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U.S. SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: Commission File Number:
June 25, 2003
NEW DRAGON ASIA CORP.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
FLORIDA 88-0404114
- --------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
Room 1304 13/F Wing On Centre
111 Connaght Road Central
Sheung Wan, Hong Kong 33301
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(852) 2815-9892
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to filing requirements
for the past 90 days.
Yes X No
---- ----
The number of shares of Common Stock outstanding as of June 25, 2003 was
40,911,242.
Transitional Small Business Disclosure Format (check one): Yes No X
---- ----
ITEM 1. FINANCIAL STATEMENTS
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS, EXCEPT PER SHARE DATA)
AS OF
-----------------------------
JUNE 25, DECEMBER 25,
A S S E T S 2003 2002
(Unaudited)
------------- --------------
Current Assets:
Cash and cash equivalents $ 659 $ 628
Restricted cash 181 181
Accounts receivable, net of allowance for doubtful accounts
of $507 at June 25, 2003 and $415 at December 25, 2002 6,731 7,328
Other receivables, deposits and prepayments 829 1,066
Inventories 4,685 5,202
Due from related companies 2,296 2,499
------------- --------------
Total current assets 15,381 16,904
Property, machinery and equipment, net 18,669 19,340
Land use rights, net 4,054 4,110
------------- --------------
Total assets $ 38,104 $ 40,354
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 4,325 $ 3,614
Accounts payable 4,673 4,728
Other payables and accruals 1,027 1,282
Taxes payable 169 889
Due to related companies 733 802
------------- --------------
Total current liabilities 10,927 11,315
Due to an immediate parent company 3,687 5,782
Due to joint venture partners 6,077 5,571
------------- --------------
Total liabilities 20,691 22,668
------------- --------------
Stockholders' equity:
Common stock, authorized - 107,000,000 shares,
issued and outstanding - 40,911,242 at June 25, 2003
and December 25, 2002 4 4
Additional paid-in-capital 8,132 8,132
Retained earnings 9,277 9,550
------------- --------------
Total stockholders' equity 17,413 17,686
------------- --------------
Total liabilities and stockholders' equity $ 38,104 $ 40,354
============= ==============
The accompanying notes are an integral part of
these consolidated financial statements.
2
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JUNE 25, JUNE 25, JUNE 25, JUNE 25,
2003 2002 2003 2002
----------------------- -----------------------
Net sales $ 5,478 $ 7,498 $ 12,026 $ 14,391
Cost of goods sold (5,345) (6,098) (11,046) (11,622)
--------- --------- --------- ---------
Gross profit 133 1,400 980 2,769
Selling and distribution expenses (248) (309) (490) (556)
General and administrative
expenses (439) (105) (672) (427)
--------- --------- --------- ---------
Income (loss) from operations (554) 986 (182) 1,786
Other income and expenses:
Interest expense (68) (88) (128) (149)
Interest income 56 46 108 90
Other income 6 (4) 31 1
--------- --------- --------- ---------
Income (loss) before provision for
income taxes (560) 940 (171) 1,728
Provision for income taxes (29) (166) (102) (315)
--------- --------- --------- ---------
Net income loss) $ (589) $ 774 $ (273) $ 1,413
========= ========= ========= =========
Basic and diluted earnings (loss)
per common share $(0.014) $ 0.019 $ (0.007) $ 0.035
========= ========= ========= =========
Weighted average shares used
to compute basic and diluted
net income (loss) per common share 40,911 40,911 40,911 40,911
========= ========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
3
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
-------------------------
JUNE 25, JUNE 25,
2003 2002
------------ ------------
Cash flows from operating activities:
Net (loss) income $ (273) $ 1,413
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Amortization and depreciation 712 862
Loss on disposal of machinery and equipment 37 2
Provision for bad debts 92 6
Changes in assets and liabilities:
Accounts receivable 505 (350)
Other receivables, deposits and prepayments 237 (177)
Inventories 517 (409)
Accounts payable and accrued liabilities (310) 2,239
Taxes payable (720) 459
------------ ----------
Net cash provided by operating activities 797 4,045
------------ ----------
Cash flows from investing activities:
Due from related companies 203 (521)
Due to related companies (69) (205)
Decrease in investment - 72
Proceeds from sale of machinery and equipment 8 5
Purchases of property, machinery and equipment (30) (213)
------------ ----------
Net cash provided by (used in) investing activities 112 (862)
------------ ----------
Cash flows from financing activities:
Proceeds from short-term borrowings 1,807 2,290
Payments on short-term borrowings (1,096) (1,627)
Net decrease in due to an immediate parent company (2,095) (1,930)
Net increase (decrease) in due to joint venture partners 506 (723)
------------ ----------
Net cash used in financing activities (878) (1,990)
------------ ----------
Net increase in cash and cash equivalents 31 1,193
Cash and cash equivalents at the beginning of the period 628 1,293
------------ ----------
Cash and cash equivalents at the end of the period $ 659 $ 2,486
============ ==========
The accompanying notes are an integral part of
these consolidated financial statements.
4
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(ALL INTERIM INFORMATION RELATING TO THE THREE- AND SIX-MONTH PERIODS ENDED JUNE
25, 2003 AND 2002 IS UNAUDITED)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
New Dragon Asia Corporation (formerly Bio-Aqua Systems, Inc.) and its
subsidiaries (the "Group" or "NDAC"), a United States corporation
incorporated in the State of Florida, is principally engaged in the
manufacturing, marketing and distribution of instant noodles and flour in
the People's Republic of China ("PRC"). NDAC has its principal offices in
Hong Kong. The group of NDAC is composed of four limited liability
companies, incorporated under the laws of the British Virgin Islands (BVI).
Prior to December 2001, Bio-Aqua Systems, Inc. ("Bio-Aqua") owned majority
Interests in Tepual, S.A. and Krisel, S.A., Chilean corporations
principally engaged in the business of (1) research, consulting,
development and control of the production of meals for feed used by the
aquaculture, poultry and cattle farming industries, (2) sales of vaccine
products, and (3) krill fishing in Uruguay.
Due to lack of working capital, Bio-Aqua suspended all of its operations
during 2001. On August 7, 2001, it was announced that it would seek to
divest its current operations and acquire a new operating company with the
goal of enhancing shareholder value.
On December 13, 2001 Bio-Aqua entered into a Share Exchange Agreement with
Max Rutman, Flagship Import Export LLC, a Nevada limited liability company
and New Dragon Asia Food Limited, a company organized under the laws of the
British Virgin Islands. Pursuant to the Share Exchange Agreement, Bio-Aqua
acquired from New Dragon Asia Food Limited all of the equity interests of
four companies organized under the laws of the British Virgin Islands (each
a "Subsidiary" and, collectively the "Subsidiaries") each of which in turn
holds an interest in a separate sino-foreign joint venture in exchange for
37,963,263 shares of common stock of the Registrant (the "Share Exchange").
As a condition to the closure of the Share Exchange Agreement, Max Rutman
(through his ownership interest in Flagship Import Export LLC) and Atik
S.A., owners of all 1,700,000 shares of the Class B common stock, converted
their Class B shares to shares of Class A common stock.
In connection with the terms and provisions of the amended and restated
exchange agreement, Bio-Aqua issued 1,335,912 shares of restricted common
stock to investment advisors and attorneys in connection with services
rendered to effectuated the Share Exchange. At the date of issuance of the
shares, the AMEX market quotation of the stock was $3.00 per share. NDAC
included these costs approximating $3,134,000 in other expenses in the
December 25, 2001 statements of consolidated operations and comprehensive
income, computed utilizing a 20% discount of the above AMEX market
quotation due to the restricted nature of the stock.
New Dragon Asia Corporation and its subsidiaries (the "Group" or "NDAC") is
principally engaged in the manufacturing, marketing and distribution of
instant noodles and flour in the People's Republic of China ("PRC").
The Group is subject to, among others, the following operating risks:
COUNTRY RISK - As all of the Group's operations are conducted in the PRC,
the Group is subject to special considerations and significant risks not
typically associated with companies operating in North America and Western
Europe. These include risks associated with, among others, the political,
economic and legal environments and foreign currency exchange. The Group's
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
and remittance abroad, and rates and methods of taxation, among other
things.
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)
In addition, all of the Group's revenue is denominated in Renminbi ("RMB")
which must be converted into other currencies before remittance out of the
PRC. Both the conversion of RMB into foreign currencies and the remittance
of foreign currencies abroad require approvals of the PRC government.
5
OPERATING RISK - The Group conducts its manufacturing and sales operations
through joint ventures established between the Group and certain PRC
parties. Any deterioration of these strategic relationships may have an
adverse effect on the operations of the Group.
CONCENTRATION OF CREDIT RISK - Concentration of credit risk with respect to
customer receivables are limited due to the large number of customers
comprising the Group's customer base, and their dispersion across the PRC.
In addition, the Group performs ongoing credit evaluations of each
customer's financial condition and maintains reserves for potential credit
losses. Such losses in the aggregate have not exceeded management's
expectations.
Details of the companies comprising the Group are as follows:
Percentage of
Domicile and Equity Interest
Date of Paid-Up Attributable to Principle
Name Incorporation Capital the Group Activities
- ------------------------ ------------------- ------------ ---------------- -------------------
Mix Creation The British Virgin US$ 100% Investment holding
Limited Islands 1,500,000
("MC") (a) November 7, 1997
New Dragon Asia Flour The PRC RMB 90% (b) Manufacture,
(Yantai) Company August 13, 1999 28,500,000 marketing and
Limited distribution of
("NDAFLY") flour
Rich Delta Limited The British Virgin US$ 100% Investment holding
("RD") (a) Limited 1,000,000
October 28, 1998
New Dragon Asia Food The PRC RMB 90% (c) Manufacture,
(Yantai) Company Limited December 24, 1998 17,462,000 marketing and
("NDAFY") distribution of
instant noodles
Noble Point Limited The British Virgin US$ 100% Investment holding
("NP") (a) Islands 1,000,000
October 29, 1998
New Dragon Asia The PRC RMB 90% (c) Manufacture,
Food (Dalian) Company December 28, 1998 17,430,000 marketing and
Limited distribution of
("NDAFD") instant noodles
Keen General The British Virgin US$ 100% Investment holding
Limited Islands 1,500,000
("KG") (a) July 20, 1998
Sanhe New Dragon The PRC RMB 80% (c) Manufacture,
Asia Food Company December 25, 1998 51,191,432 marketing and
Limited distribution of
("SNDAF") instant noodles
(a) MC, RD, NP and KG are wholly owned by New Dragon Asia Corporation.
(b) NDAFLY is a contractual joint venture established in the PRC to be
operated for 50 years until August 13, 2049. In September 2000, MC
contributed 90% of the registered capital to NDAFLY. Under the joint
venture agreement dated June 1, 1999 and the supplemental agreement
dated June 26, 1999, the Chinese joint venture partner is entitled to
receive a pre-determined annual fee and is not responsible for any
profit or loss to NDAFLY effective from June 26, 1999. In view of the
profit sharing arrangement, NDAFLY is regarded for financial reporting
purposes as 100% owned by the Group. The minority interest component
has been included as a component of General and Administrative
expenses for the periods ended June 25, 2003 and 2002.
6
(c) NDAFY, NDAFD and SNDAF are contractual joint ventures established in
the PRC to be operated for 50 years until December 24, 2048. In March
1999, RD and NP contributed 90% of the registered capital to NDAFY and
NDAFD, respectively, while KG contributed 80% of the registered
capital to SNDAF. Under the joint venture agreements dated November
28, 1998 and the supplemental agreement dated December 26, 1998, the
PRC joint venture partner is entitled to receive a pre-determined
annual fee and is not responsible for any profit or loss of NDAFY,
NDAFD and SNDAF effective from December 26, 1998. In view of the
profit sharing arrangements, NDAFY, NDAFD and SNDAF are regarded for
financial reporting purposes as 100% owned by the Group.
NOTE 2 - BASIS OF PRESENTATION
The unaudited consolidated financial statements include the
consolidated financial statements of MC and its subsidiary (NDAFLY),
RD and its subsidiary (NDAFY), NP and its subsidiary (NDAFD) and KG
and its subsidiary (SNDAF), as they are enterprises controlled by
NDAFL. All significant intra-group balances and transactions have been
eliminated in consolidation.
The unaudited consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United
States of America ( "U.S. GAAP"). The preparation of financial
statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
as of the date of the financial statements and the reported amounts of
revenues and expenses during the report period. Actual results could
differ from those estimates. U.S. GAAP differs from that used in the
statutory financial statements of the major operating subsidiaries of
the Group, which were prepared in accordance with the relevant
accounting principles and financial reporting regulations applicable
to joint venture enterprises as established by the Ministry of Finance
of the PRC. Certain accounting principles stipulated under U.S. GAAP
are not applicable in the PRC.
The accompanying unaudited consolidated financial statements, which
are for interim periods, do not include all disclosures provided in
the annual consolidated financial statements. These unaudited
consolidated financial statements should be read in conjunction with
the consolidated financial statements and the footnotes thereto
contained in the Annual Report on Form 10-KSB for the year ended
December 25, 2002 of New Dragon Asia Corp. and Subsidiaries, as filed
with the Securities and Exchange Commission. The December 25, 2002
balance sheet was derived from audited consolidated financial
statements, but does not include all disclosures required by U.S.
GAAP.
In the opinion of the Group's management, the accompanying unaudited
consolidated financial statements contain all adjustments (which are
of a normal recurring nature) necessary for a fair presentation of the
Group's consolidated financial position and results of operations. The
results for interim periods are not necessarily indicative of results
to be expected for the complete fiscal year.
7
NOTE 3 - INVENTORIES
Inventories consist of the following (in thousands):
June 25, December 25,
2003 2002
--------- ---------
Raw materials $ 2,403 $ 2,981
Finished goods 2,282 2,221
--------- ---------
$ 4,685 $ 5,202
========= =========
NOTE 4 - EARNINGS PER SHARE - BASIC
Basic earnings per common share ("EPS") is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into
common stock. As of June 25, 2003 and 2002, the diluted share base
excludes incremental shares relating to stock options and warrants
since their effect was anti-dilutive. The weighted-average number of
common shares outstanding for computing basic EPS was 40,911,242 as of
June 25, 2003 and 2002.
NOTE 5 - INCOME TAXES
The income of the Company is subject to PRC income taxes at rates
ranging from 27% to 33% of which 24% to 30% is attributable to the
central government and 3% to the provincial government. On application
and approval by the tax bureau, the PRC subsidiaries within the Group
are exempt from state income tax and local tax in respect of income
earned for the first two years of operation, and then subject to a 50%
reduction in state income tax and a full exemption of local income tax
for the following three years. The Company and its subsidiaries are in
different stages of enjoying the above tax incentive program.
The Group's companies that are incorporated under the International
Business Companies Act of the British Virgin Islands are exempt from
payment of the British Virgin Islands income tax.
NOTE 6 - RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the liability,
directly or indirectly, to control the other party or exercise
significant influence over the other party in making financial and
operational decisions. Parties are also considered to be related if
they are subject to common control or common significant influence.
Particulars of significant transactions between the Group and related
companies are summarized below:
06/25/2003 6/25/2002
(US $ '000) (US $ '000)
Sale of finished goods to:
Joint Venture Partner:
Shandong Long Feng Group Company 184 120
Related Parties:
Shandong Long Feng Penglai Flour Company Limited - 2
Sanhe (Yantiai) Food Company Limited 2 -
Penglai Jinhai Food Company Limited 12 175
--------------------
198 297
--------------------
8
Purchase of raw materials from:
Joint Venture Partner:
Shandong Long Feng Group Company - 5
Related Parties:
Sanhe (Yantai) Food Company Limited 8 12
Shandong Long Feng Penglai Flour Company Limited - 35
Longkou City Long Feng Packing Manufacturing Factory 526 -
Longkou City Long Feng Colour Printing Packing Factory - 372
Longkou City Long Feng Cartoon Printing Packing Factory - 178
--------------------
534 602
--------------------
NOTE 7 - CLOSURE OF OPERATIONS
There was a closure of a subcontracted factory in Xinxiang in January 2003
due to the end of the subcontracting agreement. Total assets of the
Xinxiang factory were approximately $33 thousand of which $26 thousand were
transferred to New Dragon Asia Flour (Yantai) Co Ltd and Xinxiang Guoliang
Flour Company Limited, the lessor of the factory. The rest of the assets of
the factory, in the amount of $27 thousand, have been written off.
Due to the negative effects of SARS, the Company closed its Xinxian factory
in May 2003. Fixed assets of the Xinxian factory were approximately $44
thousand, of which $26 thousand were transferred to New Dragon Asia Flour
(Yantai) Company Limited and the Taian factory. Approximately $8 thousand
of the fixed assets were sold to Shandong Long Feng Group Company and the
remaining $10 thousand were written off. The Company charged $27 thousand
of penalties related to the termination of the lease, $10 thousand of
salaries and severence pay and $56 thousand of other operating expenses to
operations in the period ended June 25, 2003.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical information, this Quarterly Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to those
discussed in this section. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date thereof. Readers should carefully review the risks described in other
documents the Company files from time to time with the Securities and Exchange
Commission, including the Annual Report on Form 10-KSB for the fiscal year ended
December 25, 2002, the Quarterly Reports on Form 10-QSB filed by the Company and
Current Reports on Form 8-K by the Company.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and the notes thereto, included as part of
this Quarterly Report.
OVERVIEW
New Dragon Asia Corp., formerly Bio-Aqua Systems, Inc., a Florida
corporation (the "Company"), was incorporated in March 1999. On December 13,
2001, we entered into a Share Exchange Agreement with Max Rutman, Flagship
Import Export LLC, a Nevada limited liability company and New Dragon Asia Food
Limited, a company organized under the laws of the British Virgin Islands.
Pursuant to the Share Exchange Agreement, on December 3, 2001 (the "Closing"),
we acquired from New Dragon Asia Food Limited all of the equity interests of
four companies organized under the laws of the British Virgin Islands (each a
"Subsidiary" and, collectively, the "Subsidiaries") each of which in turn hold
an interest in a separate sino-foreign joint venture, in exchange for 37,963,263
shares of common stock of the Company. At the closing, the Company transferred
all of the assets of the Company immediately prior to the Closing to Mr. Rutman
and Mr. Rutman assumed all of the liabilities associated with the transferred
assets.
The consolidated financial statements are presented in US dollars.
Transactions and monetary assets denominated in currencies other than the US
dollars are translated into US dollars at the respective applicable exchange
rates. Monetary assets and liabilities denominated in other currencies are
translated into US dollars at the applicable rate of exchange at the balance
sheet date. The resulting exchange gains or losses are credited or charges to
the consolidated statements of operations. Currency translation adjustments
arising from the use of different exchange rates from period to period are
included in comprehensive income.
PLAN OF OPERATIONS
Our current strategy is twofold: (1) to expand our customer sales base and
production lines; and (2) impose ongoing strict control on the factories'
hygiene in view of prevention of SARS. Plans for expansion of the existing
plants are expected to be funded through current working capital from ongoing
sales.
Our long term growth strategy includes strategic acquisitions of additional
plants with regional brand recognition to increase our market share in China. A
significant acquisition will require additional funds in the form of debt or
equity, or a combination thereof. However, there can be no assurance these funds
will be available.
10
RESULTS OF OPERATIONS
Six months ended June 25, 2003 compared to six months ended June 25, 2002
- --------------------------------------------------------------------------------
Total revenue
Total revenue for the six months ended June 25, 2003 was USD12,025,661 as
compared to USD14,391,032 a decrease of 16% for the comparable period last year.
Management believes that the SARS (Severe acute respiratory syndrome) outbreak
had a negative impact on our business. However, as the epidemic has been
contained, management believes that our business will return to at least the
pre-SARS levels.
Net Loss
The Company recorded a net loss of USD274,398 for the six months ended June
25, 2003 compared to a net income of USD1,413,435 for the corresponding period
last year. The result this quarter was adversely affected by the deterioration
in consumer demand on retail commodities caused by the widespread public
concerns over the outbreak of SARS.
SARS Effect
The outbreak of SARS negatively impacted our business as follows:-
1) Blockage of Distribution Network
The transportation of our products was adversely affected in some rural
areas as villagers atempted to block roads with a view to isolating
"quarantine" areas infected with the virus.
2) Incurred Additional Operating Expenses
Manufacturing expenses were increased as significant efforts were directed
towards ensuring absolute hygiene standards in our operating facilites.
3) Sales and Promotional Activities Halted
During the period, the provincial governments imposed strict controls on
citizens travelling. Our staff, including salespeople, was also prohibited
from leaving the factory area, negatively impacting our sales activities.
Promotional events for our products were also cancelled.
4) Deterioration in Consumer Demand
As consumers were reluctant to go out, they had more time available at home
to prepare their meals resulting in less demand for convenience food such
as instant noodles.
Administrative and general expenses
Administrative and general expenses for the six months ended June 25, 2003
increased by USD246,195 to USD672,408, compared to USD426,213 for the
corresponding period in 2002. The increase was mainly due to expenses relating
to the closure expenses of two sub-contracting factories resulting in the write
off of stock and deferred expenses and additional general provision for obsolete
stock and doubtful debts. The Xinxiang factory was closed due to the expiry of
the contract. The Xinxian branch was closed due to the sudden drop of demand in
the SARS period and the Company cannot foresee the market situation in the next
six months, therefore, the shut down can help the Company to utilize its
internal resources more efficiently.
Selling and distribution expenses
Selling and distribution expenses for the six months ended June 25, 2003
were USD490,267 , which was comparable to USD556,068 for the corresponding
period of the prior year. During the current period, the Company encountered
abrupt disruption of its sales caused by the outbreak of the SARS. Thus, selling
and distribution expenses decreased accordingly.
11
Three months ended June 25, 2003 compared to three months ended June 25, 2002
- --------------------------------------------------------------------------------
Net Sales
Net Sales for the second quarter of 2003 decreased 27% to USD5,477,551
compared to USD7,497,900 for the corresponding quarter of 2002. The decrease was
mainly due to the outbreak of SARS, which had seriously affected our business.
Net Loss
The Company incurred a net loss of USD590,004 for the second quarter of
2003. This reflected the effect of SARS which caused a decrease in sales in the
current quarter period.
Administrative and general expenses
Administrative and general expenses increased from USD104,564 for the
second quarter of 2002 to USD439,065 for the second quarter of 2003, mainly due
to the closure expenses incurred upon the closure of a flour branch in Xinxian
during the period and additional general provisions for obsolete stock and
doubtful debts. The closure expenses mainly composed of indemnity paid to the
lessor for breach of lease agreement, severance payment and the write off of
deferred expenses and assets upon closure of the branch.
Selling and distribution expenses
Selling and distribution expenses decreased from USD309,265 for the second
quarter of 2002 to USD247,820 for the corresponding period this year. The
decrease was attributable to a decrease in corresponding revenue.
Income taxes
The income of the Company is subject to PRC income taxes at rates from 27%
to 33% of which 24% to 30% is attributable to the central government and 3% to
the provincial government. On application and approval by the tax bureau, the
PRC subsidiaries within the Group are exempt from state income tax and local tax
in respect of income earned for the first two years of operation, and then
subject to a 50% reduction in state income tax and a full exemption of local
income tax for the following three years. The Company and its subsidiaries are
in different stages of enjoying the above tax incentive program.
The Group's companies that are incorporated under the International
Business Companies Act of the British Virgin Islands are exempt from payment of
the British Virgin Islands income tax.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are to fund inventories, accounts
receivable and capital expenditures. The Company has financed its working
capital requirements through a combination of internally generated cash,
short-term bank loans and advances from affiliates.
Cash and cash equivalents were USD658,795 as of June 25, 2003. This
represents a decrease of USD1,827,199 from June 25, 2002. The decrease was
primarily due to less cash flow from operating activities due to the decrease in
sales caused by the outbreak of SARS. Net cash provided by operating activities
for the six months ended June 25, 2003 was approximately USD797,000 as compared
to net cash generated from operating activities of approximately USD4,045,000
for the corresponding period in 2002. Net cash flows from the Company's
operating activities are attributable to the Company's income and changes in
operating assets and liabilities.
12
Accounts receivable and accounts payable decreased by 8% and 1%
respectively, from December 25, 2002 to June 25, 2003. There was a slight
decrease in accounts receivable due to settlement received from customers. The
Company evaluates the allowance level from time to time by applying the
Company's provision policy. Apart from the above, there has been no other
significant change in financial condition and liquidity since the fiscal year
ended June 25, 2003. The Company believes that internally generated funds
together with available bank credit will be sufficient to satisfy its
anticipated working capital needs for at least the next twelve months.
INFLATION AND CHANGING PRICES
The Company does not foresee any adverse effects on its earnings as a
result of inflation or changing prices.
FOREIGN CURRENCY RISK
Substantially all of the revenues and expenses of the Company are
denominated in Renminbi, which is the official currency of China. However, we
use the United States dollar for financial reporting purposes. With effect from
January 1, 1994, conversion of Renminbi into foreign currencies is regulated by
The People's Bank of China through a unified floating exchange rate system.
Although the PRC government has stated its intention to support the value of
Renminbi, there can be no assurance that such exchange rate will not again
become volatile or that Renminbi will not devalue significantly against the US
dollar. Exchange rate fluctuations may adversely affect the value, in US dollar
terms, of the Group's net assets and income derived from its operations in the
PRC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any market risk with respect to such factors
as commodity prices, equity prices, and other market changes that affect market
risk sensitive investments.
With respect to foreign currency exchange rates, the Company does not
believe that a devaluation or fluctuation of the RMB against the USD would have
a detrimental effect on the Company's operations, since the Company conducts
virtually all of its business in China, and the sale of its products and the
purchase of raw materials and services is settled in RMB. The effect of a
devaluation or fluctuation of the RMB against the USD would affect the Company's
results of operations, financial position and cash flows, when presented in USD
(based on a current exchange rate) as compared to RMB.
The Company does not have any interest rate risk, as the Company's debt
obligations are primarily short-term in nature, with fixed interest rates.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures Disclosure controls and
procedures are designed to ensure that information required to be disclosed
in the reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports filed under the
Exchange Act is accumulated and communicated to management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding disclosure.
Within 90 days prior to the filing of this report, the Group carried out an
evaluation, under the supervision and with the participation of the Group's
management, including the Group's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Group's disclosure controls and procedures. Based upon and as of the date
of that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Group's disclosure control and procedures are effective
to ensure that the information required to be disclosed in the reports the
Group files and submits under the exchange act is recorded, processed,
summarized and reported as and when required.
(b) Change in Internal Controls
There were no changes in the Group's internal controls or in the other
factors that could have significantly affected those controls subsequent to
the date of the Group's most recent evaluation.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 31.1: Section 302 Sarbanes Oxley Certification of the
Chief Financial Officer
Exhibit 31.2: Section 302 Sarbanes Oxley Certification of the
Chief Financial Officer
Exhibit 32.1: Section 906 Sarbanes Oxley Certification of both the
Chief Financial Officer and the Chief Executive
Officer
(b) Reports on Form 8-K:
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 13, 2003
NEW DRAGON ASIA CORP.
By: /s/ Willie Lai
-------------------------------
Name: Willie Lai
Title: Chief Financial Officer
15