U.S. SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(_) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: Commission File Number:
June 25, 2004
NEW DRAGON ASIA CORP.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
FLORIDA 88-0404114
- ----------------- ---------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2/F Kam Chung Commercial Building
19-21 Hennessy Road
Wanchai, Hong Kong 33301
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(852) 2520-0220
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to filing requirements
for the past 90 days.
Yes [X] No [_]
The number of shares of Common Stock outstanding as of June 25, 2004 was
45,061,242.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
ITEM 1. FINANCIAL STATEMENTS
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS, EXCEPT PER SHARE DATA)
AS OF
--------------------------
JUNE 25, DECEMBER 25,
A S S E T S 2004 2003
(Unaudited)
------------ ------------
Current Assets:
Cash and cash equivalents $ 442 $ 1,783
Accounts receivable, net of allowance for doubtful accounts
of $936 at June 25, 2004 and $993 at December 25, 2003 6,226 6,936
Other receivables, deposits and prepayments 1,612 1,282
Inventories 2,869 2,763
Due from related companies 1,095 124
------------ ------------
Total current assets 12,244 12,888
Property, machinery and equipment, net 16,879 17,471
Land use rights, net 3,878 3,998
------------ ------------
Total assets $ 33,001 $ 34,357
============ ============
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 1,411 $ 2,845
Accounts payable 4,195 4,565
Other payables and accruals 2,384 1,234
Taxes payable 1,303 921
Due to related companies 519 1,202
------------ ------------
Total current liabilities 9,812 10,767
Due to an immediate parent company 3 196
Due to joint venture partners 3 1,204
------------ ------------
Total liabilities 9,818 12,167
------------ ------------
Minority interest 116 --
------------ ------------
Stockholders' equity:
Common stock, par value $0.0001; authorized -
107,000,000 shares; issued and outstanding -
45,061,242 shares at June 25, 2004 and
December 25, 2003 4 4
Additional paid-in-capital 9,909 9,909
Retained earnings 13,154 12,277
------------ ------------
Total stockholders' equity 23,067 22,190
------------ ------------
Total liabilities, minority interest and
stockholders' equity $ 33,001 $ 34,357
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 25, JUNE 25, JUNE 25, JUNE 25,
2004 2003 2004 2003
------------------- -------------------
Net sales $ 8,547 $ 5,478 $ 15,945 $ 12,026
Cost of goods sold (6,986) (5,345) (13,051) (11,046)
-------- -------- -------- --------
Gross profit 1,561 133 2,894 980
Selling and distribution expenses (235) (248) (624) (490)
General and administrative
expenses (464) (439) (1,125) (672)
-------- -------- -------- --------
Income (loss) from operations 862 (554) 1,145 (182)
Other income (expenses):
Interest expense (33) (68) (72) (128)
Interest income 1 56 13 108
Other income 113 6 441 31
-------- -------- -------- --------
Income (loss) before provision for
income taxes 943 (560) 1,527 (171)
Provision for income taxes (412) (29) (658) (102)
-------- -------- -------- --------
Income (loss) before minority
interest 531 (589) 869 (273)
Minority interest 8 -- 8 --
-------- -------- -------- --------
Net income (loss) $ 539 $ (589) $ 877 $ (273)
======== ======== ======== ========
Basic and diluted earnings (loss)
per common share $ 0.012 $ (0.014) $ 0.019 $ (0.007)
======== ======== ======== ========
Weighted average shares used
to compute basic and diluted
earnings (loss) per common share 45,061 40,911 45,061 40,911
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 25,
-----------------
2004 2003
------- -------
Cash flows from operating activities:
Net income (loss) $ 877 $ (273)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 614 712
(Gain) loss on sale of machinery and equipment (15) 37
Provision for doubtful accounts (57) 92
Minority interest (8) --
Changes in operating assets and liabilities:
Accounts receivable 767 505
Other receivables, deposits and prepayments (330) 237
Inventories (106) 517
Accounts payable (370) (55)
Other payables and accruals 1,150 (255)
Taxes payable 382 (720)
------- -------
Net cash provided by operating activities 2,904 797
------- -------
Cash flows from investing activities:
Due from related companies (973) 203
Proceeds from sale of machinery and equipment 2,266 8
Purchases of property, machinery and equipment (2,151) (30)
------- -------
Net cash provided by (used in) investing activities (858) 181
------- -------
Cash flows from financing activities:
Proceeds from short-term borrowings 602 1,807
Payments on short-term borrowings (2,036) (1,096)
Due to related companies (683) (69)
Net decrease in due to an immediate parent company (193) (2,095)
Net increase (decrease) in due to joint venture partners (1,201) 506
Capital contribution from minority interest 124 --
------- -------
Net cash used in financing activities (3,387) (947)
------- -------
Net (decrease) increase in cash and cash equivalents (1,341) 31
Cash and cash equivalents at the beginning of the period 1,783 628
------- -------
Cash and cash equivalents at the end of the period $ 442 $ 659
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(SIX MONTH PERIODS ENDED JUNE 25, 2004 AND 2003 ARE UNAUDITED)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
New Dragon Asia Corporation (formerly Bio-Aqua Systems, Inc.) and its
subsidiaries (the "Group" or "NDAC"), a United States corporation
incorporated in the State of Florida, is principally engaged in the
manufacturing, marketing and distribution of instant noodles and flour
in the People's Republic of China ("PRC"). NDAC has its corporate
office in Hong Kong. The group of NDAC 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 owns 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
with Max Rutman, Flagship Import Export LLC, a Nevada limited liability
company and New Dragon Asia Food Limited, a company organized under the
laws of the British Virgin Islands. Pursuant to the Share Exchange
Agreement, Bio-Aqua acquired from New Dragon Asia Food Limited all of
the equity interests 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.
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 approvals 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 - Concentration of credit risk with
respect to customer receivables are limited due to the large number of
customers comprising the Group's customer base, and their dispersion
across the PRC. In addition, the Group performs ongoing credit
evaluations of each customer's financial condition and maintains
reserves for potential credit losses. Such losses in the aggregate have
not exceeded management's expectations.
Details of the companies comprising the Group are as follows:
Domicile and
Date of Paid-Up Percentage of Principle
Name Incorporation Capital Ownership Activities
- ---------------- ------------------ ----------- -------------- ------------------
Mix Creation The British Virgin US$ 100% Investment holding
Limited Islands 1,500,000
("MC") (a) November 7, 1997
New Dragon Asia Flour The PRC RMB 90% (b) Manufacture,
(Yantai) Company August 13, 1999 28,500,000 marketing and
Limited distribution of
("NDAFLY") flour
Rich Delta Limited The British Virgin US$ 100% Investment holding
("RD") (a) October 28, 1998 1,000,000
New Dragon Asia Food The PRC RMB 90% (c) Manufacture,
(Yantai) Company December 24, 1998 17,462,000 marketing and
Limited ("NDAFY") distribution of
instant noodles
Noble Point Limited The British Virgin US$ 100% Investment holding
("NP") (a) Islands 1,000,000
October 29, 1998
New Dragon Asia The PRC RMB 90% (c) Manufacture,
Food (Dalian) Company December 28, 1998 17,430,000 marketing and
Limited distribution of
("NDAFD") instant noodles
Keen General The British Virgin US$ 100% Investment holding
Limited Islands 1,500,000
("KG") (a) July 20, 1998
Sanhe New Dragon The PRC RMB 79.64% (c) Manufacture,
Asia Food Company December 25, 1998 51,191,432 marketing and
Limited distribution of
("SNDAF") instant noodles
Penglai New Dragon The PRC US$ 100% (d) Manufacture,
Jin Qiao Food December 5, 2003 850,000 marketing and
Company Limited distribution of
("PNDJQ") flour
Longkou City The PRC RMB 55% (e) Manufacture,
Longyuan Packing March 1, 2004 2,280,000 marketing and
Material Company distribution of
Limited packing materials
("LCLPM")
(a) MC, RD, NP and KG are wholly owned by New Dragon Asia
Corporation.
(b) NDAFLY is a contractual joint venture established in the PRC to
be operated for 50 years until August 13, 2049. In September
2000, MC contributed 90% of the registered capital to NDAFLY.
Under the joint venture agreement dated June 1, 1999 and the
supplemental agreement dated June 26, 1999, the Chinese joint
venture partner is entitled to receive a pre-determined annual
fee and is not responsible for any profit or loss to NDAFLY
effective from June 26, 1999. In view of the profit sharing
arrangement, NDAFLY is regarded for financial reporting purposes
as 100% owned by the Group. The prorated annual fee to the
Chinese joint venture partner of $18,072 has been included in
general and administrative expenses for the periods ended June
25, 2004 and 2003. The initial capital contribution has been
included as a component of the due to joint venture partners in
the consolidated balance sheets.
(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 for financial
reporting purposes as 100% owned by the Group. The prorated
annual fees to the Chinese joint venture partners of $38,655 and
$39,157 have been included in general and administrative expenses
for the periods ended June 25, 2004 and 2003, respectively. The
initial capital contributions have been included as a component
of the due to joint venture partners in the consolidated balance
sheets.
(d) PNDJQ is a wholly-owned subsidiary of MC established in PRC.
(e) LCLPM is a subsidiary of RD established in PRC. In March 1, 2004,
RD contributed 55% of the registered capital to LCLPM. The
minority interest was separately disclosed in the consolidated
balance sheets and consolidated statements of operations.
NOTE 2 - BASIS OF PRESENTATION
The interim consolidated financial statements of the Group are
unaudited. All significant intra-group balances and transactions have
been eliminated in consolidation.
The unaudited consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United
States of America ("U.S. GAAP"). The preparation of financial
statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of
revenues and expenses during the 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.
The accompanying unaudited consolidated financial statements, which are
for interim periods, do not include all disclosures provided in the
annual consolidated financial statements. These unaudited consolidated
financial statements should be read in conjunction with the
consolidated financial statements and the footnotes thereto contained
in the Annual Report on Form 10-K/A for the year ended December 25,
2003 of New Dragon Asia Corp. and Subsidiaries, as filed with the
Securities and Exchange Commission.
In the opinion of the Group's management, the accompanying unaudited
consolidated financial statements contain all adjustments (which are of
a normal recurring nature) necessary for a fair presentation of the
Group's consolidated financial position and results of operations. The
results for interim periods are not necessarily indicative of results
to be expected for the complete fiscal year.
NOTE 3 - INVENTORIES
Inventories consist of the following (US$'000):
June 25, December 25,
2004 2003
(Unaudited)
--------- ---------
Raw materials $ 1,104 $ 1,648
Finished goods 1,765 1,115
--------- ---------
$ 2,869 $ 2,763
========= =========
Inventories are stated at the lower of cost, determined on a weighted
average basis. Finished goods are composed of direct material, direct
labor and manufacturing overhead.
NOTE 4 - DISPOSAL OF DALIAN FACTORY
In May 2004, the Company entered into an agreement with and unrelated
third party ("Purchaser") whereby the Purchaser acquired the assets and
assumed certain liabilities of New Dragon Asia Food (Dalian) Company
Limited. The Company has recorded a gain of approximately $162,000 as a
result of this transaction.
NOTE 5 - EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED
Basic earnings (loss) per common share ("EPS") is computed by dividing
net income allocable to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings
(loss) per common share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock. As of June 25, 2004 and 2003,
the diluted share base excludes incremental shares relating to stock
options and warrants since their effect was anti-dilutive. The
weighted-average number of common shares outstanding for computing
basic and diluted EPS was 45,061,242 and 40,911,242 for the six months
ended June 25, 2004 and 2003, respectively.
NOTE 6 - INCOME TAXES
The income of the Company is subject to PRC income taxes at rates
ranging from 27% to 33% of which 24% to 30% is attributable to the
central government and 3% to the provincial government. On application
and approval by the tax bureau, one of the PRC subsidiaries within the
Group is exempt from state income tax and local tax in respect of
income earned for the first two years of operation, and then subject to
a 50% reduction in state income tax and a full exemption of local
income tax for the following three years.
The Group's companies that are incorporated under the International
Business Companies Act of the British Virgin Islands are exempt from
payment of the British Virgin Islands income tax.
NOTE 7 - RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the liability,
directly or indirectly, to control the other party or exercise
significant influence over the other party in making financial and
operational decisions. Parties are also considered to be related if
they are subject to common control or common significant influence.
Particulars of significant transactions between the Group and related
companies are summarized below:
June 25, June 25,
2004 2003
(Unaudited) (Unaudited)
-------- --------
(US $ '000) (US $ '000)
Sale of finished goods to:
Joint Venture Partner:
Shandong Longfeng Group Company $ - $ 184
Related Parties:
Sanhe (Yantai) Food Company Limited - 2
Penglai Jinhai Food Company Limited - 12
-------- --------
- 198
-------- --------
Purchase of raw materials from:
Related Parties:
Sanhe (Yantai) Food Company Limited - 8
Longkou City Longfeng Soybean Food Co Limited 8 -
Longkou City Longfeng Packing Manufacturing Factory 83 526
-------- --------
91 534
-------- --------
The amounts due from related companies are unsecured, non-interest
bearing and repayable upon demand.
NOTE 8 - ACQUISITION OF A FLOUR MILLER
The Group entered into an asset purchase agreement on May 25, 2004 to
purchase property, machinery and equipment, and land use rights of a
flour miller in Penglai, Shandong province, P.R.C. for US$1.33 million
cash. The purchase price has been allocated as follows (US$'000):
Property, machinery and equipment $ 1,105
Land use rights 226
--------
$ 1,331
========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical information, this Quarterly Report contains
forward-looking statements. 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 placed on these
forward-looking statements which speak only as of the date hereof. We undertake
no obligation to update these forward-looking statements. Readers should
carefully review the risks described in other documents the Company files from
time to time with the Securities and Exchange Commission, including the Annual
Report on Form 10-K for the fiscal year ended December 25, 2003, the Quarterly
Reports on Form 10-Q filed by the Company and Current Reports on Form 8-K by the
Company.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto, included as part of
this Quarterly Report.
OVERVIEW
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 3, 2001
(the "Closing"), the Company acquired from New Dragon Asia Food Limited all of
the equity interests of four companies organized under the laws of the British
Virgin Islands (each a "Subsidiary" and, collectively, the "Subsidiaries") each
of which in turn hold an interest in a separate Sino-foreign joint venture,
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 denominated in currencies other than the US dollars are
translated into US dollars at the respective applicable exchange rates. Monetary
assets and liabilities denominated in other currencies are translated into US
dollars at the applicable rate of exchange at the balance sheet date. 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.
PLAN OF OPERATIONS
Our current strategy is twofold: (1) expand our customer sales base and
production lines; and (2) impose ongoing strict control on the factories'
hygiene in view of prevention of SARS (Severe acute respiratory syndrome). Plans
for expansion of the existing plants are expected to be funded through current
working capital from ongoing sales.
Our long-term growth strategy includes strategic acquisitions of additional
plants with regional brand recognition to increase our market share in China. A
significant acquisition will require additional funds in the form of debt or
equity, or a combination thereof. However, there can be no assurance these funds
will be available.
The Dalian plant was established ten years ago and the facilities needed to be
overhauled completely in order to meet the latest PRC environmental
requirements. In consideration of the costs that would be incurred and the past
performance of the operation, management decided to cease the operation
particularly in view of the fact that the local market can be satisfied by the
Yantai factory. After negotiation with an unrelated third party in May 2004, an
agreement was signed whereby the purchaser acquired the assets and assumed
certain liabilities of New Dragon Asia Food (Dalian) Company Limited ("NDAFD"),
a PRC company of which we owned 90% of its equity. The Company has recorded a
gain of approximately $162,000 as a result of this transaction. Management
believes that the disposal of the Dalian operation will improve the Company's
profitability in the future.
The Group entered into an asset purchase agreement on May 25, 2004 to purchase
property, machinery and equipment, and land use rights of a flour miller in
Penglai, Shandong province, P.R.C. for US$1.33 million cash. The acquisition
will expand the Group's production capacity by approximately 30 percent and
contribute additional sales in coming years. It currently serves the north,
northeast and central plains regions of China.
RESULTS OF OPERATIONS
Six months ended June 25, 2004 compared to six months ended June 25, 2003
Total revenue
Total revenue for the six months ended June 25, 2004 was $15.94 million as
compared to $12.03 million for the six months ended June 25, 2003, an increase
of 32% over the comparable period last year. The increase comes from improved
sales in our flour business and additional sales from the newly established
packaging factory in Yantai.
Net income
Net income for the six months ended June 25, 2004 was $877,000 as compared
to a net loss of $273,000 for the corresponding period last year, an increase of
$1,142,000. The result was mainly due to an increase in sales from the flour
segment and the improvement in sales from the negative effects of the SARS
outbreak last year.
General and administrative expenses
General and administrative expenses for the six months ended June 25, 2004
increased by $452,502, to $1,124,910, compared to $672,408 for the corresponding
period in 2003. The increase was mainly due to the additional expenses
attributable to the newly established packaging factory in Yantai and the fact
that professional expenses related to the Company had been previously borne by
the ultimate holding company in the group base, such expenses are now borne by
the Company itself.
Selling and distribution expenses
Selling and distribution expenses for the six months ended June 25, 2004
increased by $133,508 to $623,775 compared to $490,267 for the corresponding
period of the prior year. The increase was attributed to the establishment of
the packaging factory in Yantai and the increased transportation costs
associated with more stringent maximum weight loading restrictions for truck
shipments.
Minority interest
Minority interest of $8,000 was reported during the six months ended June
25, 2004 as compared to $0 during the six months ended June 25, 2003. Minority
interest reflects the minority shareholder's proportionate interest in the
losses of Longkou City Longyuan Packing Material Company Limited.
Three months ended June 25, 2004 compared to three months ended June 25, 2003
Total revenue
Total revenue for the three months ended June 25, 2004 was $8.5 million as
compared to $5.5 million for the three months ended June 25, 2003, an increase
of 56% over the comparable period last year. The increase was attributable to
improved sales of flour, together with the addition of the packaging factory in
Yantai in the second quarter of 2004.
Net income
Net income for the three months ended June 25, 2004 was $539,000 as
compared to a net loss of $589,000 for the corresponding period last year, an
increase of $1,128,000. The increase was primarily due to the improved sales of
flour. The result was mainly due to an increase in sales from the flour segment
and the improvement in sales from the negative effects of the SARS outbreak last
year.
General and administrative expenses
General and administrative expenses for the three months ended June 25,
2004 increased by $25,000, to $464,000, compared with $439,000 for the
corresponding period in 2003. The increase was mainly due to an addition of the
factory in Yantai and the fact that professional expenses related to the Company
had been previously borne by the ultimate holding company in the group base,
such expenses are now borne by the Company itself. The addition of the new
established factory resulted in $202,000 of additional expenses which were
partially offset by the reduction in the allowance for doubtful accounts in the
flour segment.
Selling and distribution expenses
Selling and distribution expenses for the three months ended June 25, 2004
were $235,000 compared with $248,000 for the corresponding period in 2003. The
expenses slightly decreased based upon certain changes in the Company's
marketing policies.
Income taxes
The income of the Company is subject to PRC income taxes at rates from 27%
to 33%, of which 24% to 30% is attributable to the central government and 3% to
the provincial government. On application and approval by the tax bureau, one of
the PRC subsidiaries within the Group is exempt from state income tax and local
tax with regard to income earned for the first two years of operation, and then
subject to a 50% reduction in state income tax and a full exemption of local
income tax for the following three years.
The subsidiaries companies of the Group 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.
Minority interest
Minority interest of $8,000 was reported during the three months ended
June 25, 2004 as compared to $0 during the three months ended June 25, 2003.
Minority interest reflects the minority shareholder's proportionate interest in
the losses of Longkou City Longyuan Packing Material Company Limited.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are to purchase inventories and fund
accounts receivable and capital expenditures. The Company has financed its
working capital requirements through a combination of internally generated cash,
short-term bank loans and advances from affiliates.
Cash and cash equivalents were $442,000 as of June 25, 2004. This
represents a decrease of $1,341,000 from December 25, 2003. The decrease was
mainly due to the payment for the acquisition of assets for the Penglai plant
and the purchase of assets for the Sanhe factory. Net cash provided by operating
activities for the six months ended June 25, 2004 was approximately $2,904,000.
Net cash flows from the Company's operating activities are attributable to the
Company's income and changes in operating assets and liabilities.
Accounts receivable decreased by 10% and accounts payable decreased by 8%,
from December 25, 2003 to June 25, 2004. There was a decrease in accounts
receivable due to the repayment from customers and the selling of the Dalian
factory in which the accounts receivable were also acquired by the third party.
The Company evaluates the allowance for doubtful accounts from time to time by
applying the Company's provision policy. Apart from the above, there has been no
other significant change in financial condition and liquidity since the fiscal
year ended December 25, 2003. The Company believes that internally generated
funds together with available bank credit will be sufficient to satisfy its
anticipated working capital needs for at least the next twelve months.
INFLATION AND CHANGING PRICES
The Company does not foresee any adverse effects on its earnings as a
result of inflation or changing prices.
FOREIGN CURRENCY RISK
Substantially all of the revenues and expenses of the Company are
denominated in Renminbi, which is the official currency of China. However, we
use the United States dollar for financial reporting purposes. Conversion of
Renminbi into foreign currencies is regulated by The People's Bank of China
through a unified floating exchange rate system. Although the PRC government has
stated its intention to support the value of Renminbi, there can be no assurance
that such exchange rate will not again become volatile or that Renminbi will not
devalue significantly against the US dollar. Exchange rate fluctuations may
adversely affect the value, in US dollar terms, of the Group's net assets and
income derived from its operations in the PRC.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements that are reasonably
believed to have a current or future effect on the Company's financial position,
changes in financial position, increase in expenses, results of operations,
liquidity, capital expenditures or capital resources.
ITEM 3. 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.
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.
With respect to foreign currency exchange rates, the Company does not
believe that a devaluation or fluctuation of the RMB against the USD would have
a detrimental effect on the Company's operations, since the Company conducts
virtually all of its business in China, and the sale of its products and the
purchase of raw materials and services is settled in RMB. The effect of a
devaluation or fluctuation of the RMB against the USD would affect the Company's
results of operations, financial position and cash flows, when presented in USD
(based on a current exchange rate) as compared to RMB.
Interest Rate Risk
The Company does not have any interest rate risk, as the Company's debt
obligations are primarily short-term in nature, with fixed interest rates.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed
in the reports filed under the Exchange Act is accumulated and
communicated to management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions
regarding disclosure.
Within 90 days prior to the filing of this report, the Group carried
out an evaluation, under the supervision and with the participation of
the Group's management, including the Group's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and
operation of the Group's disclosure controls and procedures. Based upon
and as of the date of that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Group's disclosure controls
and procedures are effective to ensure that the information required to
be disclosed in the reports the Group files and submits under the
Exchange Act is recorded, processed, summarized and reported as and
when required.
(b) Change in Internal Controls
There were no changes in the Group's internal controls or in the other
factors that could have significantly affected those controls
subsequent to the date of the Group's most recent evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On May 14, 2004, the Company held its Annual Meeting of
Stockholders. At the meeting, seven directors were elected based on
the following votes:
Name For Against Withheld
---- --- ------- --------
Heng Jing Lu 44,404,534 44,500 -
Li Xia Wang 44,404,534 44,500 -
Ling Wang 44,404,534 44,500 -
Zhi Yong Jiang 44,404,534 44,500 -
De Lin Yang 44,404,534 44,500 -
Qi Xue 44,404,534 44,500 -
Feng Ju Chen 44,404,534 44,500 -
Additionally, the selection of Grobstein Horwath & Company LLP as
the Company's independent registered accountants for the year ending
December 25, 2004 was ratified with 44,404,534 votes in favour,
44,500 against and none withheld.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 31.1: Section 302 Sarbanes Oxley Certification of the Chief
Financial Officer
Exhibit 31.2: Section 302 Sarbanes Oxley Certification of the Chief
Executive Officer
Exhibit 32.1: Section 906 Sarbanes Oxley Certification of both the
Chief Financial Officer and the Chief Executive Officer
(b) Reports on Form 8-K:
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 13, 2004
NEW DRAGON ASIA CORP.
By: /s/ Heng Jing Lu
--------------------------------
Name: Heng Jing Lu
Title: Chief Executive Officer