacity of our storage
resources.
Facility |
|
Storage |
|
Number of
Storage Units |
|
Capacity
(metric tons) |
|
Junan Hongrun |
|
Frozen Storage |
|
7 |
|
3000 |
|
Constant Temperature |
|
8 |
|
4800 |
|
Shandong Lorain |
|
Frozen Storage |
|
5 |
|
2000 |
|
Constant Temperature |
|
3 |
|
1500 |
|
Luotian Lorain |
|
Frozen Storage |
|
12 |
|
6500 |
|
Beijing Lorain |
|
Frozen Storage |
|
6 |
|
2850 |
|
Constant Temperature |
|
3 |
|
1800 |
|
TOTAL |
|
|
|
44 |
|
22,450 |
|
Future Storage Capacity
We plan to enlarge our storage capacity along with the planned expansion of our production capacity.
By the end of 2007, our total storage capacity reached 22,450 metric tons, and by the end of 2008,
we expect that our total storage capacity will reach 25,450 metric tons.
Chestnut Harvesting Operations
Since 2003 we have grown our own chestnut trees in an attempt to reduce operating costs and ensure
the availability of raw material supplies and quality of our products. Although we have self-supplied
a large portion of our fresh vegetable needs, our agricultural operations to date have not been a
significant source of raw materials.
We believe the development of agricultural facilities is a good strategy for long-term cost-savings.
For instance, by growing Korean superior cultivar chestnuts domestically, we will be able to use
our Korean-style chestnuts grown in China as a substitute for those imported from Korea. Unlike most
vegetables and fruits, chestnut trees have a 3-5 year growing phase before they can be harvested.
Our current chestnut planting base has been self-supplying some chestnuts to our production since
2007. By 2010, our current chestnut agricultural operations are projected to harvest around 700 metric
tons of high-end chestnuts based on the number of tress currently planted and planned expansion of
our chestnut agricultural operations.
Our current agricultural operations are illustrated by the following table.
Harvest |
|
Area
(Acre) |
|
Location |
|
Chestnut (Korean, Japanese, Australian cultivar) |
|
329 |
|
Shandong |
|
Chestnut (Japanese cultivar) |
|
165 |
|
Beijing |
|
Sticky Corn |
|
329 |
|
Beijing |
|
Green Pea & Sweet Corn |
|
297 |
|
Beijing |
|
Pumpkin |
|
82 |
|
Heilongjiang |
|
We plan to expand our agricultural operations in the next few years. Among other things, we plan to
develop an 824 acre Korean-type chestnut farm, located in China. The following table illustrates
the proposed expansion of our agricultural operations. We plan to finance the expansion of our agricultural
operations by applying for a subsidized loan with an amount of US$1 million from the local government.
We also plan to use working capital loans and other regular loans to be provided by commercial banks
for an aggregate of US$1,000,000. If we need more than US$2 million, we will have to seek additional
loans or other financing. We can provide no assurances that we will be able to obtain such loans
on terms favorable to the Company, if at all. We may not be able to obtain adequate levels of additional financing, whether through equity financing, debt financing or other sources.
Additional financings could result in significant dilution to our earnings per share or the issuance
of securities with rights superior to our current outstanding securities. In addition, we may grant
registration rights to investors purchasing our equity or debt securities in the future. If we are
unable to raise additional financing, we may be unable to implement our long-term business plan,
develop or enhance our products and services, take advantage of future opportunities or respond to
competitive pressures on a timely basis, if at all. In addition, a lack of additional financing could
force us to substantially curtail or cease operations.
45
Harvest |
|
Area
(Acre) |
|
Location |
|
Organic Chestnut |
|
165 |
|
Beijing |
|
Mixed Vegetables |
|
494 |
|
Hebei |
|
Japanese Pumpkin |
|
329 |
|
Inner Mongolia |
|
Raw Materials
In 2007, about 91.16% of our raw materials consisted of agricultural products; 6.32% consisted of packaging
materials and 1.41% consisted of condiments.
Our Supply Sources
Our business depends on obtaining a reliable supply of various agricultural products, including fresh
products, red meat, fish, eggs, rice, flour and chestnuts. We self-supplied less than 16.45% of our
raw materials needed in 2007 (by value). In 2007, we procured approximately 39,630 metric tons of
chestnuts and approximately 28.034 metric tons of vegetables and other raw materials from a number
of third party suppliers and produced approximately 265metric tons of chestnuts and approximately
2752 metric tons of vegetables and other raw materials from our own agricultural operations. In addition,
we also purchased packaging materials, sugar, condiments and other products we need for production.
We believe that our raw materials are currently in adequate supply and are currently generally available
from our diverse and abundant sources. In order to manage our supplies of raw materials, we have
implemented a multi-pronged procurement strategy:
1.
Each year we select suppliers
that can offer us the best prices without compromising on quality. We typically rely on many suppliers
each year. However, we have a long-term relationship with many international and domestic suppliers.
We have been working with each of our largest suppliers for 4.5 years on average, which ensures our
access to steady supply of raw materials. The top 10 suppliers accounted for 21.79% of the total
procurement in 2007 in value terms. The following table lists the name of our top ten suppliers,
the dollar value of the raw materials supplied and the percentage of total raw materials (by cost) supplied.
|
Top 10 Suppliers (2007) |
|
|
|
Supplier |
|
Supply Value $
1USD=7.3046RMB |
|
Percentage of Total
Raw Material Cost |
|
|
|
Hainong Co. Ltd. |
|
2,187,710.08 |
|
3.30 |
% |
|
|
Chenghai Cao |
|
1,728,890.42 |
|
2.60 |
% |
|
|
Fusheng Jia |
|
1,683,009.41 |
|
2.54 |
% |
|
|
Jianlin Zhang |
|
1,551,151.23 |
|
2.34 |
% |
|
|
Jianzhong Zhang |
|
1,546,153.74 |
|
2.33 |
% |
|
|
Baodinglvjian Food Co. Ltd |
|
1,414,997.23 |
|
2.13 |
% |
|
|
Fuzhou Jinlinshe Food Co. Ltd |
|
1,302,525.55 |
|
1.96 |
% |
|
|
Hyup Sung Nongsan Agricultural |
|
1,078,567.26 |
|
1.62 |
% |
|
|
Jiguo Chen |
|
1,041,554.57 |
|
1.57 |
% |
|
|
Guangqu Wu |
|
932,162.25 |
|
1.40 |
% |
|
2.
We have also developed our
own planting areas to help ensure we are able to get raw materials of sufficient quality and in sufficient
quantity to supply our operations. Although we currently only self-supply about 4% of our raw materials,
we have successfully developed a 494-acre chestnut farm which is focused primarily on cultivating chestnuts that we would normally import from Korea, Japan and/or Australia. A material
harvest in the next Chestnut season will lower our dependence on imports. Additionally, we also have
developed a 329-acre sweet corn farm, an 82-acre Pumpkin farm, and a 297-acre green bean farm that
will help supply the production of frozen and canned products next year. The farms we own will not
only secure the supply of raw materials to meet increased demand from the market, but will also reduce
the cost of materials purchased and reduce the impact of market price fluctuation of raw material
prices on our operational costs.
46
3.
In 2007, the Chinese government
implemented various programs to encourage businesses to advance agricultural industrialization. Under
the recently implemented governmental policies for agricultural development, we are planning to expand
the farm we own to 2,500 acres gradually over the next 2 years. Such expansion would allow us to
meet a material portion of our raw material needs for future production.
4.
We have also established
relationships with agricultural associations by signing supply agreements with those associations.
We have also invested in several agricultural product companies to expand our supply networks to
ensure we have appropriate access for purchasing sufficient supplies for our production requirements.
Despite our efforts to control our supply of raw materials and maintain good relationships with our
suppliers, we could lose one or more of our suppliers at any time. We believe that we could replace
the loss of one or more suppliers with other domestic and international suppliers. However, the loss
of several suppliers may be difficult to replace and could increase our reliance on higher cost or
lower quality suppliers, which could negatively affect our profitability. In addition, if we have
to increase the number of our suppliers of raw materials and expand our own agricultural operations
in the future to meet growing production demands, we may not be able to locate new suppliers who
could provide us with sufficient materials to meet our needs. Although we have entered into a few
supply contracts, they are inadequate for all of our supply needs. In addition, reliance on foreign
suppliers would likely increase costs and reduce our margins or profitability. Any interruptions
to or decline in the amount or quality of our raw materials supply could materially disrupt our production
and adversely affect our business and financial condition and financial prospects.
Procurement Cost Control
Our raw materials presently come from three sources: overseas markets, domestic procurement (excluding
self-supply), and self-supply. Domestic procurement (including self-supply) is the biggest source
of our raw materials in value terms and accounted for 80.52% of our total raw material costs in 2007(self-supply
has not been a significant source to date -- accounting for less than 16.45% of our total raw material
costs in 2007). In 2007, overseas procurement accounted for 15.19% of our total raw material costs.
In order to control procurement costs, we located our facilities near our raw material suppliers. For
example, Junan Hongrun and Shandong Lorain are located in Shandong Province, which the National Bureau
of Statistics of China reports is Chinas largest supplier of fresh produce in terms of volume.
Shandong Providence is also a major chestnut producing region.
By using local procurement, we reduce our costs, especially transportation costs, and are able to acquire
first-hand harvest and market information. However, some raw materials must be imported. For example,
we have to use South Korean chestnuts and sugar to manufacture some chestnut products at the required
quality level. To reduce our dependence on imports, we have begun to grow Korean-style chestnuts
in China several years ago, and it will provide us with a substitute for these expensive imported
chestnuts in the future.
We generally purchase the raw materials that we use to produce our products from wholesalers, who collect
agricultural products directly from farmers. However, we do occasionally work directly with farmers.
For instance, we operate an initiative we refer to as Green-moist base which involves
a series of cooperation and lease agreements between Shandong Lorain, Beijing Lorain and local farmers.
The Green-moist base involves approximately 6,000 mus (approximately 1,000 acres) of land which is
used primarily to produce Japanese and Korean style chestnuts, sticky corns, and pumpkins for our
operations.
To ensure high quality, we have strict standards for our suppliers. We have an internal procurement
employee who travels to the harvest location during harvest season to select high quality materials
and supervise the harvest process. The prices of agricultural materials reflect external factors
such as weather conditions, and commodity market fluctuations. We are unable to control these external
factors; however we strive to get the best prices each year for each product. We have a procurement
employee who stays at the harvest market during harvest season and sends back daily price information
to us so that we can purchase raw materials at the best available prices. Internationally, we collect
daily reported price information and utilize it in our decision making process. In addition, each year we predict the expected harvest yields. If the harvest is expected to be good,
we anticipate that the raw material price will decrease and we will use that information to lock
in the best price.
47
Price changes may result in unexpected increases in production costs, and we may be unable to increase
the prices of our products to offset these increased costs and therefore may suffer a reduction to
our profit margins. We do not currently hedge against changes in our raw material prices. If the
costs of raw materials or other costs of production and distribution of our products increase further,
and we are unable to entirely offset these increases by raising the prices of our products, our profit
margins and financial condition could be adversely affected.
Our Customers
In China, we sell our products to supermarket chains, large wholesalers, and others. We are long-term
suppliers of approximately 64 Wal-Mart stores and more than 30 Metro stores. We also supply to Carrefour,
Hualian, Nong-gong-shan, Suguo, Jusco, Lianhua, and RT-mart. We also sell to small customers through
our contract sales representatives in order to reduce sale effort. We plan to gradually increase
the portion of direct sales to our supermarket and chain store clients by reducing the amount sales
that are made through wholesalers.
Internationally, we sell directly to wholesalers, food processors and mass merchandisers. Being in
the food business for more than a decade, we have established long-term relationships with many international
customers, especially in Japan and Korea. Many of our customers are well known in their national
food market. We are a major chestnut product supplier to several customers, including Shinsei Foods
Co. Ltd., Yamato and Traders Co., and Tokai Denpun Co.
Our top ten customers contributed 37.05% of the total revenue in 2007. The following table names our
largest customers and provides the dollar value of sales to these customers and the percentage contribution
to revenues made by these customers.
2007 Top 10 Customers |
|
Customers |
|
Value |
|
Contribution |
|
Shandong Lvan Import & Export Co., Ltd. |
|
12,939,195.31 |
|
15.42 |
% |
Shinsei foods |
|
7,262,757.23 |
|
8.66 |
% |
Tokai Denpun co |
|
2,908,083.28 |
|
3.47 |
% |
Yamato and Traders co. |
|
1,529,586.88 |
|
1.82 |
% |
Wal-Mart (China) |
|
1,445,666.15 |
|
1.72 |
% |
Agrana Fruit |
|
1,162,657.68 |
|
1.39 |
% |
Pinguin Nv Romenstraat |
|
1,138,037.21 |
|
1.36 |
% |
East Anglan Trading Co., Ltd |
|
998,940.30 |
|
1.19 |
% |
Sishui Xilv Food Co., Ltd |
|
901,737.96 |
|
1.07 |
% |
Korea food well |
|
797,318.68 |
|
0.95 |
% |
Total |
|
31,083,980.68 |
|
37.05 |
% |
Our Sales and Marketing Efforts
We seek to expand our client base by:
|
Direct sales communications with our larger customers,
such as Wal-Mart; |
|
|
|
Referrals from existing customers; and |
|
|
|
Participating in domestic and international food exhibitions
and trade conferences. |
Domestically, in 2007, we sold 75.84% of our products directly to our customers with the remaining
24.16% being sold through Shandong Lvan, a food trading company that we have contracted with. Our
sales area covers 19 provinces and administrative regions in China and 41 countries globally.
48
About 65.42% of our total export sales are to Japan and South Korea, about 12.04% of our total export
sales are to the European Union; 11,85% of our total export sales are to Asia (outside of Japan and
South Korea) and about 2.89% of our total export sales are to North America.
Our export sales destinations include:
|
|
Asian and Middle Eastern countries including Japan, South Korea, Singapore, the Philippines, Malaysia,
Kuwait, the United Arab Emirates, Saudi Arabia, Israel, and Qatar; |
|
|
|
|
|
European countries, including Belgium, Germany, France, Netherlands, Spain, and Sweden; and |
|
|
|
|
|
North American countries, including the U.S. and Canada. |
Japan and South Korea are our largest foreign markets, accounting for approximately 65.42% of our 2007
total exports, followed by Asia (other than Japan or Korea) and Europe.
Prior to our going public transactions we had sales to a few countries which we may be prohibited from
selling to by current US sanctions and/or terrorist states. We ceased selling to these countries
as part of the going public transaction. Management is active in reviewing the destination countries
for our products, including reviewing whether our customers are reselling our products to countries
prohibited by US sanctions and/or terrorist states. Should we determine that any of our customers
are violating US sanctions or reselling our products to terrorist states management intends
to take prompt and appropriate action to continue our commitment to comply with all laws applicable
to us, including complying with US sanctions.
We have been preparing for the brand, products marketing, and advertising activities since the second
half of 2007. We sell our products both under the Lorain and Yimeng Lorain
brands and under private labels. We have not spent a significant amount of capital on advertising
in the past. However, we plan on adopting a branding and advertising strategy in 2008 that will reinforce
our domestic branding using customer promotions and media advertising, and establishing international
branding by increasing our market presence, attending more international exhibitions and similar
activities. Currently, our primary strategies are to seek the assistance of marketing and advertising
professionals to showcase the competitive advantages of our products such as packing and brand recognition.
We have also planned to produce commercial ads and marketing materials to refresh and advance the
market acceptance and recognition of our products. We are planning to expend approximately US$1 million
for marketing activities that focus mainly on China for the period from the second quarter of 2008
to the beginning of the third quarter of 2009, of which US$600,000 will be allocated to the broadcast
of TV commercials, US$200,000 will be for newspaper ads, US$100,000 will be used for internet advertising,
and US$100,000 will be used for planning and production expenses related to the advertising campaign.
We will also produce 1,000 sets of English-language marketing video packages to be delivered to potential
clients outside of China who are interested in our products. The budget for these packages is about
US$20,000. The budget and the media to be used are summarized below.
|
China |
Local Media |
National Media |
Amount |
Percentage |
Amount |
Percentage |
TV Commercials |
0.2 million |
33.3% |
0.4 million |
66.7% |
Newspaper Ads |
0.15 million |
75% |
0.05 million |
25% |
Internet Advertising |
0.1 million |
Advertising Campaign |
0.1million |
To finance the campaign, we plan to obtain a US$500,000 working capital loan from a commercial bank
and to use another US$500,000 from our net income over the period from the third quarter of 2008
to the beginning of the third quarter of 2009. We can provide no assurances that we will be able
to obtain such loans on terms favorable to the Company, if at all. We may not be able to obtain adequate
levels of additional financing, whether through equity financing, debt financing or other sources.
Additional financings could result in significant dilution to our earnings per share or the issuance
of securities with rights superior to our current outstanding securities. In addition, we may grant
registration rights to investors purchasing our equity or debt securities in the future. If we are
unable to raise additional financing, we may be unable to implement our long-term business plan,
develop or enhance our products and services, take advantage of future opportunities or respond to
competitive pressures on a timely basis, if at all. In addition, a lack of additional financing could
force us to substantially curtail or cease operations.
49
Our Competition and Our Market Position
The overall food market is fragmented. According to the USDA, the worlds top 50 food manufacturers
shares of packaged food retail sales was less than 30% of the total in 2003. We do not have a significantly
large market share, and are subject to different competitive conditions in each business division.
Chestnut Products
The world market for chestnut products is highly fragmented. The total world-wide consumption of chestnuts
was around 1 million metric tons in 2004, according to the UDSA.
We compete primarily on the basis of the uniqueness of our products, quality, price, and market recognition.
We utilize proprietary and patent pending technology in the production of our chestnut products.
We recently received notice of the acceptance of the patent application but we have yet to finalize
the formal process of obtaining the patent. We believe that the use of this technology gives us an
advantage over our Chinese competitors by allowing us to produce chestnut products that are superior
in quality and to offer more varieties of products than those of our Chinese competitors. We believe
that we enjoy cost advantages over our foreign competitors due to the lower labor and procurement
costs in China.
Our strongest competitors in the Chestnut product market are Hebei Liyun and Foodwell (a Korean company).
Convenience Food Products
The production and sale of convenience food products is currently only a small portion of our total
production, but we expect convenience foods to be an important growth area for us in the future.
Convenience food products market competition is based mostly upon quality and product variety.
We use modern food processing technology, such as nitrogen preservation and self heating devices, in
the production of our convenience food products. Nitrogen preservation is an innovative technology
which has not been widely applied in China. With an increasing demand for wholesome, tasty and safety
convenience food we can utilize our established relationships with numerous customers, especially
large supermarket chains, to market our convenience foods. We have determined that our marketing
efforts for convenience food will mainly focus on the domestic Chinese market.
The convenience food market in China is highly fragmented and we do not face competitive pressure from
any single competitor or small group of competitors.
Frozen, Canned and Bulk Food Products
Our frozen, canned and bulk food division was previously a crucial portion of our business. Despite
its historical importance, because of its relatively low gross margin, we expect that the contribution
of this business sector to our total revenues will gradually decline.
In the frozen, canned and bulk food product market competition is based mostly upon quality, ability
to provide a reliable product supply and customer relationships.
Our strongest competitors in the frozen, canned and bulk food products market are Weitang Langdong,
Yuyao Hongji Food Co. Ltd. and Yantai Pengshun Food Co. Ltd.
Competitive Advantages
We believe that we have a lower cost and more abundant labor supply than our international competitors.
Labor cost is a large portion of total operating costs for food companies, so keeping labor cost
low provides us with a competitive advantage over our international peers.
50
We seek to manage our raw material costs by partially self-supplying various raw materials to our operations.
We also locate our production facilities in locations that are close to our main sources of raw materials
used in the production of our products at those facilities. This emphasis on location provides us
with first-hand market awareness and lower transportation costs. We believe this location strategy
provides us with an advantage over our competitors who do not similarly locate their production facilities
in the vicinity of their raw material suppliers.
We seek to use modern food processing technology and innovation in our formulations and manufacturing
processes to create high quality products. We regularly test our products with customers to ensure
that we are providing high quality products. We maintain high food safety standards, which satisfy
both domestic and international requirements.
We offer a large variety of products, numbering in the hundreds. We are the sole supplier of some products
in China, such as bottom-up chestnuts, sweet core chestnuts and chestnut inner-skin extract. We believe
that we are able to provide our customers with greater selection and a more reliable supply than
many of our competitors, which is especially important for our supermarket chain and large wholesaler
customers.
Our Intellectual Property
Trademarks
We use the trademarks and on all of our domestically sold products and international sales throughout Asia.
Patents
We have developed three proprietary technologies that we have filed patent applications for in the
PRC. We applied for all of the patents in 2005 and recently received notice of the acceptance of
the patent applications but we have to finalize the formal process of obtaining the patent.
The first proprietary technology that we are in the process of patenting relates to the production
of Oden egg packages. Oden is a Japanese style dish consisting of several ingredients such as boiled
eggs, daikon radish, konnyaku, and processed fish cakes stewed in a light, soy-flavored dashi broth.
Ingredients vary according to region and between each household. Our technology relates to the process
we use to control the sterilization of the packages that contain the Oden eggs and related food products.
Oden is considered to be one of the most popular Japanese traditional dishes. The technology we have
developed has significantly advanced our Oden orders from Japan because we are able to deliver a
unique product in terms of freshness and authentic taste that is also a convenience food. This unique
proprietary technology has been an important factor in expanding our convenience products market.
The second technology that we have filed a patent application for relates to the production of our
sweetheart chestnut products, which are preserved chestnut products. The proprietary technology relates
to the process that we use to distribute the syrup used in the processing of these preserved chestnuts
evenly throughout the chestnuts. The process also enhances the texture and preserves the natural
form of the chestnut. The focus of technology is the stability of sweetness controlling to chestnuts
which will maintain the same quality and taste without concerning the quality disparity due to the
certain differences of raw materials. Our sweetheart chestnut is a premium price product, and buyers
will pay more for sweetheart chestnuts than other chestnut products, leading higher sales and greater
profit margins. We believe that our sweetheart chestnuts have the potential to generate approximately
US$1 million in additional profit each year, which would be a material contributor to our profitability.
The third technology that we have filed a patent application for relates to the method and process
that we use to produce an extract from the chestnuts inner skin. In the past, the chestnut
inner skin had been discarded as a waste product. This method allows us to produce an extract that
can then be sold to other food processors (all of whom are currently based in Japan) who package
and sell the extract for use in combination with other foods or drinks. In Japan, chestnuts are a
popular food that can be used for different kinds of products such as food, nutrition supplement,
beverage, and desert. The increasing demand for chestnut extract has allowed us to offer a new product
line that has significantly contributed to our revenues, at little cost since it is made from product
that would otherwise be waste.
51
The proprietary technology referenced above provides us with the competitive advantage of providing
products not generally available from our primary competitors. We take reasonable steps to protect
our proprietary information, such as limiting disclosure of proprietary plans, methods and the like,
and we are seeking further patent protection. Our proprietary information will be more securely protected
if we are able to obtain patents, however, we do not believe that our operations will be materially
impacted by a failure to obtain such patents. We believe that our trade secrets are reasonably and
adequately protected.
Our Employees
As of March 31, 2008, we had a total of 1317 full-time employees and 247 part-time employees. Among
the 1,317 full-time employees, 305 of them have signed employment contracts with Shandong Lorain
and the remaining have signed their employment contracts with Linyi Zhifu Labor Service Company,
an outside company that provides employees to meet our staffing needs. We compensate the employees
of Linyi Zhifu Labor Service Company directly for the services of the employees rendered to us, paying
Linyi Zhifu Labor Service Company a service fee. The following table illustrates the allocation of
these personnel (both direct employees and leased employees) among the various job functions conducted
at our Company.
|
Department |
|
Number of Employees |
|
|
|
|
|
|
|
Production |
|
1,141 |
|
|
Quality Control |
|
24 |
|
|
Domestic Sales |
|
19 |
|
|
Human Resources |
|
5 |
|
|
Research and Development |
|
26 |
|
|
International Sales |
|
25 |
|
|
Finance |
|
19 |
|
|
Sourcing |
|
14 |
|
|
Admin |
|
25 |
|
|
Strategic planning |
|
4 |
|
|
Storage and Distribution |
|
13 |
|
|
Employee Relations |
|
2 |
|
|
Total |
|
1,317 |
|
We believe that our relationship with our employees is good. We compensate our production line employees
by unit produced (piece work) and compensate other employees by salaries and bonus based on performance.
We also provide training for our staff from time to time to enhance their technical and product knowledge
as well as their knowledge of industry quality standards.
We have not experienced any significant problems or disruption to our operations due to labor disputes,
nor have we experienced any difficulties in recruitment and retention of experienced staff.
One of our Chinese subsidiaries, Shandong Lorain has an Employee Relations Department which aims to
advance employees welfare, to assist in the fulfillment of its economic objectives, encourages
employee participation in management decisions and to advance the relations among employees and between employees and management
team.
52
As required by applicable Chinese laws, we have entered into employment contracts with all of our officers,
managers and employees.
Our employees in China participate in a state pension scheme organized by Chinese municipal and provincial
governments. We are required to contribute to the scheme at a rate of 24%, 20% and 19% of the average
monthly salary for the fiscal years ended December 31, 2007, 2006 and 2005, respectively. Most of
the personnel that provide labor to our Company are employed by an outside company. We compensate
the employees of that company directly for the services rendered to us and that company pays the
employees contribution to the pension scheme.
In addition, we are required by Chinese laws to cover employees in China with various types of social
insurance. We have purchased social insurance for all of our employees. We are required to contribute
to the scheme at a rate of 4%, 4% and 3% of the average monthly salary. As is the case with pension
scheme payments, most of the personnel that provide labor to our Company are employed by an outside
company. We compensate the employees of that company directly for the services rendered to us and
that company pays the employees social insurance.
Our Research and Development Activities
Our research and development efforts are focused on three objectives:
|
1. |
Superior product safety and quality; |
|
|
|
|
2. |
The reduction of operating costs; and |
|
|
|
|
3. |
Sustaining growth through the development of new products. |
We have research and development staff at each of our facilities. In total, about 30 of our personnel
are dedicated to research and development.
We rely heavily on customer feedback to assist us in the modification and development of our products.
We also utilize customer feedback to assist us in the development of new varieties of products. On
average, we add ten to twenty new varieties to our product portfolio each year. We also phase out
about 3 to 5 products each year.
The amount we spent on research and development activities during the fiscal years ended December 31,
2007, 2006 and 2005 was not a material portion of our total expenses for those years.
Regulation
We are subject to national and local laws of China, including Chinas environmental laws and regulations.
Under the relevant Chinese environmental laws, all manufacturing enterprises must submit an environmental
impact report to the relevant environmental protection authority before starting production operations.
In addition, manufacturing enterprises must engage professional environmental organizations to monitor
and report on pollutants and emission regularly. The main pollutants generated by our plants are
solid waste and waste water. We have taken the necessary measures to control the discharge of these
pollutants. We are in material compliance with the Chinese environmental laws and regulations as
of March 31, 2008.
Moreover, under the relevant PRC Provisions on Sanitation of Food for Export (for Trial Implementation),
unless an exporters products are exempted from inspection, an inspection is conducted by PRCs
entry-exit inspection and quarantine authorities in accordance with the PRC Law on Import and Export
Commodity Inspection. We have not been exempted from inspection, however, we have been authorized
by the relevant authorities to conduct self-inspection of certain of our export products, and all
of products that we export have been inspected and are qualified for exportation.
53
MANAGEMENT
Directors and Executive Officers
The following sets forth the name and position of each of our current executive officers and directors.
Name |
|
Age |
|
Position |
|
|
|
|
|
Si Chen |
|
45 |
|
Sole Director and Chief Executive Officer |
|
|
|
|
|
Xiaodong Zhou |
|
37 |
|
President and Chief Operating Officer |
|
|
|
|
|
Jing Thomas Wu |
|
37 |
|
Chief Financial Officer and Treasurer |
MR. SI CHEN. Mr. Chen became chief executive officer on May 3, 2007 when we completed our recapitalization of Lorain
Holding, and our sole director on May 13, 2007. Mr. Chen is the founder of our Company .He founded
Shandong Lorain, the first subsidiary of Lorain Group Company, in 1994 and served as the chairman
of the Lorain Group Companies since that time until the Lorain Group Companies were acquired in August,
2006. After the acquisition in August, 2006, Mr. Chen served as a director of Shandong Lorain until
the recapitalization of Lorain Holding. Before establishing Shandong Lorain, Mr. Chen worked for
the county government and was responsible for the local agricultural economic development. Since
1994, Mr. Chen has been in charge of our strategic decisions and operational management of the Lorain
Group Companies and its predecessors.
MR. XIAODONG ZHOU. Mr. Zhou became our president and chief operating officer on May 3, 2007 when we completed our recapitalization
of Lorain Holding. Mr. Zhou joined the Lorain Group Companies in 1994 as a production manager. He
has been the CEO of the Lorain Group Companies since 2000. Before he joined the Lorain Group Companies,
he worked for the county government as an economic official.
MR. JING THOMAS WU. Mr. Wu became our chief financial officer and treasurer on November 20, 2007. Prior to his appointment,
Mr. Wu served as a Senior Consultant at Beijing Tian Qin Consultant Company for the prior eighteen
months. Prior to that, Mr. Wu was the Chief Operating Officer for Caleto (China) Corporation LTD,
a U.S. multinational corporation, headquartered in Beijing from 2001 until he began working for Beijing
Tian Qin Consultant Company. Responsible for all of Caleto (China) Corporation LTDs finance
and accounting functions, he instituted a number of effective programs, including putting into operation
an enterprise resource planning (ERP) management system. Mr. Wu obtained his B.A. in accounting and
international marketing from Nanjing University. He also has a Masters of Business Administration
(MBA) from China Foreign Trade University. Mr. Wu is a Certified Public Account in China.
There are no agreements or understandings for any of our executive officers or directors to resign
at the request of another person and no officer or director is acting on behalf of nor will any of
them act at the direction of any other person.
Directors are elected until their successors are duly elected and qualified.
Board Composition and Committees
The board of directors is currently composed of one person, Si Chen.
We currently do not have standing audit, nominating or compensation committees, although we may form
such committees in the future as the membership of the board of directors increases. Since we do
not currently have an audit committee, we do not have an audit committee financial expert. Our board
of directors handles the functions that would otherwise be handled by an audit committee. Upon the
establishment of an audit committee, the board of directors will determine whether any of the directors
qualify as an audit committee financial expert.
We have not implemented a process for stockholders to send communications to the board of directors
because we have not had significant operations until recently. We intend to establish a reporting
mechanism as soon as practicable.
54
Director Compensation
Historically, we have not paid our directors fees for attending scheduled and special meetings of our
board of directors. In the future, we may adopt a policy of paying independent directors a fee for
their attendance at board and committee meetings. We do reimburse our directors for reasonable travel
expenses related to attendance at board of director meetings.
Family Relationships
There are no family relationships among our director or officers.
Code of Ethics
On April 30, 2007, our board of directors adopted a new code of ethics that applies to our director
and all of our officers and employees, including our principal executive officer, principal financial
officer, and principal accounting officer. The new code addresses, among other things, honesty and
ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including
disclosure requirements under the federal securities laws, confidentiality, trading on inside information,
and reporting of violations of the code. A copy of the Code of Ethics has been filed as Exhibit 14
to our current report on Form 8-K filed on May 9, 2007.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview
The following is a discussion of our program for compensating our named executive officers and director.
Currently, we do not have a compensation committee, and as such, our board of directors is responsible
for determining the compensation of our named executive officers.
Compensation Program Objectives and Philosophy
The primary goals of our policy of executive compensation are to attract and retain the most talented
and dedicated executives possible, to assure that our executives are compensated effectively in a
manner consistent with our strategy and competitive practice and to align executives compensation
with the achievement of our short- and long-term business objectives.
The board of directors considers a variety of factors in determining compensation of executives, including
their particular background and circumstances, such as their training and prior relevant work experience,
their success in attracting and retaining savvy and technically proficient managers and employees,
increasing our revenues, broadening our product line offerings, managing our costs and otherwise
helping to lead our Company through a period of rapid growth.
Mr. Si Chen, our chief executive officer and president, is also our sole director. Mr. Chen plays an
important role in the management of the Company, including determining compensation of officers and
directors. As such, he is primarily responsible for determination of his compensation as an officer
and director of the Company. However, Mr. Chen has adhered to, and continues to adhere to our compensation
policies and other internal governance policies that were established some time ago.
In the near future, we expect that our board of directors will form a compensation committee charged
with the oversight of executive compensation plans, policies and programs of our Company and with
the full authority to determine and approve the compensation of our chief executive officer and make
recommendations with respect to the compensation of our other executive officers. We expect that
our compensation committee will continue to follow the general approach to executive compensation
that we have followed to date, rewarding superior individual and company performance with commensurate
cash compensation.
Elements of Compensation
55
The
compensation determination for executive officers in 2007 was mainly based on a previously-established
compensation policy and internal governance documents. The total amount of compensation extended
to our executive officers is RMB1.15 million per year (approximately USD$ 158,000 per year), which
includes RMB 430,000 (approximately USD $ 59,000) for the Chief Executive Officer, RMB 359,000 (approximately
USD $49,200) for the Chief Operational Officer and RMB360,000 per year (approximately USD $49,300)for
the Chief Financial Officer. Our compensation program for the named executive officers consists of
two elements: base salary and bonus. The base salary we provide is intended to equitably compensate
the named executive officers based upon their level of responsibility, complexity and importance
of role, leadership and growth potential, and experience. We offer bonuses as a vehicle by which
the named executive officers can earn additional compensation depending on individual, business unit
and Company performance. The Company did not provide any other type of compensation to our named
executive officers in 2007.
Base Salary. Our named executive officers receive base salaries commensurate with their roles and responsibilities.
Subject to any applicable employment agreements, base salaries and subsequent adjustments, if any,
are reviewed and approved by our board of directors annually, based on an informal review of relevant
market data and each executives performance for the prior year, as well as each executives
experience, expertise and position. Our officers base salaries are calculated based on the
following factors and the relative weight assigned to each such factor: market data, such as salaries
of officers of companies similar to the Company, makes up 25% of base salary calculation; individuals
experience, expertise and position makes up 30% of base salary calculation; and individuals
performance for the prior year will be the remaining 45% of the base salary calculation. The base
salaries paid to our named executive officers in 2007 are reflected in the Summary Compensation Table below.
Incentive Bonus. Our named executive officers are eligible for an annual performance-based cash bonus in accordance
with the Companys unwritten incentive bonus plan. We provide this bonus opportunity as a way
to attract and retain highly skilled and experienced executive officers and to motivate them to achieve
annual corporate, departmental and individual goals which consist of various revenue, cost and operational
targets established by the board of directors. The bonus is based on the individuals performance
evaluation and consideration of current market conditions. The weight assigned to certain targets
to evaluate individual performance is approximately as follows: overall achievement of goals of such
officer will be 30% of the bonus calculation, the success of marketing new products will be 20% of
the bonus calculation, the performance of safety management of our production lines will be 10% of
the bonus calculation, attendance of such officer is 15% of the bonus calculation, efforts to environmental
protection and energy-saving production is 10% of the bonus calculation, the quality and quantity
of any strategic proposals made by the officer will be 10% of the bonus calculation, and the last
5% will be reserved for other outstanding performance. The bonus amounts are determined following
the end of the fiscal year based on our performance and the performance of our executives. We have
adopted the above standards from the consideration of the needs for our Company as well as from consulting
the similar standards adopted by the industries domestically and nationally. The bonus amounts paid
to our named executive officers in 2007 are reflected in the Summary Compensation Table below.
Stock-Based Awards under the Equity Incentive Plan
Historically, we have not granted equity awards as a component of compensation, and we presently do
not have an equity-based incentive program. In the future, we will likely adopt and establish an
equity incentive plan pursuant to which equity awards may be granted to eligible employees, including
each of our named executive officers, if our board of directors determines that it is in the best
interest of American Lorain and our stockholders to do so.
Retirement Benefits
Currently, we do not provide any company sponsored retirement benefits to any employee, including the
named executive officers.
Perquisites
Historically, we have provided certain of our named executive officers with minimal perquisites and
other personal benefits. We do not view perquisites as a significant element of our compensation
structure, but do believe that perquisites can be useful in attracting, motivating and retaining
the executive talent for which we compete. It is expected that our historical practices regarding
perquisites will continue and will be subject to periodic review by our by our board of directors.
56
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning all cash and non-cash compensation awarded to,
earned by or paid to the following persons for services performed for us and our subsidiaries during
2007 in all capacities. No executive officers received compensation of $100,000 or more in 2007.
As of March 31, 2008 there are no grants outstanding. We have not adopted a new policy or program
for share based awards for employees or directors.
Name and
Principal Position |
|
Year |
|
Salary ($) |
|
Bonus ($) |
|
Stock
Awards
($) |
|
Option
Awards
($) |
|
Non
Equity
Incentive
Plan
Compensation
Earnings
($) |
|
Non
qualified
Deferred
Compensation
Earnings
($) |
|
All Other Compensation
($) |
|
Total
($) |
|
Dimitri Cocorinis,
Former Director,
and CEO (1) |
|
2006
2007 |
|
|
|
|
|
1,500(2)
0 |
|
|
|
|
|
|
|
|
|
1,500(3)
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terry Cononelos,
Former Director,
Secretary,
Treasurer and CFO
(4) |
|
2006
2007 |
|
|
|
|
|
1,500(2)
0 |
|
|
|
|
|
|
|
|
|
1,500(3)
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hisashi Akazawa
(5) |
|
2006
2007 |
|
0
0 |
|
0
0 |
|
0
0 |
|
0
0 |
|
0
0 |
|
0
0 |
|
|
|
0
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Si Chen, principal
Executive officer
and sole director
(6) |
|
2006
2007 |
|
6,300
59,000 |
|
0
0 |
|
0
0 |
|
0
0 |
|
0
0 |
|
0
0 |
|
0
0 |
|
0
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huanxiang Sheng,
Former CFO and
Treasurer (7) |
|
2006
2007 |
|
12,308
49,200 |
|
0
0 |
|
0
0 |
|
0
0 |
|
0
0 |
|
0
0 |
|
0
0 |
|
0
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Wu (8)
CFO |
|
2007
|
|
5,478 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
_____________________________ |
(1) |
Mr. Cocorinis served as our chief executive officer from 1994 until his resignation on April 12, 2007
in connection with the sale by American Lorain to Halter Financial Investments, L.P. of 100,000 newly
issued restricted shares of our Series A Preferred Stock which represented approximately 90% of our
issued and outstanding capital stock and voting control at such time for $455,000. At such time,
Timothy P. Halter became our chief executive officer. |
|
|
(2) |
On February 17, 2006, the board of directors approved the issuance of 150,000 shares of common stock
each to Dimitri Cocorinis and Terry Cononelos, who were officers of American Lorains predecessor,
Millennium Quest, Inc. The issuance of this stock was authorized in consideration of services rendered
by Messrs. Cocorinis and Cononelos to American Lorains predecessor, Millennium Quest, Inc.
The transaction was valued at $1,500 per officer ($0.01 per share) in accordance with FAS-123R. |
|
|
(3) |
Our Company (formerly Millennium Quest) in 2006 adopted FAS123R to account for stock based compensation
for its employee and directors. In 2006, Millennium Quest authorized 300,000 shares for compensation
to officers and directors. The share vested immediately upon grant and issuance. Millennium Quest
valued the compensation at $.01 per share for a total $3,000. The compensation expense was recorded
to Millennium Quests financial statements. The current financial statements which have been
retroactively restated as result of the reverse merger transaction are those of the legal acquiree
(accounting acquirer) and do |
57
|
not recognize expense for the aforementioned stock compensation. The valuation model used to calculate
$.01 per share used by former management considered the market price, trading volume, and price volatility,
of the stock of Millennium Quest and accordingly assigned a value of $.01. Former management has
not indicated a fair value for their services rendered for which they received the stock awards as
compensation. There is no cash settlement of these shares. Based on a post reverse split ratio of
32.84, with all fractional shares rounded down, and offering price of $4.25; the shares would be
valued at $38,820 {300,000 shares / 32.84 = 9,134; 9,134 * $4.25 = $38,820}. |
|
|
(4) |
Mr. Cononelos served as our chief financial officer from 1994 until his resignation on April 5, 2007
in connection with the sale by American Lorain to Halter Financial Investments, L.P. of newly issued
shares of common stock representing approximate 90% of our issued and outstanding capital stock for
$455,000. |
|
|
(5) |
Mr. Hisahsi Akazawa served as our chairman and CEO from the time of formation of Lorain Holdings in
August, 2006 until the completion of the recapitalization of Lorain Holdings on May 3, 2007. |
|
|
(6) |
On May 3, 2007, we acquired Lorain Holding in a recapitalization transaction that was structured as
a share exchange and in connection with that transaction; Mr. Chen became our chief executive officer
and sole director. Prior to the effective date of the recapitalization, Mr. Chen served the Lorain
Group Companies as a director of one of its subsidiaries, Shandong Lorain. Prior to Lorain Holdings
acquiring the Lorain Group Companies in August, 2006, Mr. Chen served as the chairman and principal
executive officer of the Lorain Group Companies. The annual, long term and other compensation shown
in this table include the amount Mr. Chen received in 2006 from the Lorain Group Companies. |
|
|
(7) |
On May 3, 2007, we acquired Lorain Holding in a recapitalization transaction that was structured as
a share exchange and in connection with that transaction; Mr. Huangxiang Sheng became our chief financial
officer. Prior to the effective date of the recapitalization, Mr. Huangxiang Sheng served the
Lorain Group Companies as chief financial officer of our subsidiary, Shandong Lorain. Prior to Lorain
Holdings acquiring the Lorain Group Companies in August, 2006, Mr. Sheng served as the chief financial
officer of the Lorain Group Companies. The annual, long term and other compensation shown in this
table include the amount Mr. Huangzian Sheng received in 2006 from the Lorain Group Companies. Mr.
Sheng resigned as the chief financial officer on November 20, 2007. |
|
|
(8) |
Mr. Thomas Wu has served as our Chief Financial Officer since November 2007, after the resignation
of our former CFO, Mr. Sheng. |
Bonuses and Deferred Compensation
Other than the incentive bonus previously described in this prospectus, we do not have any bonus, deferred
compensation or retirement plan. We do not have a compensation committee. All decisions regarding
compensation are determined by our entire board of directors.
Stock Option and Stock Appreciation Rights
We do not currently have a stock option plan or stock appreciation rights plan. No stock options or
stock appreciation rights were awarded during the fiscal year ended December 31, 2007.
Employment Agreements
We and our subsidiary, Shandong Lorain, have employment agreements with the following three executive
officers:
Mr. Si Chen - our CEOs employment agreement with Shandong Lorain became effective as of March
2, 2005. Mr. Chen is an employee-at-will of Shandong Lorain. Our CEOs employment agreement
with us became effective as of May 3, 2007. Mr. Chen is an employee-at-will of ours.
Mr. Xiandong Zhou - our COOs employment agreement with Shandong Lorain became effective as of
July 2, 2002. Mr. Zhou is an employee-at-will of Shandong Lorain. Our COOs employment agreement
with us became effective as of May 3, 2007. Mr. Zhou is an employee-at-will of ours.
58
Mr. Jing Thomas Wu - our CFOs employment agreement with Shandong Lorain became effective as of
November 20, 2007. Mr. Wu is an employee-at-will of Shandong Lorain. Our CFOs employment agreement
with us became effective as of November 20, 2007. Mr. Wu is an employee-at-will of ours.
Each of the employment agreements provide that the executives will be provided cash compensation. Pursuant
to the existing employment agreements, we should pay about RMB 1,210,000 to our executive officers.
The cash payable to Mr. Chen amounts to RMB 450,000 per year, the cash payable to Mr. Zhou amounts
to RMB 400,000 per year and the amount payable to Mr. Wu is RMB 360,000 per year. The employment
agreements include standard non-competition and confidentiality covenants, and the agreements with
Shandong Lorain provide that ten thousand RMB (approximately $1250) will be paid to the non-breaching
party if there is a breach of contract. The employment agreements do not provide any change in control
or severance benefits to the executives, and we do not have any separate change-in-control agreements
with any of our executive officers.
Director Compensation
No cash compensation or other compensation was paid to our current director for services as a director
during the fiscal year ended December 31, 2007 and we have no standard arrangement pursuant to which
any director is compensated for services as a director.
Indemnification of Directors and Executive Officers and Limitation of Liability
Our bylaws provide for the indemnification of our present and prior directors and officers or any person
who may have served at our request as a director or officer of another corporation in which we
own
shares of capital stock or of which we are a creditor, against expenses actually and necessarily
incurred by them in connection with the defense of any actions, suits or proceedings in which they,
or any of them, are made parties, or a party, by reason of being or having been director(s) or
officer(s)
of us or of such other corporation, in the absence of negligence or misconduct in the
performance
of their duties. This indemnification policy could result in substantial expenditure
by us, which
we may be unable to recoup.
Insofar as indemnification by us for liabilities arising under the Exchange Act may be permitted to
our directors, officers and controlling persons pursuant to provisions of the Certificate of Incorporation
and Bylaws, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification
is against public policy and is, therefore, unenforceable. In the event that a claim for indemnification
by such director, officer or controlling person of us in the successful defense of any action, suit
or proceeding is asserted by such director, officer or controlling person in connection with the
securities being offered, we will, unless in the opinion of our counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the Exchange Act and will be governed
by the final adjudication of such issue.
At the present time, there is no pending litigation or proceeding involving a director, officer, employee
or other agent of ours in which indemnification would be required or permitted. We are not aware
of any threatened litigation or proceeding which may result in a claim for such indemnification.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Transactions
On May 3, 2007, we consummated the transactions contemplated by a share exchange agreement with the
owners of the issued and outstanding capital stock of Lorain Holding. Pursuant to the share exchange
agreement, we acquired 100% of the outstanding capital stock of Lorain Holding in exchange for 697,663
shares of our Series B Voting Convertible Preferred Stock, which were converted into 16,307,872 shares
of our common stock on July 17, 2007 when an amendment to our certificate of incorporation increasing
the total authorized shares became effective. As a result of this transaction, Mr. Akazawa, a Japanese
citizen, became the beneficial owner of approximately 65.43% of our outstanding capital stock.
On May 3, 2007 we entered into a cancellation and escrow agreement with Halter Financial Investments,
L.P. (HFI), Halter Financial Group, L.P. (HFG) and Securities Transfer Corporation,
whereby HFI and HFG agreed to deposit into escrow 229,227 shares of our common stock that they held
upon conversion of their Series A Voting Convertible Preferred Stock into common stock (taking into
account the contemplated 1-for-32.84 reverse stock split and the conversion of Series B Voting Convertible Preferred Stock into common stock) and agreed that
if we report, on a consolidated basis, in our Annual Report filed with the U.S. Securities and Exchange
Commission, net income of $12.5 million for fiscal 2008, HFI and HFG will transfer to us for cancellation
such shares in order to reduce the ownership of a certain group of stockholders. If this performance
threshold is not met, the shares will be returned to HFI and HFG. Our former director Timothy P.
Halter is the Chairman of both HFI and HFG.
59
On April 10, 2007, we completed the sale of an aggregate of 100,000 restricted shares of our Series
A Preferred Stock to HFI for a cash purchase price of $455,000 pursuant to a Stock Purchase Agreement
entered into between us and HFI dated as of April 5, 2007. The Series A Preferred Stock was entitled
to 428.56 votes per share and represented approximately 90% of the capital stock and voting control
of the Company as of the date of such acquisition. The transaction resulted in a change in control
of the Company. HFI used its own funds to acquire the Series A Preferred Stock which is convertible
into Common Stock at the option of the holder at any time on or after the earliest to occur of: (a)
September 30, 2007; (b) the date on which we complete a business combination with a corporation or
business entity with current business operations; or (c) the date such conversion is approved by
our board of directors. The Preferred Stock is also convertible at our option upon five days advance
notice to the holder.
On February 17, 2006, the board of directors approved the issuance of 150,000 shares of common stock
each to Dimitri Cocorinis and Terry Cononelos, American Lorains former officers, or a total
of 300,000 shares of common stock. The issuance of this stock was authorized in consideration of
services rendered by Messrs. Cocorinis and Cononelos to American Lorain. The transaction was valued
at $3,000 ($0.01 per share).
On February 14, 2007 our subsidiary Shandong Lorain entered into a financial advisory agreement with
HFG International, Limited, a Hong Kong corporation, whereby HFG agreed to provide certain financial
advisory and consulting services in implementing a restructuring plan, advising us on matters related
to a capital raising transaction and facilitating Lorain Holdings going public transaction.
In consideration for these services, HFG International, Limited was paid a fee of $450,000 upon the
closing of the going public transaction. Our former director Timothy P. Halter is the principal stockholder
and the chief executive officer of HFG International, Limited.
On or about February 1, 2006, C&C Investment Partnership, a partnership owned by Messrs. Cocorinis
and Cononelos, loaned American Lorain $20,000 to cover business operations and outstanding payables.
The loan is repayable, with interest at 7% per annum, on or before August 1, 2006 or the date on
which the Company enters into a merger, reorganization or acquisition transaction, whichever occurs
first. The former board of directors of the Company consisted of Messrs. Cocorinis and Cononelos,
so this transaction cannot be considered the result of arms length negotiations. On August
11, 2006, C&C Investment Partnership agreed to extend the due date of this note for an additional
120 days. Pursuant to a Settlement and Stock Issuance Agreement dated on or about April 5, 2007,
C&C Investment Partnership agreed to accept 2,500,000 shares of restricted common stock in the
Company in payment and satisfaction of all amounts owed to C&C Investment Partnership by the Company.
In August 2006, Lorain Holding acquired certain interests in the Lorain Group Companies from a British
Virgin Islands company controlled by Si Chen, our chairman and sole director. Mr. Chen served the
Lorain Group Companies as a director of one of its subsidiaries, Shandong Lorain. Prior to Lorain
Holdings acquiring the Lorain Group Companies, Mr. Chen served as the chairman and principal executive
officer of the Lorain Group Companies.
Director Independence Standards
The Companys Board of Directors has determined that no member of the Board of Directors qualifies
as an independent director in accordance with the listing requirements of NASDAQ.
CHANGE IN ACCOUNTANTS
On May 3, 2007, concurrent with the change in control transaction discussed above, our Board of Directors
elected to continue the existing relationship of our new subsidiary Lorain Holding with Samuel H.
Wong & Co., LLP, Certified Public Accountants and appointed Samuel H. Wong & Co., LLP, Certified
Public Accountants as our independent auditor, and we signed an engagement letter and formally engaged
Samuel H. Wong & Co, LLP as our auditors on May 23, 2007. Additionally, concurrent with the decision
to maintain our relationship with Samuel H. Wong & Co., LLP, Certified Public Accountants, our
Board of Directors approved the dismissal of Michael J. Larson, LLC as our independent auditor, effective
upon the filing of Companys 10-QSB disclosing financial results for the first quarter of 2007
with the Commission on May 21, 2007.
60
No accountants report issued by Michael J. Larson, LLC on the financial statements for either
of the past two (2) years contained an adverse opinion or a disclaimer of opinion or was qualified
or modified as to uncertainty, audit scope or accounting principles, except for a going concern opinion
expressing substantial doubt about the ability of us to continue as a going concern.
During our two most recent fiscal years (ended December 31, 2006 and 2005) and from January 1, 2007
to the date of dismissal, there were no disagreements with Michael J. Larson, LLC on any matter of
accounting principles or practices, financial disclosure, or auditing scope or procedure. There were
no reportable events, as described in Item 304(a)(1)(v) of Regulation S-K, during our two most recent
fiscal years (ended December 31, 2006 and 2005) and from January 1, 2007 to the date of dismissal.
We furnished a copy of a disclosure substantially similar to the proceeding three paragraphs to Michael
J. Larson, LLC and requested Michael J. Larson, LLC to furnish us with a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the statements made by us herein
in response to Item 304(a) of Regulation S-K and, if not, stating the respect in which it does not
agree. A copy of the letter was filed by us as Exhibit 16.1 to our current report on Form 8-K, filed
on May 25, 2007.
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the selling stockholders and the shares
offered by them in this prospectus. Beneficial ownership is determined in accordance with the rules
of the SEC. In computing the number of shares beneficially owned by a selling stockholder and the
percentage of ownership of that selling stockholder, shares of common stock underlying shares of
convertible preferred stock, options or warrants held by that selling stockholder that are convertible
or exercisable, as the case may be, within 60 days of May 12, 2008 are included. Those shares, however,
are not deemed outstanding for the purpose of computing the percentage ownership of any other selling
stockholder. Each selling stockholders percentage of ownership in the following table is based
upon 24,935,421 shares of common stock outstanding as of May 13, 2008 (the 24,935,421 shares of common
stock does not include 1,875,159 shares issuable upon the exercise of certain warrants held by selling
stockholders). Does not include 1,875,159 shares issuable upon the exercise of certain warrants held
by selling stockholders.
The named selling stockholders acquired the securities being registered for resale in the following
list from several transactions our Company had completed before and after the recapitalization on
May 3, 2007. On April 10, 2007, our Company (then known as Millennium Quest, Inc.) completed the
sale of an aggregate of 100,000 restricted shares of its Series A Voting Convertible Preferred Stock
(the Preferred Stock) to Halter Financial Investments, L.P. (the Purchaser)
for a cash purchase price of $455,000 pursuant to the Stock Purchase Agreement entered into between
the Company and Purchaser and dated as of April 5, 2007. The Preferred Stock is entitled to 428.56
votes per share and is convertible into 428.56 shares of Common Stock. On July 30, 2007, in
accordance with the Certificate of Designation of the Series A Preferred Stock, the purchaser requested
to convert their shares of Series A Preferred Stock into shares of the common stock, par value
$.001 per share (the Common Stock) of the Company on the basis of 13.04994 shares of Common Stock for each 1 share of Series A
Preferred Stock (after giving effect to the recent 32.84-for-1 reverse stock split). The purchaser
designated 626,397 shares to be issue to Halter Financial Investments, LB and 678,596 shares to be
issued to Halter Financial Group, LP respectively.
At the closing of the Stock Purchase Agreement, C&C Investment Partnership (C&C),
a partnership owned by the Companys two former officers, entered into a Settlement and Stock
Issuance Agreement (the Settlement Agreement) with the Company, pursuant to which C&C
and its principals agreed to accept the issuance to them of a total of 2,500,000 shares of restricted
Common Stock of the Company in full payment and satisfaction of $25,000 in principal amount of notes
payable obligations to C&C. On April 17, 2007, these shares were issued to Dimitri Cocorinis
and Terry Cononelos, the former officers of the Company as well as the partners of C&C, each
deemed to be a beneficial owner of the 1,250,000 shares held of record by C&C in cancellation
of debt as described above. The shares issuable under the Settlement Agreement will not participate
in the special distribution. The holders of these shares will be granted the same piggyback registration
rights as the Purchaser. In addition to the above deemed shares, on February 17, 2006, Dimitri
Cocorinis and Terry Cononelos each were deemed 150,000 shares of restricted common stock of company
in consideration of services rendered by them to the Company. Cocorinis and Cononelos have owned
1,836,925 and 1,875,456 shares of common stock of Company.
On April 24, 2007, our Company (under its former name Millennium Quest, Inc), entered
into consulting agreements (Consulting Agreements) with Heritage Management Consultants, Inc.
(Heritage) and Chunhua Xiong (Consultant), respectively. Each
of Heritage and Consultant has been engaged to assist the Company in its efforts to consummate a combination transaction with a privately
held business entity. In consideration for the services to be provided under the Consulting
Agreements, Heritage and Consultant received 1,642,000, and 4,105,000 shares of the Companys
common stock, respectively. Heritage and Mr. Xiong own 50,000 and 125,000 common stock of the Company
respectively after giving effect to the recent 32.84-for-1 reverse stock split.
61
On May 3, 2007, we also completed a private placement pursuant to which we issued and sold to 56 accredited
investors 604,674 shares of our Series B Voting Convertible Preferred Stock for approximately $19.8
million pursuant to a Securities Purchase Agreement dated May 3, 2007. On July 17, 2007 the above
issued 604,674 shares of our Series B Voting Convertible Preferred Stock were subsequently converted
into 6,990,401 shares of our common stock, immediately following the effectiveness of an amendment
to our charter that, among other things, increased the number of our authorized shares of common
stock from 20,000,000 to 200,000,000. Upon the consummation of the recapitalization, the former stockholders of Lorain Holding became our
controlling stockholders. The issuance of our shares to these investors was made in reliance on the
exemption provided by Section 4(2) of the Securities Act for the offer and sale of securities not
involving a public offering and Regulation D promulgated thereunder.
In connection with the above transaction, we also granted the above 56 accredited investors and Sterne
Agee & Leach, Inc. (the Sterne Agee) and Civilian Capital, Inc. (the Civilian),
the placement agent and its designee three-year warrants to purchase 1,887,395 shares of our Common
Stock exercisable at $4.25 per share and include piggyback registration rights to register such shares.
Among which, Sterne Agee & Civilian is eligible to purchase up to an aggregate of 342,531 and
146,799 shares of our common stock respectively, being registered for resale in the following list.
No selling stockholders are employees or suppliers of ours or our affiliates. Except as specifically
set forth in the footnotes to the table, none of the selling stockholders has held a position as
an officer or director of the Company, nor has any selling stockholder had any material relationship
of any kind with us or any of our affiliates. All information with respect to share ownership has
been furnished by the selling stockholders. The shares being offered are being registered to permit
public secondary trading of the shares and each selling stockholder may offer all or part of the
shares owned for resale from time to time. In addition, none of the selling stockholders has any
family relationships with our officers, directors or controlling stockholders. Furthermore, except
for Civilian Capital, Inc., no selling stockholder is a registered broker-dealer or an affiliate
of a registered broker-dealer.
For additional information, refer to Security Ownership of Certain Beneficial Owners and Management
below.
The term selling stockholders also includes any transferees, pledgees, donees, or other
successors in interest to the selling stockholders named in the table below. To our knowledge, subject
to applicable community property laws, each person named in the table has sole voting and investment
power with respect to the shares of common stock set forth opposite such persons name. We will
file a supplement to this prospectus (or a post-effective amendment hereto, if necessary) to name
successors to any named selling stockholders who are able to use this prospectus to resell the securities
registered hereby.
Name and Address |
Shares
Beneficially
Owned Before
the Offering |
|
Maximum
Number of
Shares to be Sold |
|
Beneficial
Ownership
After the
Offering (1) |
|
Percentage of
Common
Stock Owned
After Offering (1) |
JLF Partners I, LP (2)
c/o JLF Asset Management, LLC
2775 Via De La Valle, Suite 204
Del Mar, CA 92014
Attn: Hien Tran |
836,199 |
|
836,199 |
|
0 |
|
* |
JLF Partners II, LP (3)
c/o JLF Asset Management, LLC
2775 Via De La Valle, Suite 204
Del Mar, CA 92014
Attn: Hien Tran |
58,940 |
|
58,940 |
|
0 |
|
* |
62
Name and Address |
Shares
Beneficially
Owned Before
the Offering |
|
Maximum
Number of
Shares to be Sold |
|
Beneficial
Ownership
After the
Offering (1) |
|
Percentage of
Common
Stock Owned
After Offering (1) |
JLF Offshore Fund, Ltd. (4)
c/o JLF Asset Management, LLC
2775 Via De La Valle, Suite 204
Del Mar, CA 92014
Attn: Hien Tran |
1,013,022 |
|
1,013,022 |
|
0 |
|
* |
Mortar Rock Offshore, Ltd. (5)
c/o Mortar Rock Capital Management
200 Park Avenue, 33rd Floor
New York, NY 10166
Attn: Randy Saluck |
114,414 |
|
114,414 |
|
0 |
|
* |
Mortar Rock Capital, LP(6)
c/o Mortar Rock Capital Management
200 Park Avenue, 33rd Floor
New York, NY 10166
Attn: Randy Saluck |
309,620 |
|
309,620 |
|
0 |
|
* |
Guerrilla Partners, LP (7)
c/o Peter Siris
237 Park Avenue, 9th Floor
New York, NY 10017 |
102,001 |
|
102,001 |
|
0 |
|
* |
Hua-Mei 21st Century Partners, LP (8)
c/o Peter Siris
237 Park Avenue, 9th Floor
New York, NY 10017 |
127,202 |
|
127,202 |
|
0 |
|
* |
Gary C. Evans (9)
1808 Point de Vue
Flower Mound, TX 75022 |
424,035 |
|
424,035 |
|
0 |
|
* |
Carolyn Prahl (10)
5133 Lake in the Woods
Lakeland, FL 33813 |
42,403 |
|
42,403 |
|
0 |
|
* |
Silver Rock I, Ltd. (11)
c/o FCIM Corp.
117 East 57th Street, #50C
New York, NY 10022
Attn: Ezzat Jallad |
120,001 |
|
120,001 |
|
0 |
|
* |
Kensington Partners, L.P. (12)
200 Park Avenue, Suite 3300
New York, NY 10166
Attn: Richard Keim |
371,372 |
|
371,372 |
|
0 |
|
* |
Bald Eagle Fund, Ltd. (13)
200 Park Avenue, Suite 3300
New York, NY 10166
Attn: Richard Keim |
17,052 |
|
17,052 |
|
0 |
|
* |
Charles Nirenberg (14)
200 Park Avenue, Suite 3300
New York, NY 10166
Attn: Richard Keim |
13,080 |
|
13,080 |
|
0 |
|
* |
Peter Orthwein (15)
200 Park Avenue, Suite 3300
New York, NY 10166
Attn: Richard Keim |
22,530 |
|
22,530 |
|
0 |
|
* |
Richard D. Squires(16)
100 Crescent Court, Suite 450
Dallas, TX 75201 |
84,806 |
|
84,806 |
|
0 |
|
* |
63
Name and Address |
Shares
Beneficially
Owned Before
the Offering |
|
Maximum
Number of
Shares to be Sold |
|
Beneficial
Ownership
After the
Offering (1) |
|
Percentage of
Common
Stock Owned
After Offering (1) |
Carlyle Multi-Strategy Master Fund, Ltd. (17)
c/o Carlyle Blue Wave Partners
Management LP
1177 Avenue of Americas, 16th Floor
New York, NY 10036
Attn: Chief Legal Officer |
508,843 |
|
508,843 |
|
0 |
|
* |
Jayhawk Private Equity Fund, L.P. (18)
5410 West 61st Place, Suite 100
Mission, KS 66205 |
1,595,677 |
|
1,595,677 |
|
0 |
|
* |
Jayhawk Private Equity Co-Invest Fund, L.P. (19)
5410 West 61st Place, Suite 100
Mission, KS 66205 |
100,466 |
|
100,466 |
|
0 |
|
* |
Alpha Capital Anstalt (20)
c/o LH Financial Services Corp.
150 Central Park South, Second Floor
New York, NY 10019
Attn: Ari Kloger |
127,210 |
|
127,210 |
|
0 |
|
* |
The Nutmeg Mercury Fund, L.L.L.P. (21)
c/o The Nutmeg Group, LLC
3346 Commercial Ave.
Northbrook, IL 60062
Attn: Randi White |
106,008 |
|
106,008 |
|
0 |
|
* |
Black Diamond Fund, LLLP (22)
c/o Brandon S. Goulding
3346 Commercial Ave.
Northbrook, IL 60062 |
169,614 |
|
169,614 |
|
0 |
|
* |
Professional Traders Fund, LLC (23)
1400 Old County Road, Suite 206
Westbury, New York 11590
Attn: Marc K. Swickle |
42,403 |
|
42,403 |
|
0 |
|
* |
Professional Offshore Opportunity Fund, Ltd. (24)
1400 Old County Road, Suite 206
Westbury, New York 11590
Attn: Marc K. Swickle |
63,604 |
|
63,604 |
|
0 |
|
* |
Excalibur Limited Partnership (25)
c/o William Hechter
33 Prince Arthur Avenue
Toronto, Ontario, Canada 75R 1B2 |
169,614 |
|
169,614 |
|
0 |
|
* |
Excalibur Limited Partnership II (26)
c/o William Hechter
33 Prince Arthur Avenue
Toronto, Ontario, Canada 75R 1B2 |
84,806 |
|
84,806 |
|
0 |
|
* |
Outpoint Offshore Fund, Ltd. (27)
c/o Outpoint Capital Management, LLC
237 Park Ave., Suite 900
New York, NY 10017 |
127,210 |
|
127,210 |
|
0 |
|
* |
Iroquois Master Fund Ltd. (28)
c/o Iroquois Master Fund Ltd.
641 Lexington Ave. 26th Floor
New York, NY 10022
Attn: Joshua Silverman |
53,004 |
|
53,004 |
|
0 |
|
* |
64
Name and Address |
Shares
Beneficially
Owned Before
the Offering |
|
Maximum
Number of
Shares to be Sold |
|
Beneficial
Ownership
After the
Offering (1) |
|
Percentage of
Common
Stock Owned
After Offering (1) |
Suzette Doucet (29)
c/o Doucet Asset Management, LLC
2204 Lakeshore Drive, Suite 218
Birmingham, AL 35209
Attn: Chris Doucet |
21,201 |
|
21,201 |
|
0 |
|
* |
James B. Lisle and W. Pauline Lisle (30)
500 NW 14th Street
Oklahoma City, OK 73103 |
5,299 |
|
5,299 |
|
0 |
|
* |
Donna H. Dodson (31)
230 Rodriguez St. A
Santa Fe, NM, 87501-2908 |
21,201 |
|
21,201 |
|
0 |
|
* |
Ultra DTD LLC (32)
c/o Donna H. Dodson
230 Rodriguez St. A
Santa Fe, NM, 87501-2908 |
10,600 |
|
10,600 |
|
0 |
|
* |
Dan A. Boyington 1990 Rev. Trust (33)
c/o Dan Boyington
609 Glenridge Rd.
Edmond, OK 73013 |
12,720 |
|
12,720 |
|
0 |
|
* |
Donald J. Timberlake (34)
1600 Elmhurst
Oklahoma City, OK 73121 |
5,299 |
|
5,299 |
|
0 |
|
* |
Jack Thompson IRA (35)
211 N. Robinson, Suite 200
Oklahoma City, OK 73102 |
5,299 |
|
5,299 |
|
0 |
|
* |
Robert G. Rader & Judith T. Rader TTEES
of the Rader Living Trust dtd. 9-2-97 (36)
7009 No. Shawnee Dr.
Oklahoma City, OK 73116 |
5,299 |
|
5,299 |
|
0 |
|
* |
O. Clifton Gooding (37)
3428 Hemlock Ave.
Oklahoma City, OK 73121 |
5,299 |
|
5,299 |
|
0 |
|
* |
William H. Garrett Rev. Trust (38)
c/o Capital West Securities
211 N. Robinson, Ste. 200
Oklahoma City, OK 73102
Attn: Ann Garrett |
5,299 |
|
5,299 |
|
0 |
|
* |
Anne Wileman Workman Trust (39)
1814 Huntington Ave.
Nichols Hills, OK 73116-5524 |
5,299 |
|
5,299 |
|
0 |
|
* |
Restated Gene F. Boyd Rev. Living Trust
DTD 1/20/00 (40)
c/o Gene Boyd
712 Franklin Court
Ardmore, OK 83401 |
10,600 |
|
10,600 |
|
0 |
|
* |
J. David Jensen, IRA (41)
c/o J. David Jensen
1904 Huntington Ave.
Oklahoma City, OK 73116 |
10,600 |
|
10,600 |
|
0 |
|
* |
Robert O. McDonald (42)
1244 NW 63
Oklahoma City, OK 73111 |
12,000 |
|
12,000 |
|
0 |
|
* |
65
Name and Address |
Shares
Beneficially
Owned Before
the Offering |
|
Maximum
Number of
Shares to be Sold |
|
Beneficial
Ownership
After the
Offering (1) |
|
Percentage of
Common
Stock Owned
After Offering (1) |
Yuexing Zhu (43)
Baiyun Road No. 220-1
Guiyang City, China 550008 |
42,403 |
|
42,403 |
|
0 |
|
* |
Yong Ma (44)
4-2004 Taiyue Yuan Xiao Qu
Zhichunlu, Haidian
Beijing, China 100088 |
84,806 |
|
84,806 |
|
0 |
|
* |
Xuan Zhao (45)
Room 802, 258-12, Tiandeng Road
Shanghai, China 200237 |
84,806 |
|
84,806 |
|
0 |
|
* |
Quanfang Ji (46)
8314 Inverness Dr.
Madison, WI 53717 |
24,000 |
|
24,000 |
|
0 |
|
* |
Songling Gan (47)
1599 Unit 30 Flat 1602, Ding Xiang Road
Shanghai, China 200135 |
127,212 |
|
127,212 |
|
0 |
|
* |
Youliang Tang (48)
23-6D, Yitian Garden, Fuqiang Road
Futian District, Shenzhen China 518000 |
169,614 |
|
169,614 |
|
0 |
|
* |
Jianwei Huang (49)
3A-1001, Ming Xi Gu Garden
No. 12, Gongye Road 6
Shenzhen, China |
24,000 |
|
24,000 |
|
0 |
|
* |
Columbia China Capital Group, Inc.(50)
Mid-Section of Beihuan Road
Junan County, Shandong Province, China
276600
Attn: Jinhua Zhang |
12,513 |
|
12,513 |
|
0 |
|
* |
Yali Lin (51)
Mid-Section of Beihuan Road
Junan County, Shandong Province, China
276600
Attn: Jinhua Zhang |
21,858 |
|
21,858 |
|
0 |
|
* |
Jingyan Liu (52)
Mid-Section of Beihuan Road
Junan County, Shandong Province, China
276600
Attn: Jinhua Zhang |
21,858 |
|
21,858 |
|
0 |
|
* |
Zhenwei Ji (53)
Mid-Section of Beihuan Road
Junan County, Shandong Province, China
276600
Attn: Jinhua Zhang |
367,807 |
|
367,807 |
|
0 |
|
* |
Hong Kong Shun Ho Investment Group
Limited (54)
Unit 503, 5/FL, Silvercord, Tower 2, 30
Canton Road, Tsimshatsui, Kowloon
Hong Kong
Attn: Tan Wang |
42,403 |
|
42,403 |
|
0 |
|
* |
66
Name and Address |
Shares
Beneficially
Owned Before
the Offering |
|
Maximum
Number of
Shares to be Sold |
|
Beneficial
Ownership
After the
Offering (1) |
|
Percentage of
Common
Stock Owned
After Offering (1) |
Budworth Investments Ltd. (55)
c/o Harbinger Venture Management Co., Ltd.
7F, No. 187, Tiding Blvd., Sec. 2, Neihu
Taipei , Taiwan 114 R.O.C.
Attn: Teh-Chien Chou |
148,412 |
|
148,412 |
|
0 |
|
* |
Harbinger (BVI) Venture Capital Corp.(56)
c/o Harbinger Venture Management Co., Ltd.
7F, No. 187, Tiding Blvd., Sec. 2, Neihu
Taipei , Taiwan 114 R.O.C.
Attn: Teh-Chien Chou |
275,623 |
|
275,623 |
|
0 |
|
* |
Halter Financial Investments, L.P. (57)
12890 Hilltop Road
Argyle, Texas 76226 |
626,397 |
|
626,397 |
|
0 |
|
* |
Halter Financial Group, L.P. (58)
12890 Hilltop Road
Argyle, Texas 76226 |
678,596 |
|
678,596 |
|
0 |
|
* |
Chunhua Xiong (59)
Floor 7, Room 702, 128 Prinsep Street,
Singapore 188647 |
125,000 |
|
125,000 |
|
0 |
|
* |
Heritage Management Consultants, Inc. (60)
101 Watersedge
Hilton Head Island, SC, 29928 |
50,000 |
|
50,000 |
|
0 |
|
* |
Dimitri Cocorinis (61)
1200 South Bonneville Drive
Salt Lake City, UT 84108 |
56,521 |
|
56,521 |
|
0 |
|
* |
Terry Cononelos(62)
4089 Mount Olympus Way
Salt Lake City, UT 84124 |
56,521 |
|
56,521 |
|
0 |
|
* |
Sterne Agee & Leach, Inc. (63)
800 Shades Creek Parkway, Suite 700
Birmingham, Alabama 35209 |
342,531 |
|
342,531 |
|
0 |
|
* |
Civilian Capital, Inc.(64)
220 E Buffalo St., Suite 403
Milwaukee, WI 53202 |
146,799 |
|
146,799 |
|
0 |
|
* |
Total |
10,470,831 |
|
10,470,831 |
|
0 |
|
* |
* Less than 1%
(1) Assumes that all securities offered are sold.
(2) Includes 696,833 shares of our common stock and 139,366 shares underlying the
warrant to purchase shares of our common stock. Jeffrey L. Feinberg is the managing member of JLF
Asset Management, LLC, which serves as the management company and/or investment manager to JLF Partners
I, L.P. Mr. Feinberg has voting and investment control over the securities held by JLF Partners I,
L.P.
(3) Includes 49,117 shares of our common stock and 9,823 shares underlying the warrant
to purchase shares of our common stock. Jeffrey L. Feinberg is the managing member of JLF Asset Management,
LLC, which serves as the management company and/or investment manager to JLF Partners II, L.P. Mr.
Feinberg has voting and investment control over the securities held by JLF Partners II, L.P.
(4) Includes 844,185 shares of our common stock and 168,837 shares underlying the
warrant to purchase shares of our common stock. Jeffrey L. Feinberg is the managing member of JLF
Asset Management, LLC, which serves as the management company and/or investment manager to JLF Offshore
Fund, Ltd. Mr. Feinberg has the sole voting and investment voting and investment control over the
securities held by JLF Off Shore Fund, Ltd.
67
(5) Includes 95,345 shares of our common stock and 19,069 shares underlying the warrant
to purchase shares of our common stock. Randy Saluck has sole voting and investment control over
the securities held by Mortar Rock Offshore, Ltd.
(6) Includes 258,017 shares of our common stock and 51,603 shares underlying the warrant
to purchase shares of our common stock. Randy Saluck has sole voting and investment control over
the securities held by Mortar Rock Capital, LP.
(7) Includes 85,001 shares of our common stock and 17,000 shares underlying the warrant
to purchase shares of our common stock. Peter Siris and Leigh Curry are the Managing Directors of
Guerrilla Capital Management, LLC, which is the General Partner of Guerrilla Partners, LP and have
voting power and investment power over securities held by Guerrilla Partners, LP.
(8) Includes 106,002 shares of our common stock and 21,200 shares underlying the warrant
to purchase shares of our common stock. Peter Siris and Leigh Curry are the Managing Directors of
Guerrilla Capital Management, LLC, which is the General Partner of Hua - Mei 21st Century Partners, LP and have voting power and investment power over securities held by Hua - Mei
21st Century Partners, LP.
(9) Includes 353,363 shares of our common stock and 70,672 shares underlying the warrant
to purchase shares of our common stock.
(10) Includes 35,336 shares of our common stock and 7,067 shares underlying the warrant to purchase
shares of our common stock.
(11) Includes 100,001 shares of our common stock and 20,000 shares underlying the warrant to purchase
shares of our common stock. Rima Salam has sole voting and investment control over the securities
held by Silver Rock I, Ltd.
(12) Includes 309,477 shares of our common stock and 61,895 shares underlying the warrant to purchase
shares of our common stock. Dick Keim has sole voting and investment control over the securities
held by Kensington Partners, LP.
(13) Includes 14,210 shares of our common stock and 2,842 shares underlying the warrant to purchase
shares of our common stock. Dick Keim has sole voting and investment control over the securities
held by Bald Eagle Fund, Ltd.
(14) Includes 10,900 shares of our common stock and 2,180 shares underlying the warrant to purchase
shares of our common stock.
(15) Includes 18,775 shares of our common stock and 3,755 shares underlying the warrant to purchase
shares of our common stock.
(16) Includes 70,672 shares of our common stock and 14,134 shares underlying the warrant to purchase
shares of our common stock.
(17) Includes 424,036 shares of our common stock and 84,807 shares underlying the warrant to purchase
shares of our common stock. Carlyle-Blue Wave Partners Management, LP (CBWPM) is the
investment manager for Carlyle Multi-Strategy Master Fund, Ltd. and has been granted investment discretion
over its portfolio investments, including the securities referenced in this prospectus. Ralph Reynolds
and Richard Goldsmith are the managing members of a managing member of the general partner of CBWPM,
and each of Mr. Goldsmith, Mr. Reynolds, and CBWPM may thereby be deemed to have beneficial ownership
of such securities. To the extent permitted by law, Mr. Goldsmith, Mr. Reynolds, CBWPM and any entities
controlled by any of them, each disclaim any beneficial interest in such securities.
(18) Includes 1,329,731 shares of our common stock and 265,946 shares underlying the warrant to purchase
shares of our common stock. Kent C. McCarthy is the Managing Member of Jayhawk Capital Management
LLC, which is the General Partner of Jayhawk Private Equity GP, LP, which is the General Partner
of Jayhawk Private Equity Fund, L.P. and has voting power and investment power over securities held
by Jayhawk Private Equity Fund, L.P.
(19) Includes 83,722 shares of our common stock and 16,744 shares underlying the warrant to purchase
shares of our common stock. Kent C. McCarthy is the Managing Member of Jayhawk Capital Management
LLC, which is the General Partner of Jayhawk Private Equity GP, LP, which is the General Partner
of Jayhawk Private Equity Co-Invest Fund, L.P. and has voting power and investment power over securities
held by Jayhawk Private Equity Co-Invest Fund, L.P.
(20) Includes 106,009 shares of our common stock and 21,201 shares underlying the warrant to purchase
shares of our common stock. Konrad Ackerman has sole voting and investment control over the securities
held by Alpha Capital Anstalt.
(21) Includes 88,340 shares of our common stock and 17,668 shares underlying the warrant to purchase
shares of our common stock. Randy Goulding has sole voting and investment control over the securities
held by The Nutmeg Mercury Fund, L.L.L.P.
(22) Includes 141,345 shares of our common stock and 28,269 shares underlying the warrant to purchase
shares of our common stock. Brandon Goulding has sole voting and investment control over the securities
held by Black Diamond Fund, LLLP.
68
(23) Includes
40,231 shares of our common stock and 2,172 shares underlying the warrant to purchase
shares of our common stock. Marc K. Swickle is the Manager of Professional Traders Fund, LLC. Mr.
Swickle has sole voting and investment control over the securities held by Professional Traders Fund,
LLC.
(24) Includes
60,345 shares of our common stock and 3,259 shares underlying the warrant to purchase
shares of our common stock. Marc K. Swickle is the Manager of Professional Offshore Opportunity Fund,
Ltd. Mr. Swickle has sole voting and investment control over the securities held by Professional
Offshore Opportunity Fund, Ltd.
(25) Includes 141,345 shares of our common stock and 28,269 shares underlying the warrant to purchase
shares of our common stock. Will Hecther has sole voting and investment control over the securities
held by Excalibur Limited Partnership.
(26) Includes 70,672 shares of our common stock and 14,134 shares underlying the warrant to purchase
shares of our common stock. Will Hecther has sole voting and investment control over the securities
held by Excalibur Limited Partnership II.
(27) Includes 106,009 shares of our common stock and 21,201 shares underlying the warrant to purchase
shares of our common stock. Jordan A. Grayson has sole voting and investment control over the securities
held by Outpoint Offshore Fund, Ltd.
(28) Includes 44,170 shares of our common stock and 8,834 shares underlying the warrant to purchase
shares of our common stock. Joshua Silverman has voting and investment control over the shares held
by Iroquois Master Fund Ltd. Mr. Silverman disclaims beneficial ownership of these shares.
(29) Includes 17,668 shares of our common stock and 3,533 shares underlying the warrant to purchase
shares of our common stock.
(30) Includes 4,416 shares of our common stock and 883 shares underlying the warrant to purchase shares
of our common stock.
(31) Includes 17,668 shares of our common stock and 3,533 shares underlying the warrant to purchase
shares of our common stock.
(32) Includes 8,834 shares of our common stock and 1,766 shares underlying the warrant to purchase
shares of our common stock. Donna H. Dodson has sole voting and investment control over the securities
held by Ultra DTD LLC.
(33) Includes 10,600 shares of our common stock and 2,120 shares underlying the warrant to purchase
shares of our common stock. Dan A. Boyington has sole voting and investment control over the securities
held by Dan A. Boyington 1990 Rev. Trust.
(34) Includes 4,416 shares of our common stock and 883 shares underlying the warrant to purchase shares
of our common stock.
(35) Includes 4,416 shares of our common stock and 883 shares underlying the warrant to purchase shares
of our common stock. Jack Thompson has sole voting and investment control over the securities held
by Jack Thompson IRA.
(36) Includes 4,416 shares of our common stock and 883 shares underlying the warrant to purchase shares
of our common stock. Robert G. Rader and Judith T. Rader collectively may be deemed to share voting
and investment control over the securities held by Robert G. Rader & Judith T. Rader TTEES of
the Rader Living Trust dtd. 9-2-97.
(37) Includes 4,416 shares of our common stock and 883 shares underlying the warrant to purchase shares
of our common stock.
(38) Includes 4,416 shares of our common stock and 883 shares underlying the warrant to purchase shares
of our common stock. Ms. Garrett has sole voting and investment control over the securities held
by William H. Garrett Rev. Trust.
(39) Includes 4,416 shares of our common stock and 883 shares underlying the warrant to purchase shares
of our common stock. Anne Wileman Workman has sole voting and investment control over the securities
held by Anne Wileman Workman Trust.
(40) Includes 8,834 shares of our common stock and 1,766 shares underlying the warrant to purchase
shares of our common stock. Gene F. Boyd has sole voting and investment control over the securities
held by Restated Gene F. Boyd Rev. Living Trust DTD 1/20/00.
(41) Includes 8,834 shares of our common stock and 1,766 shares underlying the warrant to purchase
shares of our common stock. J. David Jensen has sole voting and investment control over the securities
held by J. David Jensen, IRA.
(42) Includes 10,000 shares of our common stock and 2,000 shares underlying the warrant to purchase
shares of our common stock.
(43) Includes 35,336 shares of our common stock and 7,067 shares underlying the warrant to purchase
shares of our common stock.
(44) Includes 70,672 shares of our common stock and 14,134 shares underlying the warrant to purchase
shares of our common stock.
(45) Includes 70,672 shares of our common stock and 14,134 shares underlying the warrant to purchase
shares of our common stock.
69
(46) Includes 20,000 shares of our common stock and 4,000 shares underlying the warrant to purchase
shares of our common stock.
(47) Includes 106,010 shares of our common stock and 21,202 shares underlying the warrant to purchase
shares of our common stock.
(48) Includes 141,345 shares of our common stock and 28,269 shares underlying the warrant to purchase
shares of our common stock.
(49) Includes 20,000 shares of our common stock and 4,000 shares underlying the warrant to purchase
shares of our common stock.
(50) Includes 10,428 shares of our common stock and 2,085 shares underlying the warrant to purchase
shares of our common stock. James Tie Li is the Managing Director of Columbia China Capital Group,
Inc. Mr. Li has sole voting and investment control over the securities held by Columbia China Capital
Group, Inc.
(51) Includes 18,215 shares of our common stock and 3,643 shares underlying the warrant to purchase
shares of our common stock.
(52) Includes 18,215 shares of our common stock and 3,643 shares underlying the warrant to purchase
shares of our common stock.
(53) Includes 306,506 shares of our common stock and 61,301 shares underlying the warrant to purchase
shares of our common stock.
(54) Includes 35,336 shares of our common stock and 7,067 shares underlying the warrant to purchase
shares of our common stock. Dan Wong has sole voting and investment control over the securities held
by Hong Kong Shun Ho Investment Group Limited.
(55) Includes 123,677 shares of our common stock and 24,735 shares underlying the warrant to purchase
shares of our common stock. Chou Teh-Chien has sole voting and investment control over the securities
held by Budworth Investments Ltd.
(56) Includes 229,686 shares of our common stock and 45,937 shares underlying the warrant to purchase
shares of our common stock. Chou Teh-Chien has sole voting and investment control over the securities
held by Harbinger (BVI) Venture Capital Corp.
(57) Includes 626,397 shares of our common stock owned by Halter Financial Investments, L.P., or HFI,
of which Halter Financial Investments GP, LLC is the sole general partner. The limited partners of
HFI are: (i) TPH Capital, L.P. of which TPH Capital GP, LLC is the general partner and Timothy P.
Halter is the sole member of TPH Capital GP, LLC; (ii) Bellfield Capital Partners, L.P. of which
Bellfield Capital Management, LLC is the sole general partner and David Brigante is the sole member
of Bellfield Capital Management, LLC; (iii) Colhurst Capital L.P of which Colhurst Capital GP, LLC
is the general partner and George L. Diamond is the sole member of Colhurst Capital GP, LLC; and
(iv) Rivergreen Capital, LLC of which Marat Rosenberg is the sole member. As a result, each of the
foregoing persons may be deemed to be a beneficial owner of the shares held of record by HFI.
(58) Includes 678,596 shares of our common stock owned by Halter Financial Group, L.P., or HFG, of
which Halter Financial Group GP, LLC is the sole general partner. The limited partners of HFI are:
(i) TPH Capital, L.P. of which TPH Capital GP, LLC is the general partner and Timothy P. Halter is
the sole member of TPH Capital GP, LLC; (ii) Bellfield Capital Partners, L.P. of which Bellfield
Capital Management, LLC is the sole general partner and David Brigante is the sole member of Bellfield
Capital Management, LLC; (iii) Colhurst Capital L.P of which Colhurst Capital GP, LLC is the general
partner and George L. Diamond is the sole member of Colhurst Capital GP, LLC.
(59) Chunhua Xiong is the consultant who provided has been engaged to assist the Company in its efforts
to consummate a combination transaction with a privately held business entity.
(60) Jim Groh is the President and owner and has voting and investment power over securities held by
Heritage Management Consultants, Inc.
(61) Dimitri Cocorinis, the former officer of the Company, are also the partners of C&C and may
each be deemed to be a beneficial owner of the shares held of record by C&C.Includes 2,500,000
shares of the Companys Common Stock to be issued on or about April 17, 2007 to C&C Investment
Partnership pursuant to the Settlement and Stock Issuance Agreement. Cocorinis and Cononelos are
the partners of C&C and may each be deemed to be a beneficial owner of the shares held of record
by C&C.
(62) Terry Cononelos, the former officer of the Company, are also the partners of C&C and may each
be deemed to be a beneficial owner of the shares held of record by C&C.Includes 2,500,000 shares
of the Companys Common Stock to be issued on or about April 17, 2007 to C&C Investment
Partnership pursuant to the Settlement and Stock Issuance Agreement. Cocorinis and Cononelos are
the partners of C&C and may each be deemed to be a beneficial owner of the shares held of record
by C&C.
(63) Represents shares underlying a warrant for the purchase of 342,530 shares of our common stock
in the aggregate for services in connection with the private placement. Ryan Medo has sole voting
and investment control over the securities held by Sterne Agee & Leach, Inc.
(64) Represents shares underlying a warrant for the purchase of 146,799 shares of our common stock
in the aggregate for services in connection with the private placement. Civilian Capital, Inc. is
owned by Civilian Pictures, Inc. and Peter McDonnell and Barry Poltermann have voting and investment power over securities held
by Civilian Pictures, Inc.
70
We will not receive any of the proceeds from the sale of any shares by the selling stockholders. We
have agreed to bear expenses incurred by the selling stockholders that relate to the registration
of the shares being offered and sold by the selling stockholders, including the SEC registration
fee and legal, accounting, printing and other expenses of this offering.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of our common stock as of
March 31, 2008 (i) by each person who is known by us to beneficially own more than 5% of our common
stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors
as a group.
Unless otherwise specified, the address of each of the persons set forth below is in care of American
Lorain Corporation, Beihuan Road, Junan County, Shandong, China 276600.
Name & Address of
Beneficial Owner |
Office, If Any |
|
Title of Class |
|
Amount &
Nature of
Beneficial
Ownership (1) |
|
Percent of
Class (2) |
|
|
|
|
|
|
|
|
Officers and Directors |
Mr. Si Chen |
Sole Director and
Chief Executive
Officer |
|
Common Stock $0.001 par value |
|
14,677,084 |
|
58.89% |
Mr. Xiandong Zhou |
President and
Chief Operating
Officer |
|
Common Stock $0.001 par value |
|
0 |
|
0% |
Mr. Jing Thomas Wu |
Chief Financial
Officer |
|
Common Stock $0.001 par value |
|
0 |
|
0% |
All officers and directors as a group
(3 persons named above) |
|
|
Common Stock $0.001 par value |
|
14,677,084 |
|
58.89% |
5% Securities Holder |
Mr. Hisashi Akazawa 3 |
|
|
Common Stock $0.001 par value |
|
16,307,872 |
|
65.43% |
Halter Financial Investments, L.P. 4 |
|
|
Common Stock $0.001 par value |
|
626,397 |
|
2.51% |
Halter Financial Group, L.P. 4 |
|
|
Common Stock $0.001 par value |
|
678,596 |
|
2.72% |
Jeffrey L. Feinberg 5 |
|
|
Common Stock $0.001 par value |
|
1,911,765 |
|
7.57% |
JLF Asset Management, L.L.C 5. |
|
|
Common Stock $0.001 par value |
|
1,911,765 |
|
7.57% |
Jayhawk Private Equity Fund, L.P. (“JPEF”) 6 |
|
|
Common Stock $0.001 par value |
|
1,595,677 |
|
6.4% |
Jayhawk Private Equity GP, L.P. (“JPEGP”) 6 |
|
|
Common Stock $0.001 par value |
|
1,696,143 |
|
6.8% |
Jayhawk Capital Management, L.L.C. (“JCM) 6 |
|
|
Common Stock $0.001 par value |
|
1,696,143 |
|
6.8% |
Kent C. McCarthy 6 |
|
|
Common Stock $0.001 par value |
|
1,696,143 |
|
6.8% |
Jayhawk Private Equity Co-Invest Fund, L.P. (“JPECF”) 6 |
|
|
Common Stock $0.001 par value |
|
100,466 |
|
0.4% |
Mr. Si Chen 3 |
|
|
Common Stock $0.001 par value |
|
14,677,084 |
|
58.89% |
Total Shares Owned by Persons Named above |
|
|
|
Common Stock $0.001 par value |
|
17,612,865 |
|
85.02% |
71
* Less than 1%
1 Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Each of the beneficial owners listed above
has direct ownership of and sole voting power and investment power with respect to the shares of
our common stock.
2 A total of 24,935,421 shares of our common stock are considered to be outstanding pursuant to SEC Rule
13d-3(d) (1). The 24,935,421 shares of common stock does not include 1,875,159 shares issuable upon
the exercise of certain warrants held by selling stockholders. For each Beneficial Owner above, any
options exercisable within 60 days have been included in the denominator.
3 Mr. Akazawa owns a total of 16,307,872 shares of our common stock and Mr. Chen owns a total of 0 shares
of our common stock. Mr. Akazawa has granted our sole director and Chief Executive Officer, Mr. Chen,
the right to purchase a total of 14,677,085 shares of our common stock in accordance with the terms
of an option agreement between Mr. Akazawa and Mr. Chen.
4 Halter Financial Investments, L.P. owns 626,397 shares of our common stock and its affiliate Halter
Financial Group, L.P. owns 678,596 shares of our common stock.
5 Jeffrey L. Feinberg is the managing member of JLF Asset Management, LLC, which serves as the management
company and/or investment manager to JLF Partners I, L.P., JLF Partners II, L.P., and JLF Offshore
Fund, Ltd. JLF Partners I, L.P. owns 836,199 shares of our common stock, JLF Partners II, L.P. owns
58,940 shares of our common stock and JLF Offshore Fund, Ltd. Owns 1,013,022 shares of our common
stock. Mr. Feinberg has voting and investment control over the securities held by JLF Partners I, L.P.
6 JPEF owns 1,595,677 shares of our common stock and its affiliate JPECF owns 100,466 shares of our
common stock. Mr. McCarthy is the manager of and controls JCM. JCM is the general partner of JPEGP
and as a result controls JPEGP. JPEGP is the general partner of JPEF and as a result controls
JPEF. JPEGP is the general partner of JPECF and as a result controls JPECF. The shares includes 1,329,731 shares
of common stock, par value $0.001 per share, and 265,946 warrants that are exercisable within 60
days of the filing of this report held by the Jayhawk Private Equity Fund, L.P. and 83,722 shares
of common stock, par value $0.001, and 16,744 warrants that are exercisable within 60 days of the
filing of this report held by the Jayhawk Private Equity Co-Invest Fund, L.P.
DESCRIPTION OF CAPITAL STOCK
Common Stock
We are authorized to issue up to 200,000,000 shares of common stock, par value $0.001 per share.
Each outstanding share of common stock entitles the holder thereof to one vote per share on all matters.
Our bylaws provide that the persons receiving the greatest number of votes shall be elected as the
directors. Stockholders do not have preemptive rights to purchase shares in any future issuance of
our common stock. Upon our liquidation, dissolution or winding up, and after payment of creditors
and preferred stockholders, if any, our assets will be divided pro-rata on a share-for-share basis
among the holders of the shares of common stock.
The holders of shares of our common stock are entitled to dividends out of funds legally available
when and as declared by our board of directors. Pursuant to a Preferred Stock Purchase Agreement
with Halter Financial Investments, L.P., dated April 5, 2007, we paid a special cash dividend in
the aggregate amount of $415,000, or $0.18 per share, to holders of common stock outstanding on April
16, 2007. Other than the special dividend discussed previously, our board of directors has never
declared a dividend and does not anticipate declaring a dividend in the foreseeable future. Should
we decide in the future to pay dividends, as a holding company, our ability to do so and meet other
obligations depends upon the receipt of dividends or other payments from our operating subsidiaries
and other holdings and investments. In addition, our operating subsidiaries, from time to time, may
be subject to restrictions on their ability to make distributions to us, including as a result of
restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S.
dollars or other hard currency and other regulatory restrictions. In the event of our liquidation,
dissolution or winding up, holders of our common stock are entitled to receive, ratably, the net
assets available to stockholders after payment of all creditors.
72
All of the issued and outstanding shares of our common stock are duly authorized, validly issued, fully
paid and non-assessable. To the extent that additional shares of our common stock are issued, the
relative interests of existing stockholders will be diluted.
We have obtained the written consent of a majority in interest of our stockholders approving an amendment
and restatement of our Restated Certificate of Incorporation that, among other things, increases
our authorized common stock from 20 million to 200 million shares and effectuates a 1-for-32.84 reverse
stock split of our common stock. We filed this amendment with the Delaware Secretary of State on
July 17, 2007.
Preferred Stock
We are authorized to issue 5,000,000 shares of preferred stock. We may issue shares of preferred stock
in one or more classes or series within a class as may be determined by our board of directors, who
may establish the number of shares to be included in each class or series, may fix the designation,
powers, preferences and rights of the shares of each such class or series and any qualifications,
limitations or restrictions thereof. Any preferred stock so issued by the board of directors may
rank senior to the common stock with respect to the payment of dividends or amounts upon liquidation,
dissolution or winding up of us, or both. Moreover, under certain circumstances, the issuance of
preferred stock or the existence of the un-issued preferred stock might tend to discourage or render
more difficult a merger or other change in control.
In connection with the Amendment to the Certificate of Incorporation, all shares of our Series A Voting
Convertible Preferred Stock and Series B Voting Convertible Preferred Stock were converted in shares
of Common Stock. We currently have no shares of Preferred Stock outstanding.
Warrants
We have granted a group of accredited investors and the placement agent and its designee three-year
warrants to purchase 1,875,159 shares of our Common Stock exercisable at $4.25 per share.
We issued warrants to Sterne Agee & Leach, Inc.s designee, for the purchase of up to an aggregate
of 489,330 shares of our common stock, which warrants are for a term of 3 years from issuance and
have an exercise price of $4.25 per share, and include piggyback registration rights to register
such shares.
The exercise price of the foregoing warrants was determined based on the offering price of our common
stock sold in the private placement transaction completed on May 3, 2007.
Transfer Agent and Registrar
Our independent stock transfer agent is Interwest Transfer Company, Inc. Their mailing address is 1981
East Holladay Blvd., P.O. Box 17136, Salt Lake City, UT 84117. Their phone number is (801) 272-9294.
SHARES ELIGIBLE FOR FUTURE SALE
As of May 13, 2008, we had outstanding 24,935,142 shares of common stock.
Shares Covered by this Prospectus
All of the 10,470,831 shares of Common Stock being registered in this offering may be sold without
restriction under the Securities Act, so long as the registration statement of which this prospectus
is a part is, and remains, effective.
Rule 144
The resale of shares that are held by our affiliates and the resale of shares that are held by non-affiliates
for a period of less than two years are governed by the following requirements of Rule 144 of the
Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated)
who has beneficially owned shares of our common stock for at least one year, including any person
who may be deemed to be an affiliate (as the term affiliate is defined under
the Securities Act), would be entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of:
73
|
|
1% of the number of shares of common stock then outstanding, which as of May 12, 2008, would equal
249,232 shares; or |
|
|
|
|
|
the average weekly trading volume of our common stock during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale. |
However, since our shares are quoted on the NASDs Electronic Bulletin Board, which is not an
automated quotation system, our stockholders cannot rely on the market-based volume limitation
described in the second bullet above. If in the future our securities are listed on an exchange or
quoted on NASDAQ, then our stockholders would be able to rely on the market-based volume limitation.
Unless and until our stock is so listed or quoted, our stockholders can only rely on the percentage
based volume limitation described in the first bullet above.
Sales under Rule 144 are also governed by other requirements regarding the manner of sale, notice filing
and the availability of current public information about us. Under Rule 144, however, a person who
is not, and for the three months prior to the sale of such shares has not been, an affiliate of the
issuer is free to sell shares that are restricted securities which have been held for
at least two years without regard to the limitations contained in Rule 144. The selling stockholders
will not be governed by the foregoing restrictions when selling their shares pursuant to this prospectus.
We believe that none of our outstanding shares may currently be sold in reliance on Rule 144.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during
the three months preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years, including the holding period of any prior owner other than an affiliate,
is entitled to sell such shares without complying with the manner of sale, notice filing, volume
limitation or notice provisions of Rule 144.
We believe that none of our outstanding shares may currently be sold in reliance on Rule 144.
PLAN OF DISTRIBUTION
The selling stockholders may, from time to time, sell any or all of their shares of common stock on
any stock exchange, market or trading facility on which the shares are traded or in private transactions.
These sales may be at fixed prices, at prevailing market prices at the time of the sale, at varying
prices determined at the time of sale, or at negotiated prices. The selling stockholders may use
any one or more of the following methods when selling shares:
|
|
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
|
|
|
|
|
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; |
|
|
|
|
|
purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
|
|
|
|
|
an exchange distribution in accordance with the rules of the applicable exchange; |
|
|
|
|
|
privately negotiated transactions; |
|
|
|
|
|
short sales; |
|
|
|
|
|
broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; |
|
|
|
|
|
a combination of any such methods of sale; and |
|
|
|
|
|
any other method permitted pursuant to applicable law. |
The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available,
rather than under this prospectus.
The selling stockholders may also engage in puts and calls and other transactions in our securities
or derivatives of our securities and may sell or deliver shares in connection with these trades.
Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate
in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or,
if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to
be negotiated. The selling stockholders do not expect these commissions and discounts to exceed what
is customary in the types of transactions involved. Any profits on the resale of shares of common
stock by a broker-dealer acting as principal might be deemed to be underwriting discounts or commissions under the Securities Act. Discounts, concessions, commissions
and similar selling expenses, if any, attributable to the sale of shares will be borne by a selling
stockholder. The selling stockholders may agree to indemnify any agent, dealer or broker-dealer that
participates in transactions involving sales of the shares if liabilities are imposed on that person
under the Securities Act. In connection with sales of the shares of common stock or otherwise, the
selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage
in short sales of the shares of common stock in the course of hedging in positions they assume. The
selling stockholders may also sell shares of common stock short and deliver shares of common stock
covered by this prospectus to close out short positions and to return borrowed shares in connection
with such short sales. The selling stockholders may also loan or pledge shares of common stock to
broker-dealers that in turn may sell such shares.
74
The selling stockholders may from time to time pledge or grant a security interest in some or all of
the shares of common stock owned by them and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell the shares of common stock from time
to time under this prospectus after we have filed a supplement to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act of 1933 amending the list of selling stockholders
to include the pledgee, transferee or other successors in interest as selling stockholders under
this prospectus.
The selling stockholders also may transfer the shares of common stock in other circumstances, in which
case the transferees, pledgees or other successors in interest will be the selling beneficial owners
for purposes of this prospectus and may sell the shares of common stock from time to time under this
prospectus after we have filed a supplement to this prospectus under Rule 424(b)(3) or other applicable
provision of the Securities Act of 1933 amending the list of selling stockholders to include the
pledgee, transferee or other successors in interest as selling stockholders under this prospectus.
Any selling stockholders who are affiliated with broker-dealers and any broker-dealers or agents that
are involved in selling the shares of common stock may be deemed to be underwriters within
the meaning of the Securities Act in connection with such sales. In such event, any commissions received
by such selling stockholders, broker-dealers or agents and any profit on the resale of the shares
of common stock purchased by them may be deemed to be underwriting commissions or discounts under
the Securities Act.
We are required to pay all fees and expenses incident to the registration of the shares of common stock.
We have agreed to indemnify the selling stockholders against certain claims, damages and liabilities,
including liabilities under the Securities Act.
The selling stockholders have advised us that they have not entered into any agreements, understandings
or arrangements with any underwriters or broker-dealers regarding the sale of their shares of common
stock, nor is there an underwriter or coordinating broker acting in connection with a proposed sale
of shares of common stock by any selling stockholder. If we are notified by any selling stockholder
that any material arrangement has been entered into with a broker-dealer for the sale of shares of
common stock, if required, we will file a supplement to this prospectus. If the selling stockholders
use this prospectus for any sale of the shares of common stock, they will be subject to the prospectus
delivery requirements of the Securities Act.
Under the securities laws of some states, the shares of common stock may be sold in such states only
through registered or licensed brokers or dealers. In addition, in some states the shares of common
stock may not be sold unless such shares have been registered or qualified for sale in such state
or an exemption from registration or qualification is available and is complied with.
There can be no assurance that any selling stockholder will sell any or all of the shares of common
stock registered pursuant to the shelf registration statement, of which this prospectus forms a part.
The selling stockholders and any other person participating in such distribution will be subject to
applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the
timing of purchases and sales of any of the shares of common stock by the selling stockholders and
any other participating person. Regulation M may also restrict the ability of any person engaged
in the distribution of the shares of common stock to engage in market-making activities with respect
to the shares of common stock. All of the foregoing may affect the marketability of the shares of
common stock and the ability of any person or entity to engage in market-making activities with respect
to the shares of common stock.
Once sold under the shelf registration statement, of which this prospectus forms a part, the shares
of common stock will be freely tradable in the hands of persons other than our affiliates.
75
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed upon for us by Thelen Reid
Brown Raysman & Steiner LLP, Washington, D.C. and
Lewis, Hansen, Waldo & Pleshe, LLC, Salt Lake City.
EXPERTS
The consolidated financial statements of American Lorain included in this prospectus and in the registration
statement have been audited by Samuel H. Wong & Co., LLP, Certified Public Accountants, an independent
registered public accounting firm, to the extent and for the periods set forth in their report appearing
elsewhere herein and in the registration statement, and are included in reliance on such report,
given the authority of said firm as an expert in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, a registration statement on Form S-1 under the Securities Act with respect
to the common stock offered in this offering. This prospectus does not contain all of the information
set forth in the registration statement. For further information with respect to us and the common
stock offered in this offering, we refer you to the registration statement and to the attached exhibits.
With respect to each such document filed as an exhibit to the registration statement, we refer you
to the exhibit for a more complete description of the matters involved.
You may inspect our registration statement and the attached exhibits and schedules without charge at
the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549.
You may obtain copies of all or any part of our registration statement from the SEC upon payment
of prescribed fees. You may obtain information on the operation of the public reference room by calling
the SEC at 1-800-SEC-0330.
Our SEC filings, including the registration statement and the exhibits filed with the registration
statement, are also available from the SECs website at www.sec.gov, which contains reports,
proxy and information statements and other information regarding issuers that file electronically
with the SEC.
76
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN LORAIN CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEAR ENDED DECEMBER 31, 2007
Content |
Page |
AMERICAN LORAIN CORPORATION FINANCIAL STATEMENTS AS OF
DECEMBER 31, 2007, 2006, 2005, AND 2004 |
|
|
Report of Independent Registered Public Accounting Firm |
|
|
Consolidated Balance Sheets |
|
|
Consolidated Statements of Income |
|
|
Consolidated Statements of Stockholders Equity |
|
|
Consolidated Statements of Cash Flows |
|
|
Notes to Consolidated Financial Statements |
|
|
AMERICAN LORAIN (FORMERLY MILLENNIUM QUEST) FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2007 |
|
|
Statement of Cash Flows-NON Consolidated (Retroactively Restated) |
|
77
AMERICAN LORAIN CORPORATION
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006, AND 2005
(Stated in US Dollars)
78
AMERICAN LORAIN
CORPORATION
|
|
CONTENTS |
PAGES |
|
|
|
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM |
F-1 |
|
|
CONSOLIDATED BALANCE SHEETS |
F-2 F-3 |
|
|
CONSOLIDATED STATEMENTS OF INCOME |
F-4 |
|
|
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY |
F-5 |
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
F-6 |
|
|
NOTES TO FINANCIAL STATEMENTS |
F-7F-24 |
79
REPORT OF REGISTERED INDEPENDENT PUBLIC
ACCOUNTING FIRM
To:
The Board of Directors and Stockholders of
American Lorain Corporation
We have audited the accompanying
consolidated balance sheets of American Lorain Corporation as of December 31,
2007, 2006, and 2005, and the related consolidated statements of income,
stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated 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 American Lorain Corporation as of December 31, 2007, 2006,
and 2005, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
South San Francisco, California
February 26, 2008
Samuel H. Wong & Co., LLP
Certified Public Accountants
F-1
AMERICAN LORAIN CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2007, 2006, AND 2005
(Stated in US Dollars)
|
Note |
|
2007 |
|
2006 |
|
2005 |
ASSETS |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
Cash and Cash equivalents |
|
$ |
6,769,973 |
$ |
2,290,676 |
$ |
7,429,038 |
Restricted Cash |
3 |
|
2,021,839 |
|
2,549,321 |
|
2,838,067 |
Short-term Investment |
|
|
7,246 |
|
26,620 |
|
16,476 |
Trade accounts receivable |
4 |
|
32,859,688 |
|
11,805,231 |
|
7,992,923 |
Other receivables |
5 |
|
7,552,976 |
|
4,683,630 |
|
6,336,056 |
Inventory |
6 |
|
17,903,344 |
|
12,294,354 |
|
15,451,754 |
Advance to Suppliers |
|
|
5,357,951 |
|
2,406,160 |
|
2,807,961 |
Prepaid Expenses and Taxes |
|
|
916,774 |
|
38,375 |
|
- |
|
|
|
|
|
|
|
|
Total current assets |
|
$ |
73,389,790 |
$ |
36,094,367 |
$ |
42,872,275 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
7 |
|
24,022,181 |
|
13,517,908 |
|
10,289,333 |
Land use rights, net |
8 |
|
3,047,021 |
|
2,777,475 |
|
1,331,751 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
100,458,992 |
$ |
52,389,750 |
$ |
54,493,359 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Short-term bank loans |
9 |
$ |
24,077,504 |
$ |
23,137,648 |
$ |
22,675,029 |
Notes payable |
10 |
|
2,734,444 |
|
3,466,581 |
|
3,765,452 |
Accounts payable |
|
|
6,251,833 |
|
2,327,620 |
|
3,275,965 |
Income tax payable |
|
|
1,121,528 |
|
402,216 |
|
305,021 |
Current maturities of long term debts |
12 |
|
- |
|
5,117 |
|
- |
Accrued liabilities and other payables |
11 |
|
16,784,108 |
|
2,570,263 |
|
2,765,249 |
Customers deposits |
|
|
957,642 |
|
843,091 |
|
489,675 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
$ |
51,927,058 |
$ |
32,752,536 |
$ |
33,276,391 |
|
|
|
|
|
|
|
|
Long-term bank loans |
12 |
|
102,542 |
|
105,560 |
|
- |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
$ |
52,029,600 |
$ |
32,858,096 |
$ |
33,276,391 |
The accompanying notes are an integral
part of these financial statements.
F-2
AMERICAN LORAIN CORPORATION
CONSOLIDATED BALANCE SHEETS (Continued)
AS OF DECEMBER 31, 2007, 2006, AND 2005
(Stated in US Dollars)
|
Note |
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
Minority interests |
13 |
$ |
3,887,021 |
$ |
2,922,355 |
$ |
2,500,186 |
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
Common Stock, $0.001 par value,
200,000,000 shares authorized; 24,923,178 and 17,932,777 shares issued and
outstanding as of December 31, 2007, 2006, and 2005 |
14 |
|
24,923 |
|
17,933 |
|
17,933 |
Additional paid-in-capital |
|
|
24,187,268 |
|
6,846,620 |
|
11,820,441 |
Statutory reserves |
|
|
4,497,647 |
|
4,439,604 |
|
2,787,212 |
Retained earnings |
|
|
13,985,824 |
|
4,298,947 |
|
3,593,433 |
Accumulated other comprehensive |
|
|
|
|
|
|
|
Income |
|
|
1,846,708 |
|
1,006,195 |
|
497,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
44,542,370 |
$ |
16,609,299 |
$ |
18,716,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY |
|
$ |
100,458,992 |
$ |
52,389,750 |
$ |
54,493,359 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these financial statements.
F-3
AMERICAN LORAIN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated in US Dollars)
|
Note |
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
82,094,963 |
$ |
49,560,957 |
$ |
30,195,144 |
Cost of revenues |
|
|
(61,932,474) |
|
(37,533,260) |
|
(22,250,332) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
20,162,490 |
$ |
12,027,697 |
$ |
7,944,812 |
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
Selling and marketing expenses |
|
|
(2,623,138) |
|
(1,440,941) |
|
(1,089,423) |
General and administrative expenses |
|
|
(2,864,813) |
|
(1,932,729) |
|
(1,197,962) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
14,674,539 |
$ |
8,654,027 |
$ |
5,657,427 |
|
|
|
|
|
|
|
|
Investment income |
|
|
4,769 |
|
- |
|
- |
Government subsidy income |
|
|
1,373,280 |
|
481,403 |
|
319,530 |
Interest income |
|
|
209,010 |
|
165,648 |
|
122,077 |
Other income |
|
|
155,467 |
|
- |
|
- |
Other expenses |
|
|
(1,445,780) |
|
(133,635) |
|
(18,344) |
Interest Expense |
|
|
(2,376,088) |
|
(1,834,246) |
|
(1,518,518) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before tax |
|
$ |
12,595,196 |
$ |
7,333,197 |
$ |
4,562,172 |
Income tax |
15 |
|
(2,134,916) |
|
(1,064,379) |
|
(324,580) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests |
|
$ |
10,460,279 |
$ |
6,268,818 |
$ |
4,237,592 |
Minority interests |
|
|
(715,359) |
|
(340,328) |
|
(22,915) |
Net income |
|
|
9,744,920 |
|
5,928,490 |
|
4,214,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
Basic |
|
$ |
0.43 |
$ |
0.33 |
$ |
0.24 |
Diluted |
|
$ |
0.42 |
$ |
0.33 |
$ |
0.24 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
Basic |
|
|
22,554,210 |
|
17,932,778 |
|
17,932,778 |
Diluted |
|
|
23,177,268 |
|
17,932,778 |
|
17,932,778 |
The accompanying notes are an integral
part of these financial statements.
F-4
AMERICAN LORAIN CORPORATION
STATEMENT OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007,
2006, AND 2005 (Stated in US Dollars)
|
|
|
|
|
|
Accumulated |
|
|
Number |
|
Additional |
|
|
Other |
|
|
of |
Common |
Paid-in |
Statutory |
Retained |
Comprehensive |
|
|
Shares |
Stock |
Capital |
Reserves |
Earnings |
Income |
Total |
Balance, January 1, 2005 |
17,932,777 |
17,933 |
2,938,639 |
2,416,659 |
8,874,915 |
55,942 |
14,304,088 |
Net Income |
|
- |
|
|
4,214,677 |
|
4,214,677 |
Increase in APIC from
the increase in registered capital in the PRC, net of minority interest |
|
- |
8,881,802 |
|
|
|
8,881,802 |
Appropriations to
Statutory Reserves |
|
- |
|
370,553 |
(370,553) |
|
0 |
Dividends |
|
- |
|
|
(9,125,607) |
|
(8,683,786) |
Foreign Currency
Translation Adjustment |
|
- |
|
|
|
441,821 |
- |
Balance, December 31,
2005 |
17,932,777 |
17,933 |
11,820,441 |
2,787,212 |
3,593,433 |
497,763 |
18,716,781 |
|
|
|
|
|
|
|
|
Balance, January 1, 2006 |
17,932,777 |
17,933 |
11,820,441 |
2,787,212 |
3,593,433 |
497,763 |
18,716,781 |
Net Income |
|
- |
|
|
5,928,490 |
|
5,928,490 |
Consolidation
elimination of investments in subsidiaries against APIC |
|
- |
(4,973,821) |
|
|
|
(4,973,821) |
Appropriations to
Statutory Reserves |
|
- |
|
1,652,393 |
(1,652,393) |
|
- |
Dividends |
|
- |
|
|
(3,570,583) |
|
(3,570,583) |
Foreign Currency
Translation Adjustment |
|
- |
|
|
|
508,432 |
508,431 |
Balance, December 31,
2006 |
17,932,777 |
$ 17,933 |
$ 6,846,620 |
$ 4,439,604 |
$ 4,298,947 |
$ 1,006,195 |
$ 16,609,299
|
|
|
|
|
|
|
|
|
Balance, January 1, 2007 |
17,932,777 |
$ 17,933 |
$ 6,846,620 |
$ 4,439,604 |
$ 4,298,947 |
$ 1,006,195 |
$ 16,609,299
|
Issuance of Common Stock
for Cash |
6,990,401 |
6,990 |
17,340,648 |
|
|
|
17,347,638 |
Net Income |
|
|
|
|
9,744,920 |
|
9,744,920 |
Appropriations to
Statutory Reserves |
|
|
|
58,043 |
(58,043) |
|
- |
Foreign Currency
Translation Adjustment |
|
|
|
|
|
840,513 |
840,513 |
Balance, December 31,
2007 |
24,923,178 |
24,923 |
24,187,268 |
4,497,647 |
13,985,824 |
1,846,708 |
44,542,370 |
|
|
|
|
|
|
|
|
|
Comprehensive |
|
Comprehensive |
|
Comprehensive |
|
|
|
Income |
|
Income |
|
Income |
|
|
|
2007 |
|
2006 |
|
2005 |
|
Totals |
Net Income |
9,744,920 |
|
5,928,490 |
|
4,214,677 |
|
19,888,087 |
Foreign Currency Translation
Adjustment |
840,513 |
|
508,431 |
|
441,821 |
|
1,790,765 |
|
10,585,433 |
|
6,436,921 |
|
4,656,498 |
|
21,678,852 |
The accompanying notes are an integral
part of this financial statements.
F-5
AMERICAN LORAIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 2007, 2006, AND 2005
(Stated in US Dollars)
|
|
2007 |
|
2006 |
|
2005 |
Cash flows from operating activities
|
|
|
|
|
|
|
Net income |
$ |
9,744,920 |
$ |
5,928,490 |
$ |
4,214,677 |
Minority
interest |
|
964,666 |
|
340,328 |
|
22,914 |
Fire Loss |
|
1,392,379 |
|
- |
|
- |
Depreciation |
|
802,927 |
|
579,736 |
|
515,495 |
Amortization |
|
17,798 |
|
48,038 |
|
33,468 |
(Increase)/decrease in accounts
& other receivables |
|
(23,809,252) |
|
(1,840,469) |
|
(13,270,141) |
(Increase)/decrease in
inventories |
|
(8,560,781) |
|
3,587,757 |
|
(786,131) |
Increase/(decrease) in accounts
and other payables |
|
15,862,094 |
|
(673,977) |
|
8,829,105 |
|
|
|
|
|
|
|
Net cash (used in)/provided by
operating |
|
|
|
|
|
|
activities |
$ |
(3,585,249) |
$ |
7,969,903 |
$ |
(440,613) |
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
Purchase of plant and equipment |
|
(7,657,346) |
|
(3,421,639) |
|
(1,791,731) |
Purchase of biological assets |
|
(2,784,136) |
|
- |
|
- |
Increase of construction in
progress |
|
(2,258,097) |
|
- |
|
- |
(Increase)/decrease in
restricted cash |
|
527,482 |
|
373,788 |
|
(1,210,599) |
Payment of land use rights |
|
(287,344) |
|
(1,421,291) |
|
(6,492) |
Investments in securities |
|
19,374 |
|
(7,857,172) |
|
(6,461) |
|
|
|
|
|
|
|
Net cash used in investing activities |
$ |
(12,440,067) |
$ |
(12,326,314) |
$ |
(3,015,283) |
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
Issue of common stock |
|
17,347,638 |
|
2,855,765 |
|
11,501,969 |
Dividend paid |
|
- |
|
(3,575,032) |
|
(9,125,596) |
Bank borrowings |
|
25,645,795 |
|
24,744,115 |
|
22,460,266 |
Bank repayment |
|
(23,329,333) |
|
(24,946,473) |
|
(18,903,904) |
|
|
|
|
|
|
|
Net cash provided by/(used in)
financing |
|
|
|
|
|
|
Activities |
$ |
19,664,100 |
$ |
(921,625) |
$ |
5,932,735 |
Net in cash and cash equivalents |
|
|
|
|
|
|
(used)/sourced |
|
3,638,784 |
|
(5,278,036) |
|
2,476,839 |
|
|
|
|
|
|
|
Effect of foreign currency translation
on cash |
|
|
|
|
|
|
and cash equivalents |
|
840,513 |
|
139,674 |
|
200,061 |
|
|
|
|
|
|
|
Cash and cash equivalentsbeginning of
year |
|
2,290,676 |
|
7,429,038 |
|
4,752,138 |
|
|
|
|
|
|
|
Cash and cash equivalentsend of year |
$ |
6,769,973 |
$ |
2,290,676 |
$ |
7,429,038 |
|
|
|
|
|
|
|
Supplementary cash flow information: |
|
|
|
|
|
|
Interest received |
$ |
209,010 |
$ |
165,648 |
$ |
122,077 |
Interest paid |
|
2,293,442 |
|
1,791,272 |
|
1,559,400 |
Taxes Paid |
|
740,943 |
|
- |
|
- |
The accompanying notes
are an integral part of these financial statements.
F-6
American Lorain (formerly "Millennium Quest")
Balance Sheet- Non Consolidated (Retroactively Restated)
As of December 31, 2007
|
12/31/2007 |
12/31/2006 |
|
|
|
Cash |
5,268 |
- |
|
|
|
Investment in Subsidiaries |
44,537,102 |
16,609,299 |
|
|
|
Total Assets |
44,542,370 |
16,609,299 |
|
|
|
Total Liabilities |
- |
- |
|
|
|
Common stock, $0.001 par value,
200,000,000 shares authorized; 24,923,178 and 17,932,777 shares issued and
outstanding at December 31, 2007 and 2006 |
24,923 |
17,933 |
Additional paid-in capital |
24,187,268 |
6,846,620 |
Statutory reserves |
4,497,647 |
4,439,604 |
Retained earnings |
13,985,824 |
4,298,947 |
Accumulated other comprehensive
income |
1,846,708 |
1,006,195 |
|
|
|
Total Equity |
44,542,370 |
16,609,299 |
|
|
|
|
|
|
Total Liabilities & Equity |
44,542,370 |
16,609,299 |
The accompanying notes
are an integral part of these financial statements.
F-7
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
1.
ORGANIZATION, BASIS OF PRESENTATION, AND PRINCIPAL ACTIVITIES
(a)
Organization history of American Lorain Corporation (formerly
known as Millennium Quest, Inc.)
American Lorain Corporation (the Company or ALC) is a
Delaware corporation incorporated on February 4, 1986. From inception through
May 3, 2007, the Company did not engage in any active business operations other
than in search and evaluation of potential business opportunity to become an
acquiree of a reverse-merger deal.
(b)
Organization History of International
Lorain Holding Inc. and its subsidiaries
International Lorain Holding Inc. (ILH) is a Cayman Islands
company incorporated on August 4, 2006 and was until May 3, 2007 wholly-owned by
Mr. Hisashi Akazawa. Through restructuring and acquisition in 2006, the Company
presently has two direct wholly-owned subsidiaries, Junan Hongrun and Luotian
Lorain, and one indirectly wholly-owned subsidiary through Junan Hongrun, which
is Beijing Lorain.
In addition, the Company directly and
indirectly has 80.2% ownership of Shandong Lorain. The rest of the 19.8%, which
is owned by the State under the name of Shandong Economic Development Investment
Co. Ltd., is not included as a part of the Group.
(c)
Reverse-Merger
On May 3, 2007, the Company entered into a share exchange
agreement with International Lorain Holding Inc. (ILH) whereby the Company
consummated its acquisition of ILH by issuance of 697,663 Series B voting
convertible preferred shares to the shareholders of ILH in exchange of 5,099,503
ILH shares. Concurrently on May 3, 2007, the Company also entered into a
securities purchase agreement with certain investors and Mr. Hisashi Akazawa and
Mr. Si Chen (each a beneficial owner) whereby the Company issued 319,913
(after reverse-split at 32.84 from 10,508,643) common shares to its shareholders
as consideration of the Companys reverse-merger with Lorain.
The share exchange transaction is referred to hereafter as the
reverse-merger transaction. The share exchange transaction has been accounted
for as a recapitalization of ALC where the Company (the legal acquirer) is
considered the accounting acquiree and ILH (the acquiree) is considered the
accounting acquirer. As a result of this transaction, the Company is deemed to
be a continuation of the business of ILH.
Accordingly, the accompanying consolidated financial statements
are those of the accounting acquirer, ILH. The historical stockholders equity
of the accounting acquirer prior to the share exchange has been retroactively
restated as if the share exchange transaction occurred as of the beginning of
the first period presented. See also Note 14 Capitalization.
F-8
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
(d)
Business Activities
The Company develops, manufactures, and sells convenience foods
(such as cut fruit and premixed salads, which are known as lightly processed;
ready-to-cook (or RTC) meals; ready-to-eat (or RTE) meals and meals ready-to-eat
(or MRE); chestnut products; and frozen, canned, and bulk foods, in hundreds of
varieties. The Company operates through indirect Chinese subsidiaries. The
products are sold in 19 provinces and administrative regions in China and 23
foreign countries. Food products are categorized into three types: (1) chestnut
products, (2) convenience food, and (3) frozen, canned, and bulk food.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(a)
Method of Accounting
The Company maintains its general ledger and journals with the
accrual method accounting for financial reporting purposes. The financial
statements and notes are representations of management. Accounting policies
adopted by the Company conform to generally accepted accounting principles in
the United States of America and have been consistently applied in the
presentation of financial statements, which are compiled on the accrual basis of
accounting.
(b)
Principles of consolidation
The consolidated financial statements which include the Company
and its subsidiaries are compiled in accordance with generally accepted
accounting principles in the United States of America. All significant
inter-company accounts and transactions have been eliminated. The consolidated
financial statements include 100% of assets, liabilities, and net income or loss
of those wholly-owned subsidiaries; ownership interests of minority investors
are recorded as minority interests.
As of December 31, 2006, the detailed identities of the
consolidating subsidiaries are as follows:
Name of Company |
Place of incorporation |
Attributable equity
interest % |
Registered
capital |
|
Shandong Green Foodstuff Co., Ltd |
PRC |
80.2 |
$12,901,823 |
(RMB 100,860,000) |
Luotian Green Foodstuff Co., Ltd |
PRC |
100 |
$1,279,181 |
(RMB 10,000,000) |
Junan Hongrun Foodstuff Co., Ltd |
PRC |
100 |
$2,430,445 |
(RMB 19,000,000) |
Beijing Green Foodstuff Co., Ltd |
PRC |
100 |
$1,279,181 |
(RMB 10,000,000) |
(c)
Use of estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles in the United States of America
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 those estimates
F-9
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
(d)
Economic and political risks
The Companys operations are conducted in the PRC. Accordingly,
the Companys business, financial condition and results of operations may be
influenced by the political, economic and legal environment in the PRC, and by
the general state of the PRC economy.
The Companys operations in the PRC are subject to special
considerations and significant risks not typically associated with companies in
North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environment and foreign currency
exchange. The Companys results may be adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion, remittances abroad, and rates and methods of taxation,
among other things.
(e)
Lease prepayments
Lease prepayments represent the cost of
land use rights in the PRC. Land use rights are carried at cost and amortized
on a straight-line basis over the period of rights of 50 years.
(f)
Property, plant and equipment
Plant and equipment are carried at cost
less accumulated depreciation. Depreciation is provided over their estimated
useful lives, using the straight-line method. Estimated useful lives of the
plant and equipment are as follows:
Buildings |
40 years |
Machinery and
equipment |
10
years |
Motor vehicles |
10 years |
Office equipment |
5
years |
The cost and related accumulated
depreciation of assets sold or otherwise retired are eliminated from the
accounts and any gain or loss is included in the statement of income. The cost
of maintenance and repairs is charged to income as incurred, whereas significant
renewals and betterments are capitalized.
(g)
Accounting for the Impairment of Long-Lived Assets
The long-lived assets held and used by the Company are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. It is reasonably possible that
these assets could become impaired as a result of technology or other industry
changes. Determination of recoverability of assets to be held and used is by
comparing the carrying amount of an asset to future net undiscounted cash flows
to be generated by the assets.
F-10
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. During the reporting years,
there was no impairment loss.
(h)
Construction in progress
Construction in progress represents direct costs of construction
or acquisition and design fees incurred. Capitalization of these costs ceases
and the construction in progress is transferred to plant and equipment when
substantially all the activities necessary to prepare the assets for their
intended use are completed. No depreciation is provided until it is completed
and ready for intended use.
(i)
Investment securities
The Company classifies its equity securities into trading or
available-for-sale. Trading securities are bought and held principally for the
purpose of selling them in the near term. All securities not included in trading
securities are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Unrealized holding gains and losses on trading securities are included in
the net income. Unrealized holding gains and losses, net of the related tax
effect, on available for sale securities are excluded from net income and are
reported as a separate component of other comprehensive income until realized.
Realized gains and losses from the sale of available-for-sale securities are
determined on a specific-identification basis.
A decline in the market value of any available-for-sale security
below cost that is deemed to be other-than-temporary results in a reduction in
carrying amount to fair value. The impairment is charged as an expense to the
statement of income and comprehensive income and a new cost basis for the
security is established. To determine whether impairment is
other-than-temporary, the Company considers whether it has the ability and
intent to hold the investment until a market price recovery and considers
whether evidence indicating the cost of the investment is recoverable outweighs
evidence to the contrary. Evidence considered in this assessment includes the
reasons for the impairment, the severity and duration of the impairment, changes
in value subsequent to year end, and forecasted performance of the investee.
Premiums and discounts are amortized or accreted over the life of
the related available-for-sale security as an adjustment to yield using the
effective-interest method. Dividend and interest income are recognized when
earned.
(j)
Inventories
Inventories consisting of finished goods and raw materials are
stated at the lower of cost or market value. Finished goods are comprised of
direct materials, direct labor and an appropriate proportion of overhead.
F-11
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTD)
(k)
Trade receivables
Trade receivables are recognized and carried at the original
invoice amount less allowance for any uncollectible amounts. An estimate for
doubtful accounts is made when collection of the full amount is no longer
probable. Bad debts are written off as incurred.
(l)
Customer deposits
Customer deposits were received from customers in connection with
orders of products to be delivered in future periods.
(m)
Cash and cash equivalents
The Company considers all highly liquid investments purchased
with original maturities of three months or less to be cash equivalents.
(n)
Advertising
All advertising costs are expensed as incurred.
(o)
Shipping and handling
All shipping and handling are expensed as incurred.
(p)
Research and development
All research and development costs are expensed as incurred.
(q)
Retirement benefits
Retirement benefits in the form of contributions under defined
contribution retirement plans to the relevant authorities are charged to the pro
forma consolidated statement of income as incurred.
(r)
Income taxes
The Company accounts for income tax using an asset and liability
approach and allows for recognition of deferred tax benefits in future years.
Under the asset and liability approach, deferred taxes are provided for the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax assets if it is
more likely than not these items will either expire before the Company is able
to realize their benefits, or that future realization is uncertain.
F-12
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTD)
(s)
Statutory reserves
Statutory reserves are referring to the amount appropriated from
the net income in accordance with laws or regulations, which can be used to
recover losses and increase capital, as approved, and are to be used to expand
production or operations.
(t)
Foreign currency translation
The accompanying financial statements are presented in United
States dollars. The functional currency of the Company is the Renminbi (RMB).
The financial statements are translated into United States dollars from RMB at
year-end exchange rates as to assets and liabilities and average exchange rates
as to revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
|
2007 |
|
2006 |
|
2005 |
Year end RMB : US$ exchange rate |
7.3141 |
|
7.81750 |
|
8.07340 |
Average yearly RMB : US$ exchange
rate |
7.6172 |
|
7.98189 |
|
8.20329 |
The RMB is not freely convertible into foreign currency and all
foreign exchange transactions must take place through authorized institutions.
No representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rates used in translation.
(u)
Revenue recognition
The Company's revenue recognition policies are in compliance with
Staff accounting bulletin (SAB) 104. Sales revenue is recognized at the date of
shipment to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectibility is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as unearned revenue.
The Company's revenue consists of invoiced value of goods, net of
a value-added tax (VAT). , No product return or sales discount allowance is made
as products delivered and accepted by customers are normally not returnable and
sales discount is normally not granted after products are delivered.
(v)
Earnings per share
Basic earnings per share is computed by dividing net income by
the weighted average number of ordinary shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the sum of the
weighted average number of ordinary shares outstanding and dilutive potential
ordinary shares during the years. During the years ended 2007, 2006, and 2006,
no dilutive potential ordinary shares were issued.
F-13
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTD)
The Company computes earnings per share (EPS) in accordance
with Statement of Financial Accounting Standards No. 128, Earnings per share
(SFAS No. 128), and SEC Staff Accounting Bulletin No. 98 (SAB 98). SFAS No.
128 requires companies with complex capital structures to present basic and
diluted EPS. Basic EPS is measured as the income or loss available to common
shareholders divided by the weighted average common shares outstanding for the
period. Diluted EPS is similar to basic EPS but presents the dilutive effect on
a per share basis of potential common shares (e.g., convertible securities,
options, and warrants) as if they had been converted at the beginning of the
periods presented, or issuance date, if later. Potential common shares that have
an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.
(w)
Commitments and contingencies
Liabilities for loss contingencies arising from claims,
assessments, litigation, fines and penalties and other sources are recorded when
it is probable that a liability has been incurred and the amount of the
assessment can be reasonably estimated.
(x)
Comprehensive income
Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, all items that are required to be recognized under
current accounting standards as components of comprehensive income are required
to be reported in a financial statement that is presented with the same
prominence as other financial statements. The Companys current component of
other comprehensive income is the foreign currency translation adjustment.
(y)
Recent accounting pronouncements
In September 2006, the FASB issued SFAS 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. SFAS 157 applies under other accounting
pronouncements that require or permit fair value measurements, where fair value
is the relevant measurement attribute. The standard does not require any new
fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal year beginning after November 15, 2007, and interim periods within
those fiscal years.
F-14
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTD)
In February 2007, the FASB issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities Including an Amendment
of SFAS 115 (SFAS No. 159), which allows for the option to measure financial
instruments and certain other items at fair value. Unrealized gains and losses
on items for which the fair value option has been elected are reported in
earnings. The objective of SFAS 159 is to provide opportunities to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply hedge accounting provisions. SFAS
159 also establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact of SFAS No.
159 on our consolidated financial statements.
In December 2007, the FASB issued SFAS 141 (revised 2007),
Business Combinations, (SFAS 141(R)). SFAS 141(R) retains the fundamental
requirements of the original pronouncement requiring that the purchase method be
used for all business combinations, but also provides revised guidance for
recognizing and measuring identifiable assets and goodwill acquired and
liabilities assumed arising from contingencies, the capitalization of in-process
research and development at fair value, and the expensing of acquisition-related
costs as incurred. SFAS 141(R) is effective for fiscal years beginning after
December 15, 2008. In the event that the Company completes acquisitions
subsequent to its adoption of SFAS 141 (R), the application of its provisions
will likely have a material impact on the Companys results of operations,
although the Company is not currently able to estimate that impact.
In December 2007, the FASB issued SFAS 160, Noncontrolling
Interests in Consolidated Financial Statements − an amendment of ARB No. 51.
SFAS 160 requires that ownership interests in subsidiaries held by parties other
than the parent (previously referred to as minority interests), and the amount
of consolidated net income, be clearly identified, labeled and presented in the
consolidated financial statements. It also requires once a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value. Sufficient disclosures are
required to clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners as components of equity. It is
effective for fiscal years beginning after December 15, 2008, and requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements are applied prospectively.
The Company does not expect the adoption of SFAS 160 to have a material impact
on its financial condition or results of operations.
F-15
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
3.
RESTRICTED CASH
Restricted Cash represents interest bearing deposits placed with
banks to secure banking facilities in the form of loans and notes payable. The
restriction of funds is based on time. The funds that collateralize loans are
held for 60 days in savings account that pay interest at the prescribed national
daily savings account rate. For funds that underline notes payable, the cash is
deposited in six month time deposits that pay interest at the national time
deposit rate.
4.
TRADE ACCOUNTS RECEIVABLE
|
|
2007 |
|
2006 |
|
2005 |
Trade accounts receivable |
$ |
33,031,997 |
$ |
12,032,112 |
$ |
8,057,885 |
Less: Allowance for
doubtful accounts |
|
(172,309) |
|
(226,881) |
|
(64,962) |
|
$ |
32,859,688 |
$ |
11,805,231 |
$ |
7,992,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Bad Debt: |
|
2007 |
|
2006 |
|
2005 |
Beginning Balance |
$ |
226,881 |
$ |
64,962 |
$ |
27,349 |
Additions to Allowance |
|
- |
|
161,919 |
|
37,613 |
Less: bad debt
written off |
|
(54,572) |
|
- |
|
- |
|
$ |
172,309 |
$ |
226,881 |
$ |
64,962 |
The
Company offers credit terms of between 90 to 180 days to most of their
international distributors and between 30 to 90 days for most of their domestic
distributors.
5.
OTHER RECEIVABLES
Other
receivables at December 31st consisted of the following: -
|
|
2007 |
|
2006 |
|
2005 |
Advances to suppliers |
$ |
2,858,351 |
$ |
175,203 |
$ |
2,909,092 |
Advances to Employees for job/travel
disbursements |
|
3,027,007 |
|
2,780,025 |
|
- |
Amount due by a non-related
enterprise |
|
1,063,932 |
|
1,083,467 |
|
- |
Other non-related receivables |
|
451,183 |
|
644,935 |
|
- |
Business taxes prepayment |
|
21,876 |
|
- |
|
29,866 |
Purchase disbursement advances |
|
- |
|
- |
|
3,388,579 |
Sundry deposits |
|
130,627 |
|
- |
|
8,519 |
|
$ |
7,552,976 |
$ |
4,683,630 |
$ |
6,336,056 |
F-16
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
6.
INVENTORIES
Inventories consisted of the following as
December 31:
|
|
2007 |
|
2006 |
|
2005 |
Raw materials |
$ |
5,278,484 |
$ |
7,785,927 |
$ |
5,584,556 |
Work in Process |
|
4,828,790 |
|
- |
|
- |
Finished goods |
|
7,796,070 |
|
4,508,427 |
|
9,867,198 |
|
$ |
17,903,344 |
$ |
12,294,354 |
$ |
15,451,754 |
7.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December
31, consisted of the following:
|
|
2007 |
|
2006 |
|
2005 |
At cost: |
|
|
|
|
|
|
Buildings |
$ |
15,547,205 |
$ |
8,967,534 |
$ |
7,204,365 |
Landscaping, plant, and tree |
|
2,784,136 |
|
1,005,878 |
|
216,513 |
Machinery and equipment |
|
5,732,776 |
|
4,362,645 |
|
3,939,192 |
Office equipment |
|
28,520 |
|
213,527 |
|
70,883 |
Motor vehicles |
|
658,547 |
|
320,932 |
|
380,767 |
|
$ |
24,751,184 |
$ |
14,870,516 |
$ |
11,811,720 |
|
|
|
|
|
|
|
Less: accumulated
depreciation |
|
|
|
|
|
|
Buildings |
|
(698,732) |
|
(508,358) |
|
(322,632) |
Machinery and equipment |
|
(1,954,257) |
|
(1,435,020) |
|
(1,033,940) |
Office equipment |
|
(15,643) |
|
(116,625) |
|
(18,936) |
Motor vehicles |
|
(318,468) |
|
(124,170) |
|
(146,879) |
|
|
(2,987,100) |
|
(2,184,173) |
|
(1,522,387) |
|
|
|
|
|
|
|
Construction in Progress |
|
2,258,097 |
|
831,565 |
|
- |
|
$ |
24,022,181 |
$ |
13,517,908 |
$ |
10,289,333 |
F-17
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
Construction in progress mainly comprises
capital expenditures for construction of the Companys new corporate campus,
including offices, factories and staff dormitories. Capital commitments for the
construction are immaterial for the three years above.
Landscaping, plant and tree is chestnut
trees investment in the development of agricultural operations, which have not
been the significant source of the raw materials needed for the Companys
operations to date.
8.
LAND USE RIGHTS, NET
Land use rights at June 30, 2007 and
December 31st consisted of the following: -
|
|
2007 |
|
2006 |
|
2005 |
Land use rights, at cost |
$ |
3,173,931 |
$ |
2,886,587 |
$ |
1,388,065 |
Less: Accumulated
amortization |
|
(126,910) |
|
(109,112) |
|
(56,314) |
|
$ |
3,047,021 |
$ |
2,777,475 |
$ |
1,331,751 |
Land use rights represent the prepaid land
use right. The PRC government owns the land on which the Companys corporate
campus is being constructed.
9.
SHORT-TERM DEBTS
Short-term debts are as follows: -
|
|
2007 |
|
2006 |
|
2005 |
Loans from Junan County
Construction Bank, |
|
|
|
|
|
|
Interest rate at 6.264% per annum
due 8/31/2007 |
$ |
410.167 |
$ |
- |
$ |
- |
Interest rate at 6.264% per annum
due 9/7/2007 |
|
343,173 |
|
- |
|
- |
Interest rate at 7.776% per annum
due 12/18/2007 |
|
261,139 |
|
- |
|
- |
Interest rate at 7.776% per annum
due 12/18/2007 |
|
355,478 |
|
- |
|
- |
Interest rate at 8.541% per annum
due 3/5/2008 |
|
355,478 |
|
- |
|
- |
Interest rate at 8.892% per annum
due 7/23/2008 |
|
328,133 |
|
- |
|
- |
Interest rate at 6.314% per annum
due 9/17/2008 |
|
256,696 |
|
- |
|
- |
Interest rate at 6.264% per annum |
|
- |
|
3,652,576 |
|
- |
Due between 1/10/2007 and 9/7/2007 |
|
|
|
|
|
|
Interest rate at 6.264% per annum |
|
- |
|
- |
|
7,053,765 |
Due between 1/16/2006 and 4/22/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from Junan County
Agriculture Bank, |
|
|
|
|
|
|
Interest rate at 10.251% per annum
due 1/11/2008 |
|
231,061 |
|
- |
|
- |
Interest rate at 10.557% per annum
due 1/11/2008 |
|
345,907 |
|
- |
|
- |
Interest rate at 11.016% per annum
due 2/21/2008 |
|
191,411 |
|
- |
|
- |
Interest rate at 11.169% per annum
due 6/7/2008 |
|
123,050 |
|
- |
|
- |
Interest rate at 11.169% per annum
due 6/7/2008 |
|
41,017 |
|
- |
|
- |
Interest rate at 11.169% per annum
due 6/29/2008 |
|
347,274 |
|
- |
|
- |
Interest rate at 11.169% per annum
due 6/29/2008 |
|
109,378 |
|
- |
|
- |
Interest rate at 11.169% per annum
due 7/3/2008 |
|
505,872 |
|
- |
|
- |
F-18
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Interest rate at 7.884% per annum
due 7/18/2008 |
|
273,444 |
|
- |
|
- |
Interest rate at 11.628% per annum
due 7/25/2008 |
|
191,411 |
|
- |
|
- |
Interest rate at 11.628% per annum
due 8/1/2008 |
|
82,033 |
|
- |
|
- |
Interest rate at 12.393% per annum
due 10/30/2008 |
|
410,167 |
|
- |
|
- |
Interest rate at 12.393% per annum
due 11/11/2008 |
|
239,264 |
|
- |
|
- |
Interest rate at 12.393% per annum
due 11/14/2008 |
|
205,083 |
|
- |
|
- |
Interest rate at 12.393% per annum
due 11/14/2008 |
|
199,614 |
|
- |
|
- |
Interest rate at 12.393% per annum
due 11/22/2008 |
|
410,167 |
|
- |
|
- |
Interest rate at 12.393% per annum
due 11/29/2008 |
|
287,117 |
|
- |
|
- |
Interest rate at 12.393% per annum
due 12/4/2008 |
|
410,167 |
|
- |
|
- |
Interest rate at 12.393% per annum
due 12/13/2008 |
|
410,167 |
|
- |
|
- |
Interest rate at 7.65% to 10.404%
per annum |
|
- |
|
6,269,636 |
|
- |
Due between 1/10/2007 and 12/5/2007 |
|
|
|
|
|
|
Interest rate at 7.65% to 10.404%
per annum |
|
- |
|
- |
|
6,160,848 |
Due between 1/3/2006 and 12/12/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from Junan County Industrial
and Commercial |
|
|
|
|
|
|
Bank, |
|
|
|
|
|
|
Interest rate at 6.120% per annum
due 1/11/2007 |
|
546,889 |
|
- |
|
- |
Interest rate at 8.424% per annum
due 3/7/2007 |
|
806,661 |
|
- |
|
- |
Interest rate at 6.120% per annum
due 11/10/2007 |
|
136,722 |
|
- |
|
- |
Interest rate at 8.073% per annum
due 12/7/2007 |
|
1,278,353 |
|
- |
|
- |
Interest rate at 7.956% per annum
due 1/18/2008 |
|
478,528 |
|
- |
|
- |
Interest rate at 7.956% per annum
due 1/18/2008 |
|
546,889 |
|
- |
|
- |
Interest rate at 6.9545% per annum
due 2/8/2008 |
|
604,299 |
|
- |
|
- |
Interest rate at 6.570% per annum
due 2/8/2008 |
|
546,889 |
|
- |
|
- |
Interest rate at 7.956% per annum
due 3/5//2008 |
|
1,367,222 |
|
- |
|
- |
Interest rate at 8.892% per annum
due 3/7/2008 |
|
410,167 |
|
- |
|
- |
Interest rate at 6.12% per annum due
6/30/2008 |
|
706,766 |
|
- |
|
- |
Interest rate at 7.290% per annum
due 6/30/2008 |
|
232,428 |
|
- |
|
- |
Interest rate at 3.5% to 6.12% per
annum |
|
- |
|
4,699,925 |
|
- |
Due between 1/11/2007 and 12/10/2007 |
|
|
|
|
|
|
Interest rate at 3.5% to 6.12% per
annum |
|
- |
|
- |
|
3,987,565 |
Due between 2/23/2006 and 12/19/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from Junan County Merchants
Bank, |
|
1,367,222 |
|
- |
|
- |
Interest rate at 6.210% per annum
due 3/13/2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from Junan County
Agricultural Financial |
|
|
|
|
|
|
Institution, |
|
|
|
|
|
|
Interest rate at 9.750% per annum
due 5/20/2008 |
|
25,977 |
|
- |
|
- |
Interest rate at 12.420% per annum
due 6/20/2008 |
|
68,361 |
|
- |
|
- |
Interest rate at 10.935% per annum
due 10/1/2008 |
|
2,597,722 |
|
- |
|
- |
F-19
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Interest rate at 9.765% per annum
|
|
- |
|
181,644 |
|
- |
Due between 1/13/2007 and 5/22/2007 |
|
|
|
|
|
|
Interest rate at 9.765% per annum |
|
- |
|
- |
|
505,923 |
Due between 1/13/2007 and 5/22/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from Linyi Commercial Bank, |
|
|
|
|
|
|
Interest rate at 10.71% per annum
due 2/6/2008 |
|
615,250 |
|
- |
|
- |
Interest rate at 10.71% per annum
due 2/9/2008 |
|
497,221 |
|
- |
|
- |
Interest rate at 13.73 % per annum
due 12/25/2008 |
|
136,722 |
|
- |
|
- |
Interest rate at 9.765% to 10.4715%
per annum |
|
- |
|
1,688,520 |
|
- |
Due between 1/9/2007 and 11/29/2007 |
|
|
|
|
|
|
Interest rate at 9.765% to 10.4715%
per annum |
|
- |
|
- |
|
1,374,885 |
Due between 1/9/2006 and 4/21/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from Junan Agricultural
Development Bank, |
|
|
|
|
|
|
Interest rate at 7.290% per annum
due 9/26/2008 |
|
1,367,222 |
|
- |
|
- |
Interest rates at 5.3625% to 6.435%
per annum |
|
- |
|
1,279,182 |
|
- |
Due between 7/19/2007 and 9/4/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from Beijing Miyun County
Shilipu Rural |
|
|
|
|
|
|
Financial Institution,
|
|
|
|
|
|
|
Interest rates at 7.56% to 9.18% per
annum |
|
- |
|
2,539,174 |
|
- |
Due between 3/30/2007 and 5/27/2007 |
|
|
|
|
|
|
Interest rates at 7.56% to 9.18% per
annum |
|
- |
|
- |
|
2,477,271 |
Due between 3/30/2006 and 5/30/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from China Agricultural
Bank, Miyun |
|
|
|
|
|
|
Interest rate at 7.02% per annum due
7/18/2007 |
|
- |
|
575,632 |
|
- |
|
|
|
|
|
|
|
Loan from China Agricultural
Bank, Luotian |
|
|
|
|
|
|
Branch |
|
|
|
|
|
|
Interest rate at 7.722% per annum
due 8/30/2008 |
|
1,039,089 |
|
- |
|
- |
Interest rates at 7.605% to 7.95%
per |
|
- |
|
972,178 |
|
- |
Due 6/30/2007 and 9/5/2007 |
|
|
|
|
|
|
Interest rates at 7.605% to 7.95%
per |
|
- |
|
- |
|
1,114,772 |
Due 9/5/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of China, Junan Branch, |
|
|
|
|
|
|
Interest rate at 7.500% per annum
due 5/19/2009 |
|
9,815 |
|
- |
|
- |
|
|
|
|
|
|
|
International Trust Co., Ltd., |
|
|
|
|
|
|
Interest rate at 7.839% per annum
due 5/19/2009 |
|
1,367,222 |
|
- |
|
- |
F-20
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
International Trust and Investment
Co., Ltd. |
|
|
|
|
|
|
Interest rate at 0.67% per annum due
6/13/2008 |
|
|
|
1,279,181 |
|
|
|
$ |
24,077,504 |
$ |
23,137,648 |
$ |
22,675,029 |
The loans, which are denominated in the
functional currency Renminbi (RMB), were primarily obtained for general working
capital.
All overdue loans were extended by its
financial institution.
10.
NOTES PAYABLE
The notes payable, which are
denominated in the functional currency of Renminbi, at December 31st,
are presented in US dollars: -
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Notes to Industrial and Commercial
Bank, |
|
|
|
|
|
|
Bank commission charge at 3.99% due
December 20, 2007 |
$ |
546,889 |
$ |
- |
$ |
- |
Bank commission charge at 3.99%
due December 12, 2007
|
|
1,093,778 |
|
- |
|
- |
Bank commission charge at 3.99% due
December 18, 2007 |
|
1,093,778 |
|
- |
|
- |
Bank commission charge at 3.744% due
June 1, 2007 |
|
- |
|
3,274,704 |
|
- |
|
|
|
|
|
|
|
Notes to Linyi Commercial Bank, |
|
|
|
|
|
|
Bank commission charge at 2.85%, due
May 20, 2007 |
|
- |
|
191,877 |
|
- |
|
|
|
|
|
|
|
Notes to Junan County Agriculture
Bank, |
|
|
|
|
|
|
Bank commission charge at 0.05%, due
3/29/2006 |
|
- |
|
- |
|
1,238,636 |
Bank commission charge at 0.05%, due
between 3/22/06 and 3/30/06 |
|
- |
|
- |
|
1,238,635 |
Bank commission charge at 0.05%, due
between 4/30/06 and 5/26/05 |
|
- |
|
- |
|
990,908 |
|
|
|
|
|
|
|
Loan from Junan County Agricultural
Financial Institution, |
|
|
|
|
|
|
Bank charge commission charge at
0.05%, due 11/25/06 |
|
- |
|
- |
|
297,273 |
|
$ |
2,734,444 |
$ |
3,466,581 |
$ |
3,765,452 |
All overdue notes were extended by its
financial institution.
F-21
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
11.
ACCRUED EXPENSES AND OTHER PAYABLE
Accrued expenses and other payables at
December 31st consisted of the following: -
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Accrued salaries and wages |
$ |
302,356 |
$ |
346,738 |
$ |
117,082 |
Accrued utility expenses |
|
515,092 |
|
114,857 |
|
218,103 |
Accrued interest expenses |
|
- |
|
11,178 |
|
304,232 |
Accrued transportation expenses |
|
371,839 |
|
100,089 |
|
6,504 |
Other accruals |
|
2,848,985 |
|
90,000 |
|
61,278 |
Business and other taxes |
|
- |
|
734,492 |
|
402,451 |
Purchases disbursements payables |
|
12,359,109 |
|
1,100,559 |
|
1,603,273 |
Interest Payable |
|
180,696 |
|
- |
|
23,455 |
Accrued staff welfare |
|
206,031 |
|
72,350 |
|
28,871 |
|
|
|
|
|
|
|
|
$ |
16,784,108 |
$ |
2,570,263 |
$ |
2,765,249 |
12.
LONG-TERM DEBTS
Long-term debts are as follow: - |
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
Loan from Bank of China, Junan
Branch, |
|
|
|
|
|
|
Interest rates at 0.67% per annum
due 5/19/2009 |
|
- |
|
14,738 |
|
- |
|
|
|
|
|
|
|
Loan from Agricultural Development
Luotian Government, |
|
|
|
|
|
|
Interest rates at 0.67% per annum
due 12/11/2010 |
|
102,542 |
|
95,939 |
|
- |
|
|
|
|
|
|
- |
Less: Current maturities of
long-term debts |
|
- |
|
(5,117) |
|
- |
|
|
|
|
|
|
|
|
|
102,542 |
|
105,560 |
|
- |
Interest expenses for the loans were $2,293,442 for the year December 31, 2007.
The Loan from Agricultural
Development Loutian Government is due in full at December 11, 2010. There is no
current portion at December 31, 2007.
F-22
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
13.
MINORITY INTERESTS
This represents the 19.8% equity of
Shangdong Lorain held by a state-owned interest, Shandong Economic Development
Investment Corporation.
14.
CAPITALIZATION
As a result of the reverse-merger on May
3, 2007 involving an exchange of shares, the total number of 24,923,178 shares
of the Companys common stock issued and outstanding at December 31, 2007 as
depicted in the following table:
Name of Shareholder |
|
Number of Share |
|
Common Stock Capital |
|
Additional Paid-in
Capital |
|
|
|
|
|
|
|
Shareholders of International Lorain
Holding |
|
|
|
|
|
|
Inc. (697,663 Series B preferred
shares |
|
|
|
|
|
|
converted to common shares at one
for 23.375 |
|
|
|
|
|
|
Split |
|
16,307,872 |
$ |
16,308 |
|
- |
|
|
|
|
|
|
|
Halter Financial Investments LP and
other |
|
|
|
|
|
|
(100,000 Series A preferred shares
converted |
|
|
|
|
|
|
to common shares: |
|
|
|
|
|
|
100,000 x 428.56 = 42,856,000 /
32.84) |
|
|
|
|
|
|
Reversed-split |
|
1,304,992 |
|
1,305 |
|
- |
|
|
|
|
|
|
|
Original Shareholders of Millenium
Quest Inc. |
|
|
|
|
|
|
(Shell) 10,508,643 shares / 32.84 |
|
|
|
|
|
|
reverse-split adjusted for
round-down |
|
319,913 |
|
320 |
|
- |
|
|
|
|
|
|
|
Original additional paid-in capital
from the |
|
|
|
|
|
|
4 PRC subsidiaries |
|
- |
|
- |
|
6,846,620 |
|
|
|
|
|
|
|
Issuance of common stock for cash |
|
6,990,401 |
|
6,990 |
|
17,340,648 |
|
|
|
|
|
|
|
|
|
24,923,178 |
|
24,923 |
|
24,187,268 |
F-23
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
15.
INCOME TAXES
All of the Groups income before income
taxes and related tax expenses are from PRC sources. In accordance with the
relevant tax laws and regulations of PRC, the corporation income tax rate is
33%. However, also in accordance with the relevant taxation laws in the PRC,
some of the subsidiaries of the Group are eligible for tax exemption. In
particular, from the time that a company has its first profitable tax year, the
company is exempt from corporate income tax for its first two year and is then
entitled to a 50% tax reduction for the succeeding three year. Actual income tax
expenses reported in the consolidated statements of income and comprehensive
income differ from the amounts computed by applying the PRC statutory income tax
rate of 33% to income before income tax for the period from August 4, 2006 (date
of incorporation) to December 31, 2007 for the following reasons: -
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Income before tax |
$ |
12,595,196 |
$ |
7,333,197 |
$ |
4,562,172 |
|
|
|
|
|
|
|
Tax at the income tax rate |
|
3,778,559 |
|
2,419,955 |
|
1,505,517 |
Effect of tax exemption granted
|
|
(1,643,643) |
|
(1,355,576) |
|
(1,180,937) |
Income tax |
$ |
2,134,916 |
$ |
1,064,379 |
$ |
324,580 |
Per Share Effect of Tax
Exemption |
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Effect of tax exemption granted |
$ |
1,643,643 |
$ |
1,378,960 |
$ |
1,180,937 |
|
|
|
|
|
|
|
Weighted-Average Shares Outstanding |
|
24,923,178 |
|
17,932,777 |
|
17,932,777 |
Per share effect |
$ |
0.0659 |
$ |
0.0769 |
$ |
0.0659 |
Effective January 1, 2008, PRC government implements a new 25% tax rate across
the board for all enterprises regardless of whether domestic or foreign
enterprise without any tax holiday which is defined as two-year exemption
followed by three-year half exemption hitherto enjoyed by tax payers. As a
result of the new tax law of a standard 15% tax rate, tax holidays terminated as
of December 31, 2007. However, PRC government has established a set of
transition rules to allow enterprises already started tax holidays before
January 1, 2008, to continue enjoying the tax holidays until being fully
utilized.
Based
on the background of each constituent of our group, the income tax rates
applicable to the four constituents for 2007, 2008 and 2009 are depicted in the
following table.
F-24
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS -
DECEMBER 31, 2007, 2006 AND 2005
(Stated in US Dollars)
Income Tax Rate |
2007 |
2008 |
2009 |
Junan Hongran |
15% |
12.5% |
25% |
Luotian Lorain |
0% |
12.5% |
12.5% |
Beijing Lorain |
0% |
0% |
12.5% |
Shangdong Lorain |
30% |
25% |
25% |
16.
SALES BY PRODUCT TYPE
Sales by categories of product at December
31, as follow: -
Category |
|
2007 |
|
2006 |
|
2005 |
Chestnut |
$ |
45,799,404 |
$ |
29,725,421 |
$ |
20,055,697 |
Meat |
|
2,518,968 |
|
3,830,986 |
|
475,703 |
Vegetable |
|
32,824,386 |
|
14,787,914 |
|
8,136,133 |
Others |
|
952,205 |
|
1,216,636 |
|
1,527,611 |
Total |
$ |
82,094,963 |
$ |
49,560,957 |
$ |
30,195,144 |
Revenue by geography at December 31, as follow:
Country |
|
2007 |
|
2006 |
|
2005 |
Australia |
$ |
18,710 |
$ |
- |
$ |
- |
Belgium |
|
2,040,636 |
|
1,682,906 |
|
1,042,364 |
Canada |
|
14,112 |
|
366,581 |
|
965,566 |
China |
|
48,566,474 |
|
23,423,978 |
|
14,831,818 |
France |
|
284,101 |
|
- |
|
- |
Germany |
|
44,527 |
|
246,030 |
|
- |
Holland |
|
586,379 |
|
- |
|
- |
Hong Kong |
|
71,860 |
|
- |
|
- |
Japan |
|
17,077,937 |
|
13,791,034 |
|
11,360,356 |
Kuwait |
|
364,893 |
|
3,930,546 |
|
112,849 |
Malaysia |
|
1,569,794 |
|
- |
|
- |
Mexico |
|
- |
|
1,425,203 |
|
282,621 |
Saudi Arabia |
|
684,321 |
|
415,426 |
|
335,410 |
Singapore |
|
2,442,038 |
|
246,388 |
|
86,779 |
South Korea |
|
5,174,079 |
|
2,409,855 |
|
358,494 |
Taiwan |
|
57,819 |
|
- |
|
- |
United Arab Emirates |
|
239,565 |
|
|
|
|
United Kingdom |
|
1,793,707 |
|
- |
|
- |
United States of America
|
|
1,064,011 |
|
- |
|
- |
Other |
|
- |
|
1,623,010 |
|
818,887 |
Total |
$ |
82,094,963 |
$ |
49,560,957 |
$ |
30,195,144 |
F-25
10,470,831 shares of common stock
PROSPECTUS
May 15, 2008
----------------------------------------------
Until 90 days from the date of this prospectus, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a prospectus. This is in
addition to the dealers obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
80
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than underwriting discounts and commissions,
payable by us in connection with the sale of common stock being registered. All amounts, other than
the SEC registration fee, are estimates. We will pay all these expenses.
|
|
Amount to be
Paid |
|
|
|
SEC Registration Fee |
$ |
1,466.32 |
|
|
|
Printing Fees and Expenses |
|
1,100 |
|
|
|
Legal Fees and Expenses |
|
75,000 |
|
|
|
Accounting Fees and Expenses |
|
17,500 |
|
|
|
Blue Sky Fees and Expenses |
|
10,000 |
|
|
|
Transfer Agent and Registrar Fees |
|
3,000 |
|
|
|
Total |
$ |
108,066.32 |
|
|
Item 14. Indemnification of Directors and Officers
Our bylaws provide for the indemnification of our present and prior directors and officers or any person
who may have served at our request as a director or officer of another corporation in which we
own
shares of capital stock or of which we are a creditor, against expenses actually and necessarily
incurred by them in connection with the defense of any actions, suits or proceedings in which they,
or any of them, are made parties, or a party, by reason of being or having been director(s) or
officer(s)
of us or of such other corporation, in the absence of negligence or misconduct in the
performance
of their duties. This indemnification policy could result in substantial expenditure
by us, which
we may be unable to recoup.
Insofar as indemnification by us for liabilities arising under the Exchange Act may be permitted to
our directors, officers and controlling persons pursuant to provisions of the Certificate of Incorporation
and Bylaws, or otherwise, we have been advised that in the opinion of the SEC, such indemnification
is against public policy and is, therefore, unenforceable. In the event that a claim for indemnification
by such director, officer or controlling person of us in the successful defense of any action, suit
or proceeding is asserted by such director, officer or controlling person in connection with the
securities being offered, we will, unless in the opinion of our counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the Exchange Act and will be governed
by the final adjudication of such issue.
At the present time, there is no pending litigation or proceeding involving a director, officer, employee
or other agent of ours in which indemnification would be required or permitted. We are not aware
of any threatened litigation or proceeding which may result in a claim for such indemnification.
Item 15. Recent Sales of Unregistered Securities
On April 5, 2007, we issued 100,000 shares of Series A Voting Convertible Preferred Stock to Halter
Financial Investments, L.P. for a consideration of $415,000. Each share of Series A Voting Convertible
Preferred Stock was entitled to 428.56 votes and can be converted into 428.56 shares of our common
stock. The foregoing transfers were made in reliance upon exemptions provided by Section 4(2) of
the Securities Act for the offer and sale of securities not involving a public offering and Regulation
D promulgated thereunder.
On May 3, 2007, we issued 697,633 shares of our Series B Voting Convertible Preferred Stock to stockholders
of Lorain Holding. The total consideration for these shares of our Series B Voting Convertible Preferred
Stock is 5,099,503 shares of common stock of Lorain Holding, which is all the issued and outstanding
capital stock of Lorain Holding. We did not receive any cash consideration in connection with the
share exchange. The number of our shares issued to the stockholders of Lorain Holding was determined
based on an arms-length negotiation. The issuance of our shares to these individuals was made in
reliance upon exemptions from the registration requirements of the Securities Act pursuant to Regulation
S thereunder.
81
On May 3, 2007, we also completed a private placement pursuant to which we issued and sold to certain
accredited investors 604,674 shares of our Series B Voting Convertible Preferred Stock for approximately
$19.8 million pursuant to a Securities Purchase Agreement dated May 3, 2007. The issuance of our
shares to these investors was made in reliance on the exemption provided by Section 4(2) of the Securities
Act for the offer and sale of securities not involving a public offering and Regulation D promulgated
thereunder.
In instances described above where we issued securities in reliance upon Regulation D, we relied upon
Rule 506 of Regulation D of the Securities Act. These stockholders who received the securities in
such instances made representations that (a) the stockholder is acquiring the securities for his,
her or its own account for investment and not for the account of any other person and not with a
view to or for distribution, assignment or resale in connection with any distribution within the
meaning of the Securities Act, (b) the stockholder agrees not to sell or otherwise transfer the purchased
shares unless they are registered under the Securities Act and any applicable state securities laws,
or an exemption or exemptions from such registration are available, (c) the stockholder has knowledge
and experience in financial and business matters such that he, she or it is capable of evaluating
the merits and risks of an investment in us, (d) the stockholder had access to all of our documents,
records, and books pertaining to the investment and was provided the opportunity to ask questions
and receive answers regarding the terms and conditions of the offering and to obtain any additional
information which we possessed or were able to acquire without unreasonable effort and expense, and
(e) the stockholder has no need for the liquidity in its investment in us and could afford the complete
loss of such investment. Management made the determination that the investors in instances where
we relied on Regulation D are accredited investors (as defined in Regulation D) based upon managements
inquiry into their sophistication and net worth. In addition, there was no general solicitation or
advertising for securities issued in reliance upon Regulation D.
In instances described above where we indicate that we relied upon Section 4(2) of the Securities Act
in issuing securities, our reliance was based upon the following factors: (a) the issuance of the
securities was an isolated private transaction by us which did not involve a public offering; (b)
there were only a limited number of offerees; (c) there were no subsequent or contemporaneous public
offerings of the securities by us; (d) the securities were not broken down into smaller denominations;
and (e) the negotiations for the sale of the stock took place directly between the offeree and us.
Item 16. Exhibits and Financial Statement Schedules
The following exhibits are included as part of this Form S-1.
|
Exhibit No. |
Description |
|
|
|
|
2.1 |
Share Exchange Agreement, dated May 3, 2007, among the registrant, International Lorain Holding, Inc. and its stockholders. Incorporated by reference to Exhibit 2.1 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
3.1 |
Restated Certificate of Incorporation of the registrant as filed with the Secretary of State of Delaware. Incorporated by reference to Exhibit 3.1 to the registrants current on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
3.2 |
Bylaws of the registrant, adopted on March 31, 2000. Incorporated by reference to Exhibit 3.2 to the registrants Registration Statement on Form 10SB12G filed October 19, 2001, in commission file 0-31619. |
|
|
|
|
4.1 |
Certificate of Designation of Series A Voting Convertible Preferred Stock of the registrant as filed with the Secretary of State of Delaware on April 9, 2007. Incorporated by reference to Exhibit 4.1 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
4.2 |
Certificate of Designation of Series B Voting Convertible Preferred Stock of registrant as filed with the Secretary of State of Delaware on April 30, 2007. Incorporated by reference to Exhibit 4.2 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
82
|
Exhibit No. |
Description |
|
|
|
|
4.3 |
Option Agreement, dated May 3, 2007, between Mr. Hisashi Akazawa and Mr. Si Chen. Incorporated by reference to Exhibit 4.3 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
4.4 |
Form of Registration Rights Agreement, dated May 3, 2007. Incorporated by reference to Exhibit to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
4.5 |
Form of Common Stock Purchase Warrants issued to investors, dated May 3, 2007. Incorporated by reference to Exhibit 4.5 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
4.6 |
Form of Common Stock Purchase Warrants issued to Sterne Agee & Leach, Inc. and its designee, dated May 3, 2007. Incorporated by reference to Exhibit 4.5 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
5.1 |
|
|
|
|
|
5.2 |
|
|
|
|
|
10.1 |
Form of the Securities Purchase Agreement, dated May 3, 2007, by and among the registrant and the investors named therein, and joined by Mr. Akazawa and Mr. Chen as to certain sections. Incorporated by reference to Exhibit 10.1 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
10.2 |
Make Good Escrow Agreement, dated May 3, 2007, by and among the registrant, Sterne Agee & Leach, Inc., Mr. Hisashi Akazawa, Mr. Si Chen and Securities Transfer Corporation. Incorporated by reference to Exhibit 10.2 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
10.3 |
Closing Escrow Agreement, dated May 3, 2007, by and among the registrant, Sterne Agee & Leach, Inc. and Thelen Reid Brown Raysman & Steiner LLP. Incorporated by reference to Exhibit 10.3 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
10.4 |
Cancellation and Escrow Agreement, dated May 3, 2007, by and among the registrant, Halter Financial Investments, L.P., Halter Financial Group, L.P. and Security Transfer Corporation. Incorporated by reference to Exhibit 10.4 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
10.5 |
Employment Agreement, dated March 2, 2005, by and between Shandong Green Foodstuff CO., LTD and Si Chen. Incorporated by reference to Exhibit 10.5 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
10.6 |
Employment Agreement, dated July 2, 2002, by and between Shandong Green Foodstuff CO., LTD and Xiandong Zhou. Incorporated by reference to Exhibit 10.6 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
83
|
Exhibit No. |
Description |
|
|
|
|
10.7 |
Employment Agreement, dated December 7 2004, by and between Shandong Green Foodstuff CO., LTD and Huanxiang Sheng. Incorporated by reference to Exhibit 10.7 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
10.8 |
Employment Agreement, dated November 20, 2007, by and between Shandong Green Foodstuff CO., LTD and Jing Thomas Wu. Incorporated by reference to Exhibit 10.1 to the registrants current report on Form 8-K filed on November 21, 2007 in commission file number 0-31619. |
|
|
|
|
10.9 |
Cooperation Agreement, dated May 18, 2006, by and between Beijing Green Foodstuff Co., Ltd. and the Chestnut Cooperation of Zhenzhai Village, Gaoling town, Miyun County. Incorporated by reference to Exhibit 10.8 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
10.10 |
Equity Transfer Agreement, dated August 15, 2006, by and between International Lorain Co., Ltd and International Lorain Holding, Inc. Incorporated by reference to Exhibit 10.9 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
10.11 |
Credit Facility Agreement, dated September 28, 2006, by and between Beijing Green Foodstuff Co., Ltd. and the Shilibao Branch of Beijing Rural Commercial Bank Co., Ltd. Incorporated by reference to Exhibit 10.10 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
10.12 |
Sales contract, dated May 13, 2006, by and between Shandong Green Foodstuff Co., Ltd. and the Shandong Lu An Import & Export Co., Ltd. Incorporated by reference to Exhibit 10.11 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
10.13 |
Sales contract, dated September 5, 2006, by and between Shandong Green Foodstuff Co., Ltd. and the Shinsei Foods Co., Ltd. Incorporated by reference to Exhibit 10.12 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
10.14 |
Sales Contract, dated September 10, 2006, by and between Junan Hongrun Foodstuff Co., Ltd. and the Shinsei Foods Co., Ltd. Incorporated by reference to Exhibit 10.13 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
10.15 |
Financial Advisory Agreement, dated February 14, 2007, by and between HFG International, Limited and Shandong Green Foodstuff Co., Ltd. Incorporated by reference to Exhibit 10.14 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
10.16 |
Consulting Agreement, dated March 8, 2007, by and between Heritage Management Consultants, Inc. and International Lorain Holding, Inc. Incorporated by reference to Exhibit 10.15 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
84
|
Exhibit No. |
Description |
|
|
|
|
14 |
Business Ethics Policy and Code of Conduct, adopted on April 30, 2007. Incorporated by reference to Exhibit 14 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
15 |
|
|
|
|
|
21 |
List of subsidiaries of the registrant. Incorporated by reference to Exhibit 21 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
23.1 |
Consent of Lewis, Hansen, Waldo & Pleshe, LLC, included in Exhibit 5.1. |
|
|
|
|
23.2 |
Consent of Thelen Reid Brown Raysman & Steiner LLP, included in Exhibit 5.2. |
|
|
|
|
23.3 |
|
|
|
|
|
24 |
Power of Attorney (included on the signature page of this registration statement). |
|
|
|
|
99.1 |
Press Release, dated May 3, 2007. Incorporated by reference to Exhibit 99.1 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
|
|
|
|
99.2 |
Press Release, dated November 20, 2007. Incorporated by reference to Exhibit 99.1 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
Item 17. Undertakings
The undersigned registrant hereby undertakes to:
File, during any period in which offers or sales are being made, a post-effective amendment to this
registration statement to:
(a) Include
any prospectus required by Section 10(a)(3) of the Securities Act, and
(b) Reflect
in the prospectus any facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering price set forth in the
Calculation of Registration Fee table in the effective registration statement, and
(c) Include
any additional or changed material information on the plan of distribution.
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
If the registrant is relying on Rule 430B (?230.430B of this chapter):
85
Each prospectus filed by the registrant pursuant to Rule 424(b)(3)shall be deemed to be part of the
registration statement as of the date the filed prospectus was deemed part of and included in the
registration statement; and
Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration
statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii),
or (x) for the purpose of providing the information required by section 10(a) of the Securities Act
of 1933 shall be deemed to be part of and included in the registration statement as of the earlier
of the date such form of prospectus is first used after effectiveness or the date of the first contract
of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for
liability purposes of the issuer and any person that is at that date an underwriter, such date shall
be deemed to be a new effective date of the registration statement relating to the securities in
the registration statement to which that prospectus relates, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that
no statement made in a registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser with a time of contract
of sale prior to such effective date, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in any such document
immediately prior to such effective date; or
If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of
a registration statement relating to an offering, other than registration statements relying on Rule
430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and
included in the registration statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will, as to a purchaser with a
time of contract of sale prior to such first use, supersede or modify any statement that was made
in the registration statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
For determining liability under the Securities Act, treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the securities at that time to be the initial
bona fide offering.
File a post-effective amendment to remove from registration any of the securities that remain unsold
at the end of the offering.
For determining any liability under the Securities Act, treat each post-effective amendment that contains
a form of prospectus as a new registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona fide offering of
those securities.
Request for acceleration of effective date or filing of registration statement becoming effective upon
filing. Include the following if acceleration is requested of the effective date of the registration
statement pursuant to Rule 461 under the Securities Act (Rule 230.461 of this chapter), if a Form
S-3 or Form F-3 will become effective upon filing with the Commission pursuant to Rule 462 (e) or
(f) under the Securities Act (Rule 230.462 (e) or (f)), or if the registration statement is filed
on Form S-8, and:
Any provision or arrangement exists whereby the registrant may indemnify a director, officer or controlling
person of the registrant against liabilities arising under the Securities Act, or
The underwriting agreement contains a provision whereby the registrant indemnifies the underwriter
or controlling persons of the underwriter against such liabilities and a director, officer or controlling
person of the registrant is such an underwriter or controlling person thereof or a member of any
firm which is such an underwriter, and
The benefits of such indemnification are not waived by such persons:
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted
to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final adjudication of such
issue.
86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of
Shandong, on the 15th day of May, 2008.
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AMERICAN LORAIN CORPORATION |
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By: |
/s/ Si Chen |
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Si Chen
Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed
by the following persons in the capacities and on the dates indicated. Each person whose signature
appears below constitutes and appoints Si Chen and Xiandong Zhou, and each of them individually,
his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this registration statement, and to file
the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting
unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
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Title |
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/s/ Si Chen
Mr. Si Chen |
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Sole Director and Chief Executive Officer
(Principal Executive Officer) |
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Date: May 15, 2008 |
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/s/ Xiandong Zhou
Mr. Xiandong Zhou |
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President and Chief Operating Officer |
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Date: May 15, 2008 |
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/s/ Jing Thomas Wu
Mr. Jing Thomas Wu |
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Chief Financial Officer (Principal Financial and
Accounting Officer) |
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Date: May 15, 2008 |
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87
EXHIBIT INDEX
Exhibit No. |
Description |
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2.1 |
Share Exchange Agreement, dated May 3, 2007 , among the registrant, International Lorain Holding, Inc. and its stockholders. Incorporated by reference to Exhibit 2.1 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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3.1 |
Restated Certificate of Incorporation of the registrant as filed with the Secretary of State of Delaware. Incorporated by reference to Exhibit 3.1 to the registrants current on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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3.2 |
Bylaws of the registrant, adopted on March 31, 2000. Incorporated by reference to Exhibit 3.2 to the registrants Registration Statement on Form 10SB12G filed October 19, 2001, in commission file 0-31619. |
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4.1 |
Certificate of Designation of Series A Voting Convertible Preferred Stock of the registrant as filed with the Secretary of State of Delaware on April 9, 2007. Incorporated by reference to Exhibit 4.1 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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4.2 |
Certificate of Designation of Series B Voting Convertible Preferred Stock of registrant as filed with the Secretary of State of Delaware on April 30, 2007. Incorporated by reference to Exhibit 4.2 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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4.3 |
Option Agreement, dated May 3, 2007, between Mr. Hisashi Akazawa and Mr. Si Chen. Incorporated by reference to Exhibit 4.3 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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4.4 |
Form of Registration Rights Agreement, dated May 3, 2007. Incorporated by reference to Exhibit to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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4.5 |
Form of Common Stock Purchase Warrants issued to investors, dated May 3, 2007. Incorporated by reference to Exhibit 4.5 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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4.6 |
Form of Common Stock Purchase Warrants issued to Sterne Agee & Leach, Inc. and its designee, dated May 3, 2007. Incorporated by reference to Exhibit 4.5 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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5.1 |
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5.2 |
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10.1 |
Form of the Securities Purchase Agreement, dated May 3, 2007, by and among the registrant and the investors named therein, and joined by Mr. Akazawa and Mr. Chen as to certain sections. Incorporated by reference to Exhibit 10.1 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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Exhibit No. |
Description |
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10.2 |
Make Good Escrow Agreement, dated May 3, 2007, by and among the registrant, Sterne Agee & Leach, Inc., Mr. Hisashi Akazawa, Mr. Si Chen and Securities Transfer Corporation. Incorporated by reference to Exhibit 10.2 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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10.3 |
Closing Escrow Agreement, dated May 3, 2007, by and among the registrant, Sterne Agee & Leach, Inc. and Thelen Reid Brown Raysman & Steiner LLP. Incorporated by reference to Exhibit 10.3 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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10.4 |
Cancellation and Escrow Agreement, dated May 3, 2007, by and among the registrant, Halter Financial Investments, L.P., Halter Financial Group, L.P. and Security Transfer Corporation. Incorporated by reference to Exhibit 10.4 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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10.5 |
Employment Agreement, dated March 2, 2005, by and between Shandong Green Foodstuff CO., LTD and Si Chen. Incorporated by reference to Exhibit 10.5 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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10.6 |
Employment Agreement, dated July 2, 2002, by and between Shandong Green Foodstuff CO., LTD and Xiandong Zhou. Incorporated by reference to Exhibit 10.6 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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10.7 |
Employment Agreement, dated December 7 2004, by and between Shandong Green Foodstuff CO., LTD and Huanxiang Sheng. Incorporated by reference to Exhibit 10.7 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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10.8 |
Employment Agreement, dated November 20, 2007, by and between Shandong Green Foodstuff CO., LTD and Jing Thomas Wu. Incorporated by reference to Exhibit 10.1 to the registrants current report on Form 8-K filed on November 21, 2007 in commission file number 0-31619. |
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10.9 |
Cooperation Agreement, dated May 18, 2006, by and between Beijing Green Foodstuff Co., Ltd. and the Chestnut Cooperation of Zhenzhai Village, Gaoling town, Miyun County. Incorporated by reference to Exhibit 10.8 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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10.10 |
Equity Transfer Agreement, dated August 15, 2006, by and between International Lorain Co., Ltd and International Lorain Holding, Inc. Incorporated by reference to Exhibit 10.9 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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Exhibit No. |
Description |
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10.11 |
Credit Facility Agreement, dated September 28, 2006, by and between Beijing Green Foodstuff Co., Ltd. and the Shilibao Branch of Beijing Rural Commercial Bank Co., Ltd. Incorporated by reference to Exhibit 10.10 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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10.12 |
Sales contract, dated May 13, 2006, by and between Shandong Green Foodstuff Co., Ltd. and the Shandong Lu An Import & Export Co., Ltd. Incorporated by reference to Exhibit 10.11 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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10.13 |
Sales contract, dated September 5, 2006, by and between Shandong Green Foodstuff Co., Ltd. and the Shinsei Foods Co., Ltd. Incorporated by reference to Exhibit 10.12 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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10.14 |
Sales Contract, dated September 10, 2006, by and between Junan Hongrun Foodstuff Co., Ltd. and the Shinsei Foods Co., Ltd. Incorporated by reference to Exhibit 10.13 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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10.15 |
Financial Advisory Agreement, dated February 14, 2007, by and between HFG International, Limited and Shandong Green Foodstuff Co., Ltd. Incorporated by reference to Exhibit 10.14 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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10.16 |
Consulting Agreement, dated March 8, 2007, by and between Heritage Management Consultants, Inc. and International Lorain Holding, Inc. Incorporated by reference to Exhibit 10.15 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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14 |
Business Ethics Policy and Code of Conduct, adopted on April 30, 2007. Incorporated by reference to Exhibit 14 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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15 |
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21 |
List of subsidiaries of the registrant. Incorporated by reference to Exhibit 21 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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23.1 |
Consent of Lewis, Hansen, Waldo & Pleshe, LLC, included in Exhibit 5.1. |
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23.2 |
Consent of Thelen Reid Brown Raysman & Steiner LLP, included in Exhibit 5.2. |
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Exhibit No. |
Description |
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23.3 |
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24 |
Power of Attorney (included on the signature page of this registration statement). |
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99.1 |
Press Release, dated May 3, 2007. Incorporated by reference to Exhibit 99.1 to the registrants current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619. |
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99.2 |
Press Release, dated November 20, 2007. Incorporated by reference to Exhibit 99.1 to the registrants current report on Form 8-K filed on November 21, 2007 in commission file number 0-31619. |
* To be filed by amendment.
100