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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 25, 2003
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
Commission file Number
NEW DRAGON ASIA CORP.
----------------------------------------------
(Name of Small Business Issuer in Its Charter)
Florida 88-0404114
- ---------------------------- ------------------------------------
(State or other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
2/F Kam Chung Commercial Building
19-21 Hennessy Road
Wanchai, Hong Kong
- ----------------------------------------------- -----------
(Address of Principal Executive Offices) (Zip Code)
(852) 2815-9892
------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock American Stock Exchange
------------ -----------------------
Securities registered under Section 12(g) of the Exchange Act:
----------------
(Title of Class)
Indicate by check mark whether the issuer: (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for past 90 days.
Yes [X] No [_]
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K is not contained in this form, and no
disclosure will be contained to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [_]
State issuer's revenue for its most recent fiscal year : $30,773,000
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity as sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter. As of June 25, 2003 the aggregate market value of the common equity
held by non-affiliates was $4,181,066.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of March 31, 2004, there
were 45,061,342 shares outstanding.
Portions of the registrant's definitive proxy statement (the "Proxy Statement")
related to the 2004 annual meeting of shareholders are incorporated by reference
into Part III of this Form 10-K.
NEW DRAGON ASIA CORP.
FORM 10-K
TABLE OF CONTENTS
---------------------------------------
PAGE
----
PART I
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters of a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 14
Item 8. Financial statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 15
Item 9A. Controls Procedures 16
PART III
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stock Matters 20
Item 13. Certain Relationships and Related Transactions 20
Item 14. Principal Accountant Fees and Services 24
Item 15. Exhibits, List and Reports on Form 8-K 24
Signatures 25
Financial Statements F1
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These statements relate to future events or the
Company's future financial performance. The Company has attempted to identify
forward-looking statements by terminology including "anticipates", "believes",
"expects", "can", "continue", "could", "estimates", "expects", "intends", "may",
"plans", "potential", "predict", "should" or "will" or the negative of these
terms or other comparable terminology. These statements are only predictions,
uncertainties and other factors, including the risks outlined under Business
Risks contained in Part 1 of this Annual Report that may cause the Company's
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking statements, although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance or achievements. The Company expectations are as of the
date this Form 10-K is filed, and the Company does not intend to update any of
the forward-looking statements after the date this Annual Report on Form 10-K is
filed to confirm these statements to actual results, unless required by law.
OVERVIEW
Company History
New Dragon Asia Corp., formerly Bio-Aqua Systems, Inc., a Florida
corporation (the "Company"), was incorporated in March 1999. On August 7, 2001,
the Company was announced that it would seek to divest its then current
operations and acquire a new operating company with the goal of enhancing
shareholder value. On December 13, 2001, the Company entered into a Share
Exchange Agreement with Max Rutman, Flagship Import Export LLC and New Dragon
Asia Food Limited, a company organized under the laws of the British Virgin
Islands. Pursuant to the Share Exchange Agreement, the Company acquired (the
"Acquisition") from New Dragon Asia Food Limited all of its 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, which equity interests
constituted all of the issued and outstanding equity interests of the
Subsidiaries, in exchange for 37,963,263 shares of common stock of the Company.
As a result of the Acquisition, the Company continued the operations of New
Dragon Asia Food Limited. All operations of New Dragon Asia Food Limited are
conducted through the sino-foreign joint ventures discussed below.
OVERVIEW OF NEW DRAGON ASIA FOOD LIMITED
The New Dragon Asia Food Group was established in 1952 under the name "Long
Feng Foods", as a grain and oil processing enterprise in the Shandong Province
of the People's Republic of China ("PRC" or "China") and developed as one of the
Province's leading flour millers. Long Feng developed into the leading flour
milling group in China. In 1992, Long Feng established a manufacturing operation
for instant noodles as the Chinese market for "convenience foods" was entering a
prolonged growth phase. Through rapid increases in capacity and maintenance of
consistent quality, Long Feng has established itself as one of China's leading
manufacturers of flour and instant noodles with seven manufacturing plants and
nationwide distribution.
1
In 1998, the Hong Kong based New World Industrial Holdings Ltd., together
with one of the largest Hong Kong food groups formed a Sino Foreign Joint
Venture under the name "New Dragon Asia Food Limited" to acquire a controlling
interest in seven of Long Feng's largest manufacturing subsidiaries. The
objective of this venture was to combine Long Feng's China manufacturing
capabilities and distribution network, New World Industrial Holdings Ltd's
financial strength and the joint venture partner's food industry management
expertise so as to capitalize on the rapid growth potential available for the
Chinese fast food industry, both within China and internationally.
New Dragon Asia Food Limited combined four of its largest and most
profitable joint ventures as the "New Dragon Asia Food Group". These joint
ventures are located in Dalian, Yantai and Sanhe and are listed as follows:
- New Dragon Asia Flour (Yantai) Company Limited
- New Dragon Asia Food (Yantai) Company Limited
- New Dragon Asia Food (Dalian) Company Limited
- Sanhe New Dragon Asia Food Company Limited
Headquartered in the Shandong Province, PRC, management of New Dragon also
operates sales and corporate offices in Hong Kong. Management draws on the
unique combination of China food manufacturing experience, together with the
marketing and branding skills of the Hong Kong partners.
Our core business is twofold: (1) the milling, sale and distribution of
flour and related products, and (2) the production of instant noodles, which we
market and sell under regional brands through supermarkets and food stores. Our
principal brand is "Long Feng". On a consolidated basis, management estimates
the Long Feng brand to be one of the top brands in the China instant food
industry.
INDUSTRY BACKGROUND
"Fast food" in the form of instant noodles was introduced to China in the
early 1980's following the commencement of the market economy in 1979. With
rapidly rising income and living standards and rapid growth of the urban middle
class, demand for quality convenience food grew rapidly.
The increasing market for instant noodles, a staple "fast food" in Asia,
has attracted foreign producers from Japan, Korea and Taiwan. While this has
generated increased competition for high end manufacturers, more popular,
national brand names such as Long Feng; are well entrenched and are increasing
in both sales and market share as less efficient local brands are absorbed or
eliminated. In a national survey taken in 2001, average annual per capita
consumption of instant noodles in China was 15 packets compared with 80 in Korea
and 44 in Japan. Management believes that growth potential in the China market,
as consumers become increasingly affluent, is considerable.
Consumption of instant noodles in China has increased dramatically as more
women enter the work force. Further, sharply higher sales at airports, train
stations and bus stations throughout the country reflect increasing business and
leisure travel by the rapidly expanding middle class.
2
Products
* Flour
We produce and market a broad range of wheat flour for use in bread,
dumplings, noodles and confectionary products. Our flour products are marketed
under the "Long Feng" brand name and sold throughout the country at both
wholesale and retail levels. At the end of 2003, our product breakdown was
approximately 60% for flour products and 40% for instant noodles.
* Noodles
We provide a wide range of instant noodle products to our customers. Our
products can be separated into two broad categories for selling and marketing
purposes: packet noodles for home preparation and for snacks.
Product Quality
Long Feng has a reputation for producing some of the highest quality food
products in China. Our production plants operate to the highest level of hygiene
and efficiency and most of our plants are certified at the ISO9002 level. Most
of our "state of the art" equipment is imported from Switzerland, Japan and
Korea. We also operate strict quality control systems, resulting in a favorable
customer perception of the "Long Feng" brand.
Production
Flour and water are the two main ingredients used to produce a quality
noodle product. To produce our noodles, we mix flour with water and other
ingredients and then extrude or roll the mixture into the desired shape of the
noodle. The mixture then travels through a series of state-of-the-art dryers
before being stabilized at room temperature. After stabilization the noodles are
steamed and cooked in deep fryers, cooled and then mixed with various seasonings
and freeze dried additives such as chicken, vegetables or beef which are
prepared from raw ingredients in a separate building within our production
complex. The finished product is then packed, palletized and shipped.
We own and operate our manufacturing plants which have an annual aggregate
production capacity of approximately 110,000 tons of flour products and in
excess of 110 million packets of instant noodles.
We closed our factory in Xinxiang in January 2003. Total assets of the
Xinxiang factory were approximately $33,000 and $26,000 transferred to New
Dragon Asia Flour (Yantai) Co Ltd and Xinxiang Guoliang Flour Company Limited,
the lessor of the factory. The remaining assets of the factory were written off
in the first quarter of 2003.
Due to the negative effects of SARS, the Company closed its Xinxian factory
in May 2003. Fixed assets of the Xinxian factory were approximately $44,000, of
which $26,000 were transferred to New Dragon Asia Flour (Yantai) Company Limited
and the Taian factory. Approximately $8,000 of the fixed assets were sold to
Shandong Long Feng Flour Company Limited, a related entity, and the remaining
$10,000 was written off. Inventory and related packaging materials amounting to
$45,000 have been written off to operations for the period ended June 25, 2003.
The Company also charged $30 thousand of penalties and taxes the termination of
the lease, $10,000 of salaries and severance pay and $28,000 of other operating
expenses and operations.
We also closed our noodle factory in Taian in December 2003.
3
Transportation and Distribution
The Company's distribution system is the key to its continued success in
developing "Long Feng" as one of the leading domestic brands in China. The
Company has over 216 points of distribution of which 16 are direct sales
offices, spread over 27 provinces in China. Most of our distributors have
long-term relationships with us and are loyal and efficient vendors of our
products.
Rural distribution operations are facilitated by a large fleet of trucks
owned by the New Dragon Asia Food Group which carry products bound for both
wholesale and retail customers in outlying areas.
Raw Materials
The noodle's primary ingredient is flour, which is extracted from wheat
through a milling process. A certain percentage of the flour needs of New Dragon
Asia Food (Yantai) Company Limited and New Dragon Asia Food (Dalian) Company
Limited are sourced from New Dragon Asia Flour (Yantai) Company Limited who
occasional purchases of high quality wheat from Australia and Canada. Wheat
sourced by our milling operating from Shandong province is generally regarded as
being the highest quality available in China. Other ingredients such as
flavorings and additives are manufactured or processed by New Dragon Asia Food
(Yantai) Company Limited and Sanhe New Dragon Asia Food Company Limited. We also
use paper products such as corrugated cardboard, as well as films and plastics
to package products. Raw and packaging materials are readily available from
various suppliers. There is no reliance on any one supplier.
MARKETING AND SALES
In China, marketing and promotion costs for manufactured products are
generally absorbed by the distributor. Most products are regionally marketed and
distributed. Our sales and marketing strategy focuses on around maintaining
strong distribution relationships, continually innovating our products and an
excellent quality/price dynamic.
COMPETITION
The instant noodle segment is highly competitive. We compete against
well-established companies, and many smaller companies. Our largest competitors
are the Master Kang and President Groups, both based in Taiwan.
Competition in the flour industry is also very competitive. Our largest
competitors are Shandong Guang Rao Ban Qiu Flour and Hebei Wu De Li Flour in the
Northern market and Shenzhen Nanshun Flour in the Southern market.
4
There are several key marketing and sales initiatives that can impact the
Company's competitive position in the Chinese market, including:
o establishing favorable brand recognition;
o developing products sought by consumers;
o implementing appropriate pricing;
o providing strong marketing support; and
o obtaining access to retail outlets and sufficient shelf space.
CUSTOMERS
Our primary customer base for both our flour products and noodles is in
stores in the rural areas throughout China, where our brand has long been
recognized as the highest quality available for the price, in contrast with our
major competitors, "Master Kang" and "President", which are focused
predominately in the more developed and competitive urban markets. The rural
market is growing rapidly benefiting from increases in rural consumer income.
Brand loyalty is strongest in this sector. The Company also sells to
supermarkets mainly in urban areas.
In addition to domestic sales, the Company also exports noodles to other
countries such as Korea. In 2003, the Company exported over 80,000,000 packets
of noodles to Korea which accounts for 3% of total sales.
No customer accounted for more than 10% of our sales.
The Company also received orders from certain KFC Corporation locations in
China and KFC's intermediary suppliers for flour. KFC requires rigorous quality
control standards of at least the ISO9002 level. These orders highlight the
brand reputation of Long Feng for and quality and recognition of the Company's
commitment to international standards.
REGULATION
We are subject to various laws and regulations administered by various
local government bodies relating to the operation of our production facilities.
We believe that we are in compliance with all governmental laws and regulations
related to our products and facilities, and we do not expect to make any
material expenditure in 2004 with respect to compliance with any such
regulations.
STRATEGY
Our strategy is to capitalize on our strong brand name and pursue strategic
partnerships and acquisitions that will enhance our economies of scale. The
following are some of the key elements of our business strategy:
- Increase the quantity of our products in rural distribution centers
- Continue to enhance our distributor relationships
- Continue to improve product quality and diversify our product range
with higher value-added products
- Build strategic joint venture relationships with multinational food
groups to enhance product range and capitalize on our China
distribution network
5
- Strengthen the training of our employees
- Implement the use of technical software to increase labor efficiency
EMPLOYEES
We employ approximately 1,400 employees. The Company believes its
relationships with its employees are good.
AVAILABLE INFORMATION
The Company files annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and proxy and information statements and
amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of
the Securities Exchange Act of 1934, as amended. The public may read and copy
these materials at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, D.C. 20549. The public may obtain information on the operation of
the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding the Company and other
companies that file materials with the SEC electronically. You may also obtain
copies of reports filed with the SEC, free of charge, on our website at
http://www.newdragonasia.com
GOVERNMENTAL REGULATION OF OUR OPERATIONS IN CHINA
All of our subsidiary companies operate from facilities that are located in
China. Accordingly, our subsidiaries' operations must conform to the
governmental regulations and rules of China.
The Chinese Legal System
The practical effect of the People's Republic of China legal system on our
business operations in China can be viewed from two separate but intertwined
considerations. First, as a matter of substantive law, the Foreign Invested
Enterprise laws which are applied to our operation in China provide significant
protection from government interference. In addition, these laws guarantee the
full enjoyment of the benefits of corporate Articles and contracts to Foreign
Invested Enterprise participants. These laws, however, do impose standards
concerning corporate formation and governance, which are not qualitatively
different from the General Corporation Laws of the United States. Similarly, the
People's Republic of China accounting laws mandate accounting practices, which
are mostly consistent with accounting principles generally accepted in the
United States. The Chinese accounting laws require that an annual "statutory
audit" be performed in accordance with the People's Republic of China accounting
standards and that the books of account of Foreign Invested Enterprises are
maintained in accordance with Chinese accounting laws. Article 14 of the
People's Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly
Foreign-Owned Enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities, at the risk of business
license revocation.
6
Second, while the enforcement of substantive rights may appear less clear
than United States procedures, the Foreign Invested Enterprises and Wholly
Foreign- Owned Enterprises are Chinese registered companies which enjoy the same
status as other Chinese registered companies in business-to-business dispute
resolution. Because the terms of the respective Articles of Association provide
that all business disputes pertaining to Foreign Invested Enterprises are to be
resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in
Stockholm, Sweden applying Chinese substantive law, the Chinese minority partner
in our joint venture companies will not assume a privileged position regarding
such disputes. Any award rendered by this arbitration tribunal is, by the
express terms of the respective Articles of Association, enforceable in
accordance with the "United Nations Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (1958)." Therefore, as a practical
matter, although no assurances can be given, the Chinese legal infrastructure,
while different in operation from its United States counterpart, should not
present any significant impediment to the operation of Foreign Invested
Enterprises.
Economic Reform Issues
Although the majority of productive assets in China are owned by the
Chinese government, in the past several years the government has implemented
economic reform measures that emphasize decentralization and encourage private
economic activity. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:
- We will be able to capitalize on economic reforms;
- The Chinese government will continue its pursuit of economic reform
policies;
- The economic policies, even if pursued, will be successful;
- Economic policies will not be significantly altered from time to
time; and
- Business operations in China will not become subject to the risk of
nationalization.
Negative impact upon economic reform policies or nationalization could
result in a total investment loss in our common stock.
Since 1979, the Chinese government has reformed its economic systems.
Because many reforms are unprecedented or experimental, they are expected to be
refined and improved. Other political, economic and social factors, such as
political changes, changes in the rates of economic growth, unemployment or
inflation, or in the disparities in per capita wealth between regions within
China, could lead to further readjustment of the reform measures. This refining
and readjustment process may negatively affect our operations.
Over the last few years, China's economy has registered a high growth rate.
Recently, there have been indications that rates of inflation have increased. In
response, the Chinese government has taken measures to curb this excessively
expansive economy. These measures have included devaluation of the Chinese
currency, the Renminbi, restrictions on the availability of domestic credit,
reducing the purchasing capability of certain of its customers, and limited
re-centralization of the approval process for purchases of some foreign
products. These austerity measures alone may not succeed in slowing down the
economy's excessive expansion or control inflation, and may result in severe
dislocations in the Chinese economy. The Chinese government may adopt additional
measures to further combat inflation, including the establishment of freezes or
restraints on certain projects or markets. These measures may adversely affect
our manufacturing company's operations.
7
To date, reforms to China's economic system have not adversely impacted our
operations and are not expected to adversely impact operations in the
foreseeable future; however, there can be no assurance that the reforms to
China's economic system will continue or that we will not be adversely affected
by changes in China's political, economic, and social conditions and by changes
in policies of the Chinese government, such as changes in laws and regulations,
measures which may be introduced to control inflation, changes in the rate or
method of taxation, imposition of additional restrictions on currency conversion
and remittance abroad, and reduction in tariff protection and other import
restrictions.
China's Accession into the WTO
On November 11, 2001, China signed an agreement to become a member of the
World Trade Organization sometimes referred to as the WTO, the international
body that sets most trade rules, further integrating China into the global
economy and significantly reducing the barriers to international commerce.
China's membership in the WTO was effective on December 11, 2001. China has
agreed upon its accession to the WTO to reduce tariffs and non-tariff barriers,
remove investment restrictions, provide trading and distribution rights for
foreign firms. The tariff rate reductions and other enhancements will enable us
to develop better investment strategies. In addition, the WTO's dispute
settlement mechanism provides a credible and effective tool to enforce members'
commercial rights. Also, with China's entry to the WTO, it is believed that the
relevant laws on foreign investment in China will be amplified and will follow
common practices.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Hong Kong. Our four manufacturing
plants consist of over 71,397 sq. meters of facilities with over 29 noodle
production lines and a 110,000 tons p.a. flour milling facility with 3
production lines, located in Dalian, Beijing and Yantai. Manufacturing
operations are vertically integrated, with the flour production utilized in the
noodle manufacturing process. Most of New Dragon's manufacturing facilities have
been awarded ISO9002 quality certification.
RENTAL RENTAL ANNUAL SIZE
FACILITY ADDRESS BEGIN EXPIRE RENTAL (US$) (sq meters)
- --------------- -------------------------- ---------- ----------- ------------- --------
Flour Mill, No.10 Huangcheng, - - - 25,345
Noodle Factory, Road (N), Longkou,
Condiment Factory Shandong, P.R.C.
Noodle Factory 1 Yanjiao Jing ha Road(N), - - - 26,274
Beijing, P.R.C.
Noodle Factory 11 Dunhuang Street, - - - 6,363
Shahekou Zone, Dalian
Liaoning Province, P.R.C.
Flour Packaging Fuhao Village, Xu Xin 03/18/01 03/18/31 1,204 1,049
ZhuangTown, Tong Zhou
District, Beijing, P.R.C.
8
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending or to the best of our knowledge, any
threatened legal proceedings. None of our directors, officers or affiliates, or
owner of record or of more than five percent (5%) of our securities, or any
associate of any such director, officer or security holder is a party adverse to
ours or have a material interest adverse to ours in reference to pending
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 25, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Prices of Common Stock
Our common stock is traded on the American Stock Exchange under the symbol
NWD. The high and low bid prices of the common stock as reported on AMEX for the
time periods indicated are set forth on the table below.
PRICE RANGE
----------------------
HIGH LOW
--------- ---------
FISCAL YEAR ENDED DECEMBER 25, 2002
First Quarter $ 2.30 $ 1.16
Second Quarter $ 2.20 $ 1.20
Third Quarter $ 1.94 $ 0.35
Fourth Quarter $ 1.04 $ 0.30
FISCAL YEAR ENDED DECEMBER 25, 2003
First Quarter $ 0.43 $ 0.15
Second Quarter $ 0.97 $ 0.24
Third Quarter $ 1.65 $ 0.50
Fourth Quarter $ 0.95 $ 0.55
(b) Shareholders
Our common shares are issued in registered form. American Stock Transfer,
Brooklyn, New York, is the registrar and transfer agent for our common stock. As
of March 15, 2004, there were 45,061,342 shares of our common stock outstanding
and we had approximately 500 shareholders of record.
9
(c) Dividends
We have never declared or paid any cash dividends on our common stock and
we do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to finance operations and
the expansion of its business. Any future determination to pay cash dividends
will be at the discretion of the board of directors and will be based upon our
financial condition, operating results, capital requirements, plans for
expansion, restrictions imposed by any financing arrangements and any other
factors that the board of directors deems relevant.
(d) Recent Sales of Unregistered Securities
On September 4 and October 7, 2003, we issued 3,300,000 shares and
850,000 shares respectively, in connection with a private placement for working
capital for an aggregate purchase price of $2,075,000. The shares were issued
pursuant to an exemption provided by Section 4(2) of the Securities Act. The
investors also received warrants to purchase 1,650,000 and 425,000 shares
respectively, of our common stock which have a term of five years at an exercise
price of $0.99 and $0.98 per share, respectively. Commissions of $214,021 were
paid to the placement agent.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company is
presented as of and for the years ended December 25, 2003, 2002, 2001 and 2000.
The selected financial data should be read in conjunction with the Company's
audited Consolidated Financial Statements and the notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
2003 2002 2001 2000
-------- -------- -------- --------
(US$'000 except per share data)
SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues $ 30,773 $ 33,704 $ 30,135 $ 31,532
Operating expenses:
Selling and distribution 1,330 1,161 613 1,520
General and administrative 2,398 601 1341 995
Operating income 2,193 4,346 4,089 3,591
Income from operations before tax 3,174 4,762 4,619 3,549
Net income 2,727 4,153 866 3,549
Earnings per share-- basic:
Operations 0.06 0.10 0.22 N/A
Net income 0.06 0.10 0.22 N/A
Earnings per share -- diluted:
Operations 0.06 0.10 0.22 N/A
Net income $0.06 $0.10 $ 0.22 $ N/A
======== ======== ======== ========
SELECTED CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 1,783 $ 628 $ 1,293 $ 1,015
Total assets 34,357 40,354 38,643 33,279
Long-term debt -- -- -- --
Long-term obligations -- -- -- --
Total stockholders' equity 22,190 17,686 13,533 4,544
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report includes forward-looking statements. Generally, the words
"believes," "anticipates," "may," "will," "should," "expect," "intend,"
"estimate," "continue," and similar expressions or the negative thereof or
comparable terminology are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, including the matters
set forth in this report or other reports or documents we file with the
Securities and Exchange Commission from time to time, which could cause actual
results or outcomes to differ materially from those projected. Undue reliance
should not be place on these forward-looking statements which speak only as of
the date hereof. We undertake no obligation to update these forward-looking
statements.
The following discussion and analysis should be read in conjunction with
"Item 6. Selected Consolidated Financial Data" and our consolidated financial
statements and the related notes thereto and other financial information
contained elsewhere in this Form 10-K.
OVERVIEW
On December 13, 2001, the Company 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
13, 2001 (the "Closing"), the Company acquired from New Dragon Asia Food Limited
all of its equity interests in 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, which equity interests constituted all of the issued
and outstanding equity interests of the Subsidiaries in exchange for 37,963,263
shares of common stock of the Registrant. At the closing, the Company
transferred all of its assets to Mr. Rutman and Mr. Rutman assumed all of the
Company's liabilities. As such, the following discussion relates to the
consolidated financial results of New Dragon Asia Limited only.
The consolidated financial statements are presented in US dollars.
Transactions and monetary assets in currency denominations other than US dollars
are converted into US dollars at the respective applicable exchange rates.
Monetary assets and liabilities denominated in other currencies are also
converted into US dollars at the applicable rate of exchange at the balance
sheet date. There are no material exchange differences as a result of the
stability of the Renminbi ("RMB") during the periods covered by the consolidated
financial statements.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 25, 2003 AND 2002
The Company generated revenues of $30.8 million for the fiscal year ended
December 25, 2003, which was a $2.9 million or 8.7% decrease from $33.7 million
for the fiscal year ended December 25, 2002. The Company's operations were
adversely affected by the decrease in consumer demand for retail commodities
caused by widespread public concerns over the outbreak of Severe Acute
Respiratory Syndrome, or SARS during the year.
THE SARS EFFECT
The outbreak of SARS, is believed to have started in Guangdong Province, China
in late 2002 and to have later spread to Beijing. The SARS outbreak impacted our
revenues by disrupting travel throughout China and causing delays in service
delivery to our customers.
11
Although the spread of SARS in China has been contained and our business
activities resumed normal operations during the third quarter of 2003, the
medical community worldwide has not fully understood the origin of SARS and has
not found a well-recognized effective treatment for SARS. As a consequence, the
potential long-term effects of SARS on economic growth in China are still
unknown. Since January 5, 2004, a small number of new SARS cases have been
reported in China. Any future worsening of the SARS epidemic could have an
adverse impact on our business. The outbreak of SARS impacted New Dragon Asia's
business as follows:
1) Blockage of Distribution Network
Since the Company's major markets are in rural areas, the
transportation of New Dragon Asia products was adversely affected by
attempts of some villagers to block roads and establish quarantine
areas to prevent the spread of SARS.
2) Additional Operating Expenses
Manufacturing expenses increased due to the need for additional
preventative measures, related to SARS, such as more hygienic product
requirements.
3) Curtailment of Sales and Promotional Activities
During the height of the SARS outbreak, the provincial governments
imposed strict travel controls. As a result, the Company's staff was
prohibited from leaving the factory area. These restrictions affected
sales activities and product promotional events had to be cancelled.
4) Deterioration in Consumer Demand
Restrictions on travel and a reluctance of people to venture out
provided more available time for preparation of meals at home, which
impacted demand for convenience food such as instant noodles.
5) Interruption in Collection Efforts
Outbreak of SARS interrupted our collection efforts, causing gross
accounts receivables and our days sales outstanding to increase at the
end of 2003.
There was a substantial increase in the gross profit margin as the gross
profit for the fourth quarter of 2003 increased by $1 million over the same
period last year. The increase is mainly due to the result of a change in
product sales mix and an increase in demand for our products at the end of the
third and fourth quarter of 2003.
The Company exported over 80,000,000 packets of noodles to Korea during
2003 which accounted for 3% of our total sales. We have also commenced selling
our products to supermarkets located in urban areas. Taken together, this is
expected to prolong the receivable cycle of the Company.
Selling and distribution expenses increased from $1.2 million for the
fiscal year ended December 25, 2002 to $1.3 million for the fiscal year ended
December 25, 2003 due to increased transportation costs associated with more
stringent weight load restrictions. General and administrative expenses
increased by $1.8 million primarily due to expenses associated with the closure
of three factories and the write off of inventory,
12
and deferred expenses, as well an additional general provision for obsolete
inventory and doubtful debts. Additionally, certain professional expenses
related to the Company, previously borne by the parent company, were charged to
the Company in the current year. Income before non-recurring items and a
provision for income taxes for the year ended December 25, 2003 was $3.2
million, representing a decrease of 33% from $4.8 million in 2002 result. The
decrease is mainly due to the effect of SARS and the tax relief granted by the
government.
Net income for 2003 was $2.7 million, or $0.06 per share, compared with
$4.2 million in 2002. The 35% decrease in net income was mainly due to the
impact of SARS and closure of our plants.
COMPARISON OF YEARS ENDED DECEMBER 25, 2002 AND 2001
The Company generated revenues of $33.7 million for the fiscal year ended
December 25, 2002, which was a $3.6 million or 12% increase from $30.1 million
for the fiscal year ended December 25, 2001. This increase is the result of
increased sales of instant noodles in two of New Dragon's joint ventures in
Dalian and Yantai, and an increase in the sale of flour products of $2.7 million
in New Dragon's flour production joint venture in Shandong which has expanded
its product line. The Company is currently operating at or near full capacity in
both flour and noodle production in the peak season. Acquisition of additional
capacity in the future will facilitate continued sales growth.
The Company's sale promotion programs have resulted in an increase in
selling and distribution expenses of 89%. Selling and distribution expenses
increased from $613 thousands for the fiscal year ended December 25, 2001 to
$1.2 million for the fiscal year ended December 25, 2002. General and
administrative expenses decreased by $740 thousand mainly due to the collection
of previously written off accounts receivable and current year reallocation of
various general and administrative expenses into cost of sales. Income before
non-recurring item and provision for income taxes for the year ended December
25, 2002 was $4.8 million, an increase of 3% over the 2001 fiscal year results.
Net income was $4.2 million or $0.10 per share on a fully diluted basis.
This represents an increase of 380% from the net income of $866 thousand in
2001. This increase is mainly due to a one-time charge taken last year in
connection with the issuance of 1.3 million shares of common stock issued to our
advisers in connection with the acquisition from New Dragon Asia Food Limited on
December 13, 2001. The charge is based on a discount to the average ten-day
closing bid price of our stock prior to December 13, 2001.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table aggregates all contractual commitments and commercial
obligations that affect the Company's financial condition and liquidity position
as of December 25, 2003:
PAYMENTS DUE BY PERIOD
(U.S. DOLLARS IN THOUSANDS)
------------------------------------------------------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----- ------ --------- --------- -------
CONTRACTUAL OBLIGATIONS:
Long-term debt $ -- $ -- $ -- $ -- $ --
Capital lease obligations -- -- -- -- --
Operating leases 37 2 4 4 27
Unconditional purchase obligations -- -- -- -- --
Other long-term obligations 5,152 114 228 228 4,582
Total contractual cash obligations 5,189 116 232 232 4,609
13
FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES
Net cash provided by the operating activities of the Company during the
year ended December 25, 2003 was $6.2 million. The Company believes that with
its existing working capital together with cash flow from operations, it has
sufficient resources to meet the capital requirements of its existing business.
However, the Company may seek financing in the form of debt equity or a
combination thereof to fund acquisition of complementary business.
INFLATION AND CHANGING PRICES
The Registrant does not foresee any adverse effects on its earnings as a
result of inflation or changing prices.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of the Company's financial statements and related
disclosures in conformity with generally accepted accounting principles in the
United States requires management to make estimates and judgments that affect
the reported amounts of assets and liabilities, revenues and expenses and
related disclosures of contingent assets and liabilities. On an on-going basis,
management evaluates the estimates and assumptions based upon historical
experience and various other factors and circumstances. Management believes that
the Company's estimates and assumptions are reasonable under the circumstance;
however, actual results may vary from these estimates and assumptions under
different future circumstances. Management has identified the following critical
accounting policies that affect the more significant judgments and estimates
used in the preparation of the Company's consolidated financial statements.
Contractual Joint Ventures - A contractual joint venture is an entity
established between the Group and another joint venture partner, with the rights
and obligations of each party governed by a contract. If the Group owns more
than 50% of the joint venture and is able to govern and control its financial
and operating policies and its board of directors, such joint venture is
considered as a de facto subsidiary and is accounted for as a subsidiary.
Revenue Recognition - The Company recognizes sales in accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements".
Sales represent the invoiced value of goods, net of value added tax ("VAT"),
supplied to customers, and are recognized upon delivery of goods and passage of
title.
All of the Company's sales made in Mainland China are subject to Mainland
Chinese value-added tax at rates ranging from 13% to 17% ("output VAT"). Such
output VAT is payable after offsetting VAT paid by the Group on purchases
("input VAT").
Inventories - Inventories are stated at the lower of cost, determined on a
weighted average basis, and net realizable value. Costs of work-in-progress and
finished goods are composed of direct material, direct labor and an attribute
portion of manufacturing overhead. Net realizable value is the estimated selling
price, in the ordinary course of business, less estimated costs to complete and
dispose.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to changes in financial market conditions in the
normal course of business due to its use of certain financial instruments.
Market risk generally represents the risk that losses may occur in the values of
financial instruments as a result of movements in interest rates and equity
prices.
14
Currency Fluctuations and Foreign Currency Risk
As all of the Company's operations are conducted in the PRC except for some
export business and limited foreign purchases of raw materials, most of our
products are sold and raw materials are sourced within the PRC in Chinese
Renminbi ("RMB"). Thus, the effect of the currency fluctuations should be
minimal.
Beginning on December 1, 1996, there are no restrictions on trade-related
foreign exchange receipts and disbursements in China. Since all of the Company's
revenue is denominated in RMB which must be converted into other currencies
before remittance out of the PRC, we may expose to the risk in fluctuation of
exchange rate on conversion of RMB into foreign currencies and the remittance of
foreign currencies. Capital account foreign exchange receipts and disbursements
are subject to control and require the approval of the PRC government.
Interest Rate Risk
All of our cash reserves and short-term borrowings are subject to changes
in interest rates and our interest expense and interest income are also
sensitive to changes in interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial Statements
The following financial statements are set forth at the end hereof.
1. Independent Auditors` Reports
2. Consolidated Balance Sheets of New Dragon Asia Corp. and Subsidiaries
as of December 25, 2003 and 2002
3. Consolidated Statements of Income and Comprehensive Income of New
Dragon Asia Corp. and Subsidiaries for the years ended December 25,
2003, 2002 and 2001
4. Consolidated Statements of Stockholder Equity of New Dragon Asia Corp.
and Subsidiaries for the years ended December 25, 2003, 2002 and 2001
5. Consolidated Statements of Cash Flows of New Dragon Asia Corp. and
Subsidiaries for the years ended December 25, 2003, 2002 and 2001
6. Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective, August 1, 2002, the Company disengaged Spear, Safer, Harmon &
Co. ("SSHC"), as the Company's independent auditors. Effective August 13, 2002,
the Company engaged Grobstein, Horwath & Company, LLP ("GH&C") as the Company's
new independent auditors. The disengagement of SSHC and the engagement of GH&C
were each approved by the Company's Board of Directors.
15
Prior to the engagement of GH&C, neither the Company nor anyone on its
behalf consulted with such firm regarding the application of accounting
principles to a specified transaction, either completed or uncompleted, or type
of audit opinion that might be rendered on the Company's consolidated financial
statements.
SSHC audited the Company's consolidated financial statements for the
period from December 26, 2000 to December 25, 2001 and reviewed the Company's
interim consolidated financial statements through March 25, 2002. SSCH's
Independent Auditors` Report as of December 25, 2001 for this period did not
contain an adverse opinion or a disclaimer of opinion, nor was the report
qualified or modified as to uncertainty, audit scope or accounting principles.
During the period from inception to August 21, 2002, there were no
disagreements with SSHC on any matter of accounting principles or practices,
consolidated financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of SSHC, would have
caused such firm to make reference to the subject matter of the disagreements in
connection with its Independent Auditors` Report on the Company's consolidated
financial statements. In addition, there were no such events as described under
Item 304(a)(1)(IV)(B) of Regulation S-B during the period from inception to
August 12, 2002.
ITEM 9A. CONTROL PROCEDURES
(a) Evaluation of disclosure controls and procedures: As of December 25,
2003, the end of the period covered by this report, the Company's chief
executive officer and its chief financial officer reviewed and evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Exchange Act Rule 13a-15(e) and 15d-15(e)), which are designed to ensure that
material information the Company must disclose in its report filed or submitted
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized, and reported on a timely basis, and have
concluded, based on that evaluation, that as of such date, the Company's
disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is accumulated and communicated to the Company's chief
executive officer and chief financial officer as appropriate to allow timely
decisions regarding required disclosure.
(b) Changes in internal control over financial reporting: For the fiscal
year ended December 25, 2003, there has been no change in the Company's internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, its internal control over financial reporting.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is set forth in the Proxy Statement
under the caption "Election of Directors".
16
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is set forth in the Proxy Statement
under the caption "Executive Compensation" and is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is set forth in the Proxy Statement
under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Parties are considered to be related if one party has the ability, 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. As used in this section the term Group shall mean New
Dragon and each of its subsidiaries.
The particulars of significant related party transactions are summarized below:
2003 2002
(US$'000) (US$'000)
--------- ---------
Sale of finished goods to:
A joint venture partner, Shandong
Longfeng Group Company $ -- $ 419
Related parties:
Zhang Guo Quan(5) -- 980
Penglai Jinhai Food Company Limited(4) -- 344
Longkou City Longfeng Colour Printing Factory(3)(6) -- 7
Longkou City Longfeng Soybean Food Company Ltd. (1) 1 --
Shandong Longfeng Group Trading Company(1) 110 2
Sanhe (Yantai) Food Company Limited (1)(7) 2 1
------ ------
$ 113 $1,753
====== ======
17
2003 2002
(US$'000) (US$'000)
--------- ---------
Purchase of raw materials from:
A joint venture partner, Shandong
Longfeng Group Company $ -- $ 8
Related parties:
Sanhe (Yantai) Food Company Limited (1) (7) 8 19
Shandong Longfeng Packing Manufacturing Factory (1) 1,330 --
Longkou City Longfeng Colour Printing Packing
Factory (3)(6) -- 907
Longkou City Longfeng Carton Packing Factory (3)(6) -- 710
Longkou City Longfeng Soybean Food Company Limited (1) 6 --
New Dragon Asia Food (Yueyang) Company Limited (2) -- 1
New Dragon Asia Food (Chengdu) Company Limited (2) -- 11
New Dragon Asia Food (Luoyang) Company Limited (2) -- 1
------ ------
$1,344 $1,657
====== ======
Pre-determined annual fee charged by joint
venture partners:
Shandong Longfeng Group Company $ 78 $ 78
Shandong Longfeng Flour Company Limited 36 36
------ ------
$ 114 $ 114
====== ======
2003 2002
(US$'000) (US$'000)
--------- ---------
Interest income earned from short-term
advances to an immediate parent company:
New Dragon Asia Food Limited $ -- $188
---- ----
Interest expenses paid to a joint
venture partner:
Shandong Longfeng Group Company $ 17 $ 18
---- ----
Rental income from joint venture partner:
Shandong Longfeng Group Company $ 64 $ 64
---- ----
Summary of related party balances is as follows:
2003 2002
(US$'000) (US$'000)
--------- ---------
Other income from:
Related parties
Sanhe (Yantai) Food Company Limited (1)(7) $ 2 $ --
Longkou City Longfeng Soybean Food Co Ltd (1) 49 --
Joint Venture Partners
Shandong Longfeng Group Company 2 --
Due to an immediate parent company, net consisting of:
New Dragon Asia Food Limited $ 196 $5,782
------ ------
18
The net amount due to New Dragon Asia Food Limited is unsecured,
non-interest bearing and repayable upon demand.
During the year ended December 25, 2003, the Group sold some machinery to
Shandong Longfeng Group Company for consideration of $992,540.
2003 2002
(US$'000) (US$'000)
--------- ---------
Due to joint venture partners, net, consisting of:
Shandong Longfeng Group Company $1,034 $3,762
Shandong Longfeng Flour Company Limited 170 1,809
------ ------
1,204 5,571
------ ------
The amounts due to joint venture partners are unsecured, non-interest
bearing and repayable upon demand, except for an amount due to Shandong Longfeng
Group Company of $280,723 which bears interest at 6.48% per annum.
2003 2002
(US$'000) (US$'000)
--------- ---------
Due from related companies consisting of:
New Dragon Asia Food (Yueyang)
Company Limited (2) $ -- $ 329
New Dragon Asia Food (Luoyang)
Company Limited (2) -- 791
New Dragon Asia Food (Chengdu)
Company Limited (2) -- 551
Penglai Jinhai Food Company Limited (4) -- 372
Shandong Longfeng Packing Manufacturing Factory (1) 1 --
Longkou City Longfeng Food Company Limited (1) 13 --
Shandong Longfeng Group Trading Company (1) 110 12
Shandong Longfeng Oceanic Foodstuff -- 10
Company Limited(1)
Zhang Guo Quan(5) -- 434
------ ------
$ 124 $2,499
====== ======
The amounts due from related companies are unsecured and non-interest
bearing, and are repayable upon demand.
19
2003 2002
(US$'000) (US$'000)
--------- ---------
Due to related companies consisting of:
Longkou City Longfeng Colour Printing Packing
Factory (3)(6) $ -- $ 463
Shandong Longfeng Packing Manufacturing
Factory (1) 609 --
Longfeng Food Company Limited(3) (6) 234 133
New Dragon Asia Food (Luoyang) Co Ltd (2) -- 6
Ningbo Hai Fu Sheng (4) -- 2
Penglai Jinhai Food Company Limited (4) -- 2
Sanhe (Yantai) Food Company Limited(1) (7) 66 76
Sanhe Senji Food Technology Development
Company Limited (1) 120 120
Longkou City Longfeng Soybean Food Co Ltd (1) 83 --
Long Feng Food (H.K.) Company Limited (1) 55 --
Shandong Longfeng Group Trading Company (1) 35 --
------ ------
$1,202 $ 802
====== ======
The amounts due to related Companies are unsecured, non-interest bearing
and are repayable upon demand.
The bank facilities of the Group are secured by corporate guarantee
provided by Shandong Longfeng Group Company, a joint venture partner.
(1) Shandong Longfeng Group Company has a beneficial interest in these
companies.
(2) These companies are wholly owned subsidiaries of NDAFL.
(3) Mr. Xue Jun Song, our former Chief Executive Officer, an ex-director
of each of the companies, has a beneficial interest in these companies.
(4) Mr. Zhen Gu Song, the son of Mr. Xue Jun Song, has a beneficial
interest in these companies.
(5) Lessor of one of our sub-contracted factories.
(6) Mr. Xue Jun Song ceased to be a director of Shandong Longfeng Group
Company on January 7, 2002.
(7) Shandong Longfeng Group Company withdrew their investment on Feb 25,
2004.
In the opinion of the directors of each of the Group companies, the above
related party transactions were carried out in the usual course of business.
20
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under by Item 14 is incorporated by reference
from the Registrant's definitive Proxy Statement.
ITEM 15. EXHIBITS AND REPORTS ON 8K
(a) The following is a list of exhibits filed as a part of this Annual Report
on Form 10-K. Where so indicated by footnote exhibits which were
previously filed are incorporated by reference.
Exhibit
Number Description
- --------- ----------------
2.1 Share Exchange Agreement dated as of December 18, 2001,
incorporated herein by reference from our filing on the
Definitive Proxy 14/A filed on on October 11, 2001
3.1 Revised Articles of Incorporation, incorporated herein by
reference from the Definitive Proxy filed on October 11, 2001
3.2 Bylaws, incorporated herein by reference from our filing on the
Definitive Proxy filed on October 11, 2001
23.1 Consent of Spear Safer and Harmon & Co.*
31.1 Certification pursuant to Rule 13a-14*
31.2 Certification pursuant to Rule 13a-14*
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes- Oxley Act of 2002*
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes- Oxley Act of 2002*
- ----------
* Filed herewith.
(b) Reports on Form 8-K
None
21
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NEW DRAGON ASIA CORP.
Dated: April 8, 2004 By /s/ Heng Jing Lu
------------------------------
Name: Heng Jing Lu
Title: Chief Executive Officer, Director
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Dated: April 8, 2004 By /s/ Heng Jing Lu
------------------------------
Name: Heng Jing Lu
Title: Chief Executive Officer, Director
Dated: April 8, 2004 By /s/ Li Xia Wang
------------------------------
Name: Li Xia Wang
Title: Chief Financial Officer, Director
Dated: April 8, 2004 By /s/ Ling Wang
------------------------------
Name: Ling Wang
Title: Deputy General Manager, Director
Dated: April 8, 2004 By /s/ Wing Leung Lai
------------------------------
Name: Wing Leung Lai
Title: Director
Dated: April 8, 2004 By /s/ Zhi Yong Jiang
------------------------------
Name: Zhi Yong Jiang
Title: Director
Dated: April 8, 2004 By /s/ Qi Xue
------------------------------
Name: Qi Xue
Title: Director
Dated: April 8, 2004 By /s/ De Lin Yang
------------------------------
Name: De Lin Yang
Title: Director
22
TABLE OF CONTENTS
- -----------------
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 25, 2003,2002 AND 2001
CONTENTS
PAGE
----
Independent Auditors` Report of Grobstein, Horwath & Company LLP F-1
Independent Auditors' Report of Spear, Safer, Harmon & Co. F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income and Comprehensive Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flow F-6 - F-7
Notes Consolidated Financial Statements F-8 - F-26
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
New Dragon Asia Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of New Dragon Asia
Corp. and Subsidiaries as of December 25, 2003 and 2002 and the related
consolidated statements of income and comprehensive 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated 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 consolidated financial position of New
Dragon Asia Corp. and Subsidiaries as of December 25, 2003 and 2002, and the
consolidated results of their operations and cash flows for the years then ended
in conformity with accounting principles generally accepted in the United
States.
Grobstein, Horwath & Company LLP
Sherman Oaks, California
March 25, 2004
F-1
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
New Dragon Asia Corp., and Subsidiaries
We have audited the accompanying consolidated balance sheet of New Dragon Asia
Corp. and Subsidiaries as of December 25, 2001, and the related consolidated
statements of operations and comprehensive income, cash flows and stockholders'
equity for the year ended December 25, 2001. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used an significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of New
Dragon Asia Corp. and Subsidiaries as of December 25, 2001, and the consolidated
results of their operations and cash flows for the year ended December 25, 2001,
in accordance with accounting principles generally accepted in the United States
of America.
Spear, Safer, Harmon & Co.
Miami, Florida
April 12, 2002
F-2
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 25, 2003 and 2002
2003 2002
(US$'000) (US$'000)
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,783 $ 628
Restricted cash -- 181
Accounts receivable, net 6,936 7,328
Other receivables, deposits and prepayments 1,282 1,066
Inventories 2,763 5,202
Due from related companies 124 2,499
------- -------
Total Current Assets 12,888 16,904
Property, machinery and equipment, net 17,471 19,340
Land use rights, net 3,998 4,110
------- -------
Total Assets $34,357 $40,354
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 2,845 $ 3,614
Accounts payable 4,565 4,728
Other payables and accruals 1,234 1,282
Taxes payable 921 889
Due to related companies 1,202 802
------- -------
Total Current Liabilities 10,767 11,315
Due to New Dragon Asia Food Limited 196 5,782
Due to joint venture partners 1,204 5,571
------- -------
Total Liabilities 12,167 26,668
Stockholders' Equity:
Common stock, par value US$0.0001;
authorized - 107,000,000 shares;
outstanding and fully paid - 45,061,342
shares as of December 25, 2003 and
40,911,342 shares as of December 25, 2002 4 4
Additional paid-in capital 9,909 8,132
Retained earnings 12,277 9,550
------- -------
Total Stockholders' Equity 22,190 17,686
------- -------
Total Liabilities and Stockholders' Equity $34,357 $40,354
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the Years Ended December 25, 2003, 2002 and 2001
2003 2002 2001
(US$'000) (US$'000) (US$'000)
-------- -------- --------
Net Sales $ 30,773 $ 33,704 $ 30,135
Cost of Goods Sold (24,852) (27,596) (24,092)
-------- -------- --------
Gross Profit 5,921 6,108 6,043
Operating Expenses:
Selling and distribution expenses (1,330) (1,161) (613)
General and administrative expenses (2,398) (601) (1,341)
-------- -------- --------
Income from Operations 2,193 4,346 4,089
Other Income and Expenses:
Interest expense (249) (265) (200)
Interest income 4 194 88
Other income 1,226 487 642
-------- -------- --------
Income Before Non-recurring Item and
Provision for Income Taxes 3,174 4,762 4,619
Non-recurring Costs of Share Exchange -- -- (3,134)
-------- -------- --------
3,174 4,762 1,485
Provision for Income Taxes (447) (609) (619)
-------- -------- --------
Net Income and Comprehensive Income $ 2,727 $ 4,153 $ 866
======== ======== ========
Earnings Per Common Share
Basic and Diluted $ 0.06 $ 0.10 $ 0.22
======== ======== ========
Weighted Average Shares Used to
Compute Earnings per Common Share
Basic and Diluted 42,108 40,911 3,895
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended December 25, 2003, 2002 and 2001
Common Additional Total
Stock Paid -In Retained Stockholders'
No. of shares Amount Capital Earnings Equity
(000) (US$' 000) (US$' 000) (US$' 000) (US$' 000)
-------- -------- -------- -------- --------
Balance at December 25, 2000 1,049 $ -- $ -- $ 4,544 $ 4,544
Conversion of Bio Aqua Shares 1,700 -- 2 -- 2
Issuance of Common Stock in
Connection with:
Exchange agreement 35,184 4 4,996 (13) 4,987
Consulting, investment
banking and legal services 2,978 -- 3,134 -- 3,134
Net Income for the Year Ended
December 25, 2001 -- -- -- 866 866
-------- -------- -------- -------- --------
Balance at December 25, 2001 40,911 4 8,132 5,397 13,533
Net Income for the Year Ended
December 25, 2002 -- -- -- 4,153 4,153
-------- -------- -------- -------- --------
Balance at December 25, 2002 40,911 4 8,132 9,550 17,686
Issuance of Common Stock in
Connection with:
Private placement 3,300 -- 1,405 -- 1,405
Private placement 850 -- 372 -- 372
Net Income for the Year Ended
December 25, 2003 -- -- -- 2,727 2,727
-------- -------- -------- -------- --------
Balance at December 25, 2003 45,061 4 9,909 12,277 22,190
======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 25, 2003, 2002 and 2001
2003 2002 2001
(US$'000) (US$'000) (US$'000)
--------- --------- ---------
Cash Flows from Operating Activities:
Net income $ 2,727 $ 4,153 $ 866
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,425 1,251 1,264
Stock issued in connection with
investment services -- -- 3,134
Provision for bad debts 578 134 87
(Gain) loss on disposal of machinery
and equipment (346) 5 4
Sources and (uses) of cash from changes in
operating assets and liabilities:
Accounts receivable (186) (2,352) (2,460)
Other receivables, deposits and
prepayments (216) 343 (197)
Inventories 2,439 125 655
Accounts payable (163) 1,288 (1,498)
Other payables and accruals (48) 544 309
Taxes payable 32 420 (1,314)
------- ------- -------
Net Cash Provided by Operating Activities 6,242 5,911 850
------- ------- -------
Cash Flows from Investing Activities:
Decrease (increase) in amounts due from related
companies 2,375 (795) (1,704)
Decrease (increase) in investment -- 72 (72)
Increase (decrease) in amounts due to related
companies 400 (2,982) 3,784
Purchases of property, machinery and equipment (92) (978) (2,663)
Proceeds from disposal of property, machinery
and equipment 994 -- --
------- ------- -------
Net Cash Provided by (Used in) Investing Activities 3,677 (4,683) (655)
------- ------- -------
F-6
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 25, 2003, 2002 and 2001
2003 2002 2001
(US$'000) (US$'000) (US$'000)
------- ------- -------
Cash Flows from Financing Activities:
Issuance of common stock 1,777 -- --
Decrease (increase) in restricted cash 181 (181) --
Proceeds from short-term borrowings 4,325 6,988 --
Payments on short-term borrowings (5,094) (6,928) (33)
Decrease in due to New Dragon Asia
Food Limited (5,586) (1,262) (9,756)
(Decrease) increase in due to joint venture
partners (4,367) (510) 4,883
------- ------- -------
Net Cash (Used in) Provided by
Financing Activities (8,764) (1,893) 83
------- ------- -------
Net Change in Cash and Cash Equivalents 1,155 (665) 278
Beginning Cash and Cash Equivalents 628 1,293 1,015
------- ------- -------
Ending Cash and Cash Equivalents $ 1,783 $ 628 $ 1,293
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 249 $ 292 $ 125
Income taxes 380 426 132
Non cash investing and financing activities:
Conversion of outstanding Bio Aqua shares -- -- 2
Issuance of common stock in connection
with exchange agreement -- -- 5,000
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 25, 2003, 2002 and 2001
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS
New Dragon Asia Corp. (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 is composed of
four wholly-owned limited liability companies, incorporated under the laws of
the British Virgin Islands (BVI). The limited liability companies are Mix
Creation Limited ("MC"), Rich Delta Limited ("RD"), Noble Point Limited ("NP"),
and Keen General Limited ("KG"). Each of the wholly-owned limited liability
companies own a majority interest in a contractual joint venture in the PRC. A
contractual joint venture is an entity established between the wholly-owned
subsidiary and another joint venture partner, with the rights and obligations of
each party governed by a contract. If the wholly-owned subsidiary owns more than
50% of the joint venture and is able to govern and control its financial and
operating policies and its board of directors, such joint venture is considered
a de facto subsidiary and has been accounted for as a subsidiary of the Group.
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 (the
"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 Exchange
Agreement, Bio-Aqua acquired from New Dragon Asia Food Limited all of its equity
interests in 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, which equity
interests constituted all of the issued and outstanding equity interests of the
Subsidiaries in exchange for 37,963,263 shares of common stock of the
Registrant.
Upon the closing of the share exchange, Max Rutman, Nestor Lagos, Pedro Sayes
and Oscar Cornejo resigned from the board of directors and on December 14, 2001
Xue Jun Song, Man Fai Leung, Shu Hua Zhang and Wing Leung Lai became members of
Bio-Aqua's board of directors. The directors then elected Wing Leung Lai as the
Chief Financial Officer, Shu Hua Zhang as the Deputy General Manager and Xue Jun
Song as the Chief Executive Officer.
F-8
As conditions of the Exchange Agreement, the Company amended its Articles of
Incorporation to:
1) Change the name of the Company to New Dragon Asia Corp.
2) Convert all the previously existing Class A and Class B common stock
into a single class of common stock.
3) Increase its authorized capital stock to 107,000,000 shares.
4) Max Rutman (through his ownership interest in Flagship Import Export
LLC) and Atik S.A., owners of all of the previously existing
1,700,000 shares of the Class B common stock, agreed to convert
their Class B shares to Class A common stock.
In connection with the terms and provisions of the Exchange Agreement, Bio-Aqua
issued 1,335,912 shares of restricted common stock to investment advisors and
attorneys in connection with services rendered to effectuate the exchange of
shares. At the date of issuance of the shares, the AMEX market quotation of the
stock was $3.00 per share. NDAC has included these costs approximating
$3,134,000 in other expenses in the accompanying statement of consolidated
income and comprehensive income for the year ended December 25, 2001, computed
by applying a 20% discount to the above AMEX market quotation due to the
restricted nature of the stock.
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.
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 the approval of the PRC government.
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 -- Concentrations 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.
F-9
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)
Details of the companies comprising the Group are as follows:
Domicile and Percentage
Date of Paid-Up of Principal
Name Incorporation Capital Ownership Activities
- --------------- ---------------- ------------ ------------ -------------
Mix Creation Limited The British US$1,500,000 100% (a) Investment holding
("MC") Virgin Islands
November 7, 1997
Rich Delta Limited The British US$1,000,000 100% (a) Investment holding
("RD") Virgin Islands
October 28, 1998
Noble Point Limited The British US$1,000,000 100% (a) Investment holding
("NP") Virgin Islands
October 29, 1998
Keen General Limited The British US$1,500,000 100% (a) Investment holding
("KG") Virgin Islands
July 20, 1998
New Dragon Asia The PRC RMB28,500,000 90% (b) Manufacture,
Flour (Yantai) August 13, 1999 marketing and
Company Limited distribution of flour
("NDAFLY")
New Dragon Asia Food The PRC RMB17,462,000 90% (c) Manufacture, marketing
(Yantai) Company December 24, 1998 and distribution of
Limited ("NDAFY") instant noodles
New Dragon Asia Food The PRC RMB17,430,000 90% (c) Manufacture, marketing
(Dalian) Company December 28, 1998 and distribution of
Limited ("NDAFD") instant noodles
Sanhe New Dragon The PRC RMB51,191,432 79.64% (c) Manufacture, marketing
Asia Food Company December 25, 1998 and distribution of
Limited ("SNDAF") instant noodles
Penglai New Dragon The PRC US$850,000 100% (d) Manufacture, marketing
Jin Qiao Food December 5, 2003 and distribution of flour
Company Limited
("PNDJQ")
(a) MC, RD, NP and KG are wholly owned by New Dragon Asia Corp.
F-10
(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 all profits or loss, net of annual fees
from the joint venture are to be allocated to NDAFLY effective from June
26, 1999. In view of the profit sharing arrangement NDAFLY is regarded as
100% owned by the Group. The minority interest component has been
included as a component of General and Administrative Expenses for the
years ended December 25, 2003, 2002 and 2001.
(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 79.64% 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 as 100% owned by the Group.
(d) PNDJQ is a wholly owned subsidiary of MC established in PRC.
NOTE 2 -- BASIS OF PRESENTATION
The consolidated financial statements include the consolidated financial
statements of MC and its subsidiaries (NDAFLY and PNDJQ), RD and its subsidiary
(NDAFY), NP and its subsidiary (NDAFD) and KG and its subsidiary (SNDAF), as
they are enterprises controlled by NDAC. All significant intra-group balances
and transactions have been eliminated in consolidation.
The consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States ("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 reporting 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.
F-11
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition -- The Group recognizes sales in accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
Sales represent the invoiced value of goods, net of value added tax ("VAT"),
supplied to customers, and are recognized upon delivery of goods and passage of
title.
All of the Group's sales made in Mainland China are subject to the Mainland
Chinese value-added tax at rates ranging from 13% to 17% ("output VAT"). Such
output VAT is payable after offsetting VAT paid by the Group on purchases
("input VAT").
Deposits or advance payments from customers prior to delivery of goods and
passage of title of goods are recorded as deposits from customers.
Advertising -- The costs of advertising are expensed in the year in which the
advertising first takes place. Total advertising expense was $81,637, $13,821
and $5,000 for the years ended December 25, 2003, 2002 and 2001, respectively.
Use of Estimates -- The preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States
requires management to make estimates and assumptions relating to the reporting
of assets and liabilities, the disclosure of contingent assets and liabilities
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents -- Highly liquid investments with a maturity of three
months or less at the time of acquisition are considered to be cash equivalents.
Financial Instruments -- The Group accounts for financial instruments under the
provisions of SFAS No. 133: "Accounting for Derivative Instruments and Hedging
Activities", which requires that all derivative financial instruments be
recognized in the consolidated financial statements and maintained at fair value
regardless of the purpose or intent for holding them. Changes in fair value of
derivative financial instruments are either recognized periodically in income or
stockholders' equity (as a component of comprehensive income), depending on
whether the derivative is being used to hedge changes in fair value or cash
flows. The adoption of SFAS 133 did not have a material impact on the Group's
consolidated financial position or its results of operations because the Group
does not currently hold any derivative financial instruments and does not engage
in hedging activities. The carrying amounts for cash and cash equivalents,
restricted cash, accounts receivable, other receivables, deposits and
prepayments, short-term borrowings, accounts payable, other payables and
accruals approximate their fair values because of the short maturity of those
instruments.
Inventories -- Inventories are stated at the lower of cost, determined on a
weighted average basis, and net realizable value. Work-in-progress and finished
goods are composed of direct material, direct labor and a portion of
manufacturing overhead. Net realizable value is the estimated selling price, in
the ordinary course of business, less estimated costs to complete and dispose.
F-12
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Property, Machinery, Equipment, Land Use Rights and Construction-in-Progress --
Property, machinery, equipment, land use rights and construction in progress are
stated at cost. Major expenditures for betterments and renewals are capitalized
while ordinary repairs and maintenance costs are expensed as incurred.
Depreciation and amortization is provided using the straight-line method over
the estimated useful lives of the assets after taking into account the estimated
residual value. The estimated useful lives are as follows:
Land use rights 27 to 50 years
Buildings 40 to 50 years
Machinery and equipment 12 years
Furniture and office equipment 5 years
Motor vehicles 5 years
Construction-in-progress represents land costs as well as factory and office
buildings under construction. The Group capitalizes interest during the
construction phase of qualifying assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 34, "Capitalization of Interest
Cost." No interest was capitalized during 2003, 2002 and 2001 as the
construction-in-progress was minimal.
In October 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144: "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS
No. 144 amends accounting and reporting standards for the disposal of segments
of a business and addresses various issues related to the accounting for the
impairment or disposal of long-lived assets. The provisions of SFAS No. 144 are
effective for fiscal years beginning after December 15, 2001. The adoption of
SFAS No. 144 did not have a material impact on the Group's consolidated
financial statements.
Income Taxes -- The Group accounts for income taxes under the provisions of SFAS
No. 109, "Accounting for Income Taxes", which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the consolidated financial statements or tax returns.
Deferred income taxes are provided using the liability method and is recognized
for all significant temporary differences between the income tax and financial
statement bases of assets and liabilities.
Operating Leases -- Operating leases represent those leases under which
substantially all the risks and rewards of ownership of the leased assets remain
with the lessors. Rental payments under operating leases are charged to expense
on the straight-line basis over the period of the relevant leases.
F-13
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Foreign Currency Translation -- The functional currency of the Group is Renminbi
("RMB"). Transactions denominated in foreign currencies are translated into RMB
at the unified exchange rates quoted by the People's Bank of China prevailing at
the dates of the transactions. Monetary assets and liabilities denominated in
foreign currencies are translated into RMB using the applicable unified exchange
rates prevailing at the balance sheet date. There are no material exchange
differences as a result of the stability of the RMB during the periods covered
by the consolidated financial statements.
Translations of amounts from Renminbi ("RMB") into United States dollars ("US$")
were at US $1.00 = RMB 8.3 for the years ended December 25, 2003, 2002 and 2001.
No representation is made that the Renminbi amounts could have been, or could
be, converted into United States dollars at that rate or at any other rate.
Earnings Per Share -- Basic earnings per common rate ("EPS") is computed in
accordance with SFAS No.128: "Earnings Per Share" by dividing net 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. The weighted-average number of
common shares outstanding for computing basic EPS was 42,107,917, 40,911,342 and
3,894,960 for years ended December 25, 2003, 2002 and 2001 respectively.
Recently Issued Accounting Standards --
(a) In April 2002, the FASB issued SFAS No.145: "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No.13, and Technical Corrections."
This SFAS made revisions to the accounting for gains and losses from the
extinguishment of debt, rescinded SFAS No.44, and required certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. The Group is
required to and will adopt SFAS No.145 on January 1, 2002. The adoption of SFAS
No.145 is not expected to have a material impact on the Group's consolidated
financial statements.
(b) In June 2002, the FASB issued SFAS No. 146: "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This SFAS also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Group adopted the
provisions of SFAS No. 146 effective December 25, 2002.
F-14
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(c) In December 2002, the FASB issued SFAS No. 148: "Accounting for Stock-Based
Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123."
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Group adopted the disclosure
provisions of SFAS No. 148 effective December 25, 2002.
(d) In May 2003, the FASB issued SFAS No. 150: "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. On November 7, 2003, the FASB deferred for an indefinite period certain
provisions of SFAS No. 150 relating to the classification and measurement of
mandatorily redeemable non-controlling interests. The Group does not believe it
has any such interests. The implementation of the remaining effective provisions
of SFAS No. 150 did not have any impact on the Group's consolidated financial
statements.
(e) In November 2002, the FASB issued Interpretation No. 45: "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others ("FIN45")." FIN45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. The
initial recognition and measurement provisions of FIN 45 apply on a prospective
basis to guarantees issued or modified after December 31, 2002. The Group has
implemented the disclosure provisions of FIN 45 in its December 25, 2003
consolidated financial statements.
(f) In January 2003, the FASB issued Interpretation No. 46: "Consolidation of
Variable Interest Entities (an interpretation of ARB No. 51) ("FIN 46")." In
December 2003, the FASB issued FIN 46R which replaced FIN 46 and clarified
Accounting Research Bulletin 51. FIN 46R addresses consolidation by business
enterprises of certain variable interest entities, commonly referred to as
special purpose entities. The Group will be required to implement the other
provisions of FIN 46R in 2003. The Group does not believe that FIN 46R will have
a material impact on its consolidated financial statements.
F-15
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Reclassifications -- Certain amounts in the fiscal 2001 consolidated financial
statements have been reclassified to conform to the fiscal 2002 presentation.
NOTE 4 -- ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 25:
2003 2002
(US$'000) (US$'000)
--------- ---------
Accounts receivable $ 7,929 $ 7,743
Less:
Allowance for doubtful accounts (993) (415)
------- -------
$ 6,936 $ 7,328
======= =======
NOTE 5 -- OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS
As of December 25, other receivables, deposits and prepayments were as follows:
2003 2002
(US$'000) (US$'000)
--------- ---------
Vendor deposits for the purchase of:
Raw materials $1,208 $ 424
Machinery and equipment -- 11
Prepayments for construction work -- 60
Advances to:
Staff (a) 63 88
Unrelated third parties (a) -- 2
Others 11 418
------ ------
$1,282 $1,066
====== ======
(a) Advances to staff and unrelated third parties are unsecured, non-interest
bearing and without predetermined repayment terms.
F-16
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 6 -- INVENTORIES
Inventories consisted of the following at December 25:
2003 2002
(US$'000) (US$'000)
--------- ---------
Raw materials $1,648 $2,981
Finished goods 1,115 2,221
------ ------
$2,763 $5,202
====== ======
NOTE 7 -- PROPERTY, MACHINERY AND EQUIPMENT, AND CONTRUCTION-
-IN-PROGRESS
Property, machinery and equipment, and construction-in-progress consisted of the
following at December 25:
2003 2002
(US$'000) (US$'000)
--------- ---------
Buildings $ 9,548 $ 9,623
Machinery and equipment 12,055 12,816
Furniture and office equipment 177 158
Motor vehicles 586 592
Construction-in-progress 3 169
-------- --------
22,369 23,358
Less: Accumulated depreciation (4,898) (4,018)
-------- --------
Property, plant and equipment, net $ 17,471 $ 19,340
======== ========
Depreciation expense was approximately $1,314,000, $1,141,000 and $1,095,000 for
the years ended December 25, 2003, 2002 and 2001, respectively.
F-17
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 8 -- LAND USE RIGHTS
Land use rights consisted of the following at December 25:
2003 2002
(US$'000) (US$'000)
--------- ---------
Land use rights $ 4,575 $ 4,575
Less:
Accumulated amortization (577) (465)
------- -------
Land use rights, net $ 3,998 $ 4,110
======= =======
Private ownership of land is not allowed in Mainland China. Rather, entities
acquire the right to use land for a designated term. As of December 25, 2003 and
2002, the land use rights consisted of four parcels of land located in Mainland
China with a net book value of approximated $3,998,000 and $4,110,000
respectively, held under land use rights of 27 to 50 years through 2025 to 2047.
Amortization expense was approximately $112,000, $110,000 and $169,000 as of
December 25, 2003, 2002 and 2001, respectively.
NOTE 9 -- SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at December 25:
2003 2002
(US$'000) (US$'000)
--------- ---------
Bank loans $2,518 $3,012
Bills payable 327 602
------ ------
$2,845 $3,614
====== ======
Bank loans are secured by corporate guarantees provided by a PRC joint venture
partner and a third party and bear interest at prevailing lending rates in the
PRC ranging from 6.01% to 6.435% per annum for the year ended December 25, 2003.
Bills payable are a form of bank borrowings with payment due within 180 days.
The bills payable were secured by pledged bank deposits of approximately
$181,000 in 2002.
F-18
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 10 -- OTHER PAYABLES AND ACCRUALS
Other payables and accruals consisted of the following at December 25:
2003 2002
(US$'000) (US$'000)
--------- ---------
Deposits from customers $ 612 $ 315
Others 112 743
Accruals for:
Staff welfare 29 18
Staff salaries and bonus 68 50
Operating expenses 64 105
Property taxes 62 51
Social insurance 287 --
------ ------
$1,234 $1,282
====== ======
NOTE 11 -- TAXATION
The PRC subsidiaries within the Group are subject to PRC income taxes on an
entity basis on income arising in or derived from the tax jurisdiction in which
they operate. The group 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.
For the years ended December 25, 2003, 2002 and 2001, substantially all of the
Group's income was generated in the PRC by NDAFLY, NDAFY, NDAFD and SNDAF (the
"joint venture"), which are subject to PRC income taxes at rates ranging from
27% to 33% (24% to 30% state income tax and 3% local income tax). The Group is
exempt from state income taxes and local income taxes for a two-year period
ending on December 25, 1999 and then subject to a 50% reduction in state income
taxes, and a full exemption from local income taxes for the following three
years ending on December 25, 2003.
As of December 25, 2003, 2002 and 2001, there do not exist any material deferred
tax assets or deferred tax liabilities.
A reconciliation of the provision for income taxes determined at the statutory
average state and local income tax rate to the Group's effective income tax rate
is as follows:
2003 2002 2001
----- ----- -----
Statutory income tax 33% 33% 33%
Impact of effective tax holiday
discussed above (21) (21) (21)
Various differences, especially as
they related to expenses of share exchange 2 1 30
--- --- ---
Effective rate 14% 13% 42%
=== === ===
F-19
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 12 -- COMMON STOCK
Prior to the execution of the Exchange Agreement, Bio Aqua was authorized to
issue 100,000,000 shares of Class A common stock; 2,000,000 shares of Class B
common stock and 5,000,000 shares of preferred stock. Immediately upon the
exchange taking place, all Class A and Class B shares were converted into a
single class of common stock. Currently the Group is authorized to issue
107,000,000 shares of common stock and 5,000,000 shares of preferred stock all
at $ .0001 par value.
On September 4, 2003, the Group issued 3,300,000 shares of common stock for an
aggregate purchase amount of $1,650,000 or $0.50 per share. The shares were
issued pursuant to an exemption provided by Section 4(2) of the Securities Act.
The purchasers were also issued warrants to purchase 1,650,000 shares of the
Group's common stock which have a term of 5 years at an exercise price of $0.99
per share. As of December 25, 2003, no warrants were exercised.
On October 7, 2003, the Group issued 850,000 shares of common stock for an
aggregate purchase amount of $425,000 or $0.50 per share. The shares were issued
pursuant to an exemption provided by Section 4(2) of the Securities Act. The
purchasers were also issued warrants to purchase 850,000 shares of the Group's
common stock which have a term of 5 years and an exercise price of $0.98 per
share. As of December 25, 2003, no warrants were exercised.
Transaction costs related to the private placements amounted to $298,000 and
have been presented as a reduction in the proceeds from the sale of shares.
As of December 25, 2003 the Group had approximately 45,061,342 of common stock
issued outstanding. As of December 25, 2002 and 2001, the Group had
approximately 40,911,342 shares of common stock issued and outstanding. No
preferred stock has been issued.
NOTE 13 -- COMMITMENTS
Lease Commitments -- The Group leases manufacturing and warehouse facilities
under operating leases which expire at various dates through March 2031. At
December 25, 2003, the Group's future minimum lease payments under operating
leases were as follows:
(US$'000)
----------
2004 $ 2
2005 2
2006 2
2007 2
2008 2
Thereafter 27
--------
$ 37
========
Total lease expense was $46,000, $74,000 and $2,000, for the years ended
December 25, 2003, 2002 and 2001 respectively.
F-20
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 13 -- COMMITMENTS (CONTINUED)
Annual Fees -- Under the supplementary joint venture agreements, the Group has
committed to pay predetermined annual fees of $114,000 to the Chinese joint
venture partners for each of the years in the period from December 26, 1998 to
2049. As of December 25, 2003, total commitments under these arrangements were
as follows:
(US$'000)
---------
Payable during the period:
Within one year $ 114
Over one year but not exceeding two years 114
Over two years but not exceeding three years 114
Over three years but not exceeding four years 114
Over four years but not exceeding five years 114
Over five years 4,582
------
$5,152
======
NOTE 14 -- RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operational decisions. Parties are also
considered to be related if they are subject to common control or common
significant influence.
Particulars of significant transactions between the Group and related companies
are summarized below:
2003 2002 2001
(US$'000) (US$'000) (US$'000)
-------- -------- --------
Sale of finished goods to:
A joint venture partner, Shandong Longfeng Group
Company $ -- $ 419 $ 83
Related parties:
Zhang Guo Quan(5) -- 980 --
Penglai Jinhai Food Company Limited(4) -- 344 --
Longkou City Longfeng Colour Printing
Factory(3)(6) -- 7 --
New Dragon Asia Food (Luoyang) Company
Limited (2) -- -- 1
Longkou City Longfeng Soybean Food Company 1 -- --
Shandong Longfeng Group Trading Company (1)(7) 110 2 --
Sanhe (Yantai) Food Company Limited (1) 2 1 --
Shandong Longfeng Penglai Flour Company Ltd (3) -- -- 62
------ ------ ------
$ 113 $1,753 $ 146
====== ====== ======
F-21
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 14 -- RELATED PARTY TRANSACTIONS (CONTINUED)
2003 2002 2001
(US$'000) (US$'000) (US$'000)
-------- -------- --------
Purchase of raw materials from:
A joint venture partner, Shandong Longfeng Group
Company $ -- $ 8 $ --
Related parties:
Sanhe (Yantai) Food Company Limited (1) (7) 8 19 48
Shandong Longfeng Penglai Flour Company Ltd (3) -- -- 924
Shandong Longfeng Packing Manufacturing
Factory (1) 1,330 -- --
Longkou City Longfeng Colour Printing Packing
Factory (3)(6) -- 907 688
Longkou City Longfeng Carton Packing Factory (3)(6) -- 710 424
Longkou City Longfeng Soybean Food
Company Limited (1) 6 --
New Dragon Asia Food (Yueyang) Company Limited (2) -- 1 --
New Dragon Asia Food (Chengdu) Company Limited (2) -- 11 --
New Dragon Asia Food (Luoyang) Company Limited (2) -- 1 --
Xinxiang Guo Liang Flour Company Limited (5) -- -- 37
------ ------ ------
$1,344 $1,657 $2,121
====== ====== ======
Pre-determined annual fee charged by joint venture partners:
Shandong Longfeng Group Company $ 78 $ 78 $ 78
Shandong Longfeng Flour Company Limited 36 36 36
------ ------ ------
$ 114 $ 114 $ 114
------ ------ ------
Interest income earned from short-term advances
to an immediate parent company:
New Dragon Asia Food Limited $ -- $ 188 $ 67
------ ------ ------
Interest expenses paid to a joint venture partner:
Shandong Longfeng Group Company $ 17 $ 18 $ 18
------ ------ ------
Rental income from joint venture partner:
Shandong Longfeng Group Company $ 64 $ 64 $ 64
------ ------ ------
F-22
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 14 -- RELATED PARTY TRANSACTIONS (CONTINUED)
Summary of related party balances is as follows:
2003 2002
(US$'000) (US$'000)
--------- ---------
Due to an immediate parent company, net consisting of:
New Dragon Asia Food Limited $ 196 $5,782
------ ------
The net amount due to New Dragon Asia Food Limited is unsecured, non-interest
bearing and repayable upon demand.
During the year ended December 25, 2003, the Group sold some machinery to
Shandong Longfeng Group Company for consideration of $992,540.
2003 2002
(US$'000) (US$'000)
--------- ---------
Due to joint venture partners, net consisting of:
Shandong Longfeng Group Company $1,034 $3,762
Shandong Longfeng Flour Company Limited 170 1,809
------ ------
$1,204 $5,571
====== ======
The amounts due to joint venture partners are unsecured, non-interest bearing
and repayable upon demand, except for an amount due to Shandong Longfeng Group
Company of $280,723 which bears interest at 6.48% per annum.
2003 2002
(US$'000) (US$'000)
--------- ---------
Due from related companies consisting of:
New Dragon Asia Food (Yueyang)
Company Limited (2) $ -- $ 329
New Dragon Asia Food (Luoyang)
Company Limited (2) -- 791
New Dragon Asia Food (Chengdu)
Company Limited (2) -- 551
Penglai Jinhai Food Company Limited (4) -- 372
Shandong Longfeng Packing Manufacturing Factory (1) 1 --
Longkou City Longfeng Food Company Limited (1) 13 --
Shandong Longfeng Group Trading Company (1) 110 12
Shandong Longfeng Oceanic Foodstuff -- 10
Company Limited(1)
Zhang Guo Quan(5) -- 434
------ ------
$ 124 $2,499
====== ======
F-23
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 14 -- RELATED PARTY TRANSACTIONS (CONTINUED)
The amounts due from related companies are unsecured and non-interest bearing,
and are repayable upon demand.
2003 2002
(US$'000) (US$'000)
--------- ---------
Due to related companies consisting of:
Longkou City Longfeng Colour Printing Packing
Factory (3)(6) $ -- $ 463
Shandong Longfeng Packing Manufacturing
Factory (1) 609 --
Longfeng Food Company Limited(3) (6) 234 133
New Dragon Asia Food (Luoyang) Co Ltd (2) -- 6
Ningbo Hai Fu Sheng (4) -- 2
Penglai Jinhai Food Company Limited (4) -- 2
Sanhe (Yantai) Food Company Limited(1) (7) 66 76
Sanhe Senji Food Technology Development
Company Limited (1) 120 120
Longkou City Longfeng Soybean Food Co Ltd (1) 83 --
Long Feng Food (H.K.) Company Limited (1) 55 --
Shandong Longfeng Group Trading Company (1) 35 --
------ ------
$1,202 $ 802
====== ======
The amounts due to related Companies are unsecured, non-interest bearing and are
repayable upon demand.
The bank facilities of the Group are secured by corporate guarantee provided by
Shandong Longfeng Group Company, a joint venture partner.
(1) Shandong Longfeng Group Company has a beneficial interest in these
companies.
(2) These companies are wholly owned subsidiaries of New Dragon Asian Food
Limited.
(3) Mr. Xue Jun Song, an ex-director of each the companies, has a beneficial
interest in these companies.
(4) Mr. Zhen Gu Song, is the son of Mr. Xu Jun Song, and has a beneficial
interest in these companies.
(5) Lessor of one of our sub-contracted factories.
(6) Mr. Xue Jun Song ceased to be a director of Shandong Longfeng Group
Company on January 7, 2002.
(7) Shandong Longfeng Group Company withdrew their investment on Feb 25, 2004.
In the opinion of the directors of each of the group companies, the above
related party transactions were carried out in the usual course of business.
F-24
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 15 -- SEGMENT INFORMATION
The Group classifies its products into two core business segments, namely
instant noodles and flour. In view of the fact that the Group operates
principally in Mainland China, no geographical segment information is presented.
Net Sales
2003 2002 2001
(US$'000) (US$'000) (US$'000)
------- ------- -------
Instant noodles $11,703 $10,847 $ 9,990
Flour 19,070 22,857 20,145
------- ------- -------
$30,773 $33,704 $30,135
======= ======= =======
Income from Operations
2003 2002 2001
(US$'000) (US$'000) (US$'000)
------- ------- -------
Instant noodles $ 296 $ 1,621 $ 1,574
Flour 1,897 2,725 2,515
------- ------- -------
$ 2,193 $ 4,346 $ 4,089
======= ======= =======
Identifiable Assets
2003 2002
(US$'000) (US$'000)
------- -------
Instant noodles $17,372 $18,390
Flour 9,572 9,543
------- -------
$26,944 $27,933
======= =======
Interest Income
2003 2002 2001
(US$'000) (US$'000) (US$'000)
-------- -------- --------
Instant noodles $ 2 $192 $ 78
Flour 2 2 10
---- ---- ----
$ 4 $194 $ 88
==== ==== ====
F-25
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 15 -- SEGMENT INFORMATION (CONTINUED)
Interest Expense
2003 2002 2001
(US$'000) (US$'000) (US$'000)
-------- -------- --------
Instant noodles $ 22 $ 18 $ 27
Flour 227 247 173
---- ---- ----
$249 $265 $200
==== ==== ====
Depreciation and Amortization
2003 2002 2001
(US$'000) (US$'000) (US$'000)
-------- -------- --------
Instant noodles $ 867 $ 703 $ 794
Flour 557 548 470
------ ------ ------
$1,424 $1,251 $1,246
====== ====== ======
Major Customers -- Details of individual customers accounting for more than 5%
of the Group's sales are as follows:
2003 2002 2001
---- ---- ----
Li Yi -- 6% 7%
===== ===== =====
Zhang Guo Quan -- 3% 5%
===== ===== =====
Major Suppliers -- Details of suppliers accounting for more than 5% of the
Group's purchases are as follows:
2003 2002 2001
---- ---- ----
Longkou City Food Collect
and Store Control Center -- 2 % 15%
===== ===== =====
Hui Town Food Institute Yu Lain Food
Control Centre -- 2 % 5%
===== ===== =====
F-26
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 16 -- RETIREMENT PLAN
As stipulated by the regulations of the PRC government, companies of the Group
operating in the PRC have defined contribution retirement plans for their
employees. The PRC government is responsible for the pension liability to these
retired employees. Commencing January 1, 2002, the Group was required to make
specified contributions to the state-sponsored retirement plan at 20% of the
basic salary cost of their staff. Each of the employees of the PRC subsidiaries
is required to contribute 6% of his/her basic salary. For the year ended
December 25, 2003, 2002 and 2001, contributions made by the Group were
approximately $151,000, $97,000 and $118,000 respectively.
NOTE 17 - SUBSEQUENT EVENT
In December 2003, the Group's management decided to temporarily idle the
operations of NDAFD. On February 27, 2004, the Group received a letter of intent
from an unrelated party to purchase the assets and assume certain liabilities of
NDAFD. As required by PRC regulations, determination of the final purchase price
and execution of a sales and purchase agreement is contingent upon a completed
asset valuation report which the Group's management expects will result in an
amount equal to the net carrying value of the assets. As of March 25, 2004, the
Group's management and the unrelated party have not yet engaged an independent
party to complete the valuation report. However, the Group's management believes
that this transaction will be completed during the year ended December 25, 2004.
The carrying amount of the NDAFD assets and related liabilities as of December
25, 2003 are as follows:
Current assets $ 112
Property, plant, equipment and
land use rights, net $2,244
Current liabilities $ 621
F-27