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UNITED STATES
SECURITIES AND 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
For the quarterly period ended: March 25, 2005
(_) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number:
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)
36/F, NEWS BUILDING, 2 SHEN NAN ZHONG ROAD,
SHENZHEN, PRC 518027
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(Address of Principal Executive Offices) (Zip Code)
(86 755) 2595-1100
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(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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-12 of the Exchange Act): Yes [_] No [X]
The number of shares of Common Stock outstanding as of March 25, 2005 was
45,061,242.
-1-
NEW DRAGON ASIA CORP.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 25, 2005
TABLE OF CONTENTS
Page
----
PART I: FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 25, 2005 (unaudited) and
December 25, 2004 3
Consolidated Statements of Operations (unaudited) for the three
months ended March 25, 2005 and 2004 4
Consolidated Statements of Cash Flows (unaudited) for the three
months ended March 25, 2005 and 2004 5
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 16
ITEM 4. Controls and Procedures 17
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities and Use of Proceeds 18
ITEM 3. Defaults Upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Security Holders 18
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBITS
-2-
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 25, DECEMBER 25,
2005 2004
---------- ----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 267 $ 219
Accounts receivable, net 6,197 6,414
Deposits and prepayments, net 4,591 2,520
Inventories, net 4,635 3,990
Due from related companies 854 1,183
---------- ----------
Total current assets 16,544 14,326
Property, machinery and equipment, net 15,837 16,098
Land use rights, net 3,794 3,822
---------- ----------
Total assets $ 36,175 $ 34,246
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,406 $ 2,696
Other payables and accruals 2,178 1,898
Taxes payable 2,028 1,491
Due to related companies 728 831
---------- ----------
Total current liabilities 8,340 6,916
Due to parent company 306 303
Due to joint venture partners 65 110
---------- ----------
Total liabilities 8,711 7,329
---------- ----------
Minority interests 41 82
---------- ----------
Stockholders' equity:
Common stock, par value $0.0001; 107,000,000 shares
authorized; 45,061,242 shares issued and outstanding
at March 25, 2005 and December 25, 2004 4 4
Additional paid-in-capital 9,909 9,909
Retained earnings 17,510 16,922
---------- ----------
Total stockholder's equity 27,423 26,835
---------- ----------
Total liabilities and stockholders' equity $ 36,175 $ 34,246
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
THREE MONTHS ENDED
MARCH 25,
----------------------
2005 2004
-------- --------
Revenue $ 8,282 $ 7,398
Cost of goods sold (6,790) (6,065)
-------- --------
Gross profit 1,492 1,333
Selling and distribution expenses (121) (389)
General and administrative expenses (573) (661)
-------- --------
Income from operations 798 283
Other income (expenses):
Interest expense -- (39)
Interest income -- 12
Other income 2 328
-------- --------
Income before taxes 800 584
Provision for income taxes (253) (246)
-------- --------
Income before minority interests 547 338
Minority interests 41 --
-------- --------
Net income $ 588 $ 338
======== ========
Basic and diluted earnings per common share $ 0.01 $ 0.01
======== ========
Weighted average common shares outstanding 45,061 45,061
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS, UNAUDITED)
THREE MONTHS ENDED
MARCH 25,
----------------------
2005 2004
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 588 $ 338
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest (41) --
Depreciation and amortization 297 310
Gain on sale of machinery and equipment -- (16)
Allowance for doubtful accounts 86 396
Changes in operating assets and liabilities:
Accounts receivable 131 652
Deposits and prepayments (2,071) (1,661)
Inventories (645) 803
Due from related parties 329 4
Accounts payable 710 (654)
Other payables and accruals 280 21
Taxes payable 537 (105)
-------- --------
Net cash provided by operating activities 201 88
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in amounts due from related companies (103) (252)
Proceeds from disposal of property, machinery and equipment -- 22
Purchases of property, machinery and equipment (8) (1)
-------- --------
Net cash (used in) investing activities (111) (231)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings -- 602
Repayments of short-term borrowings -- (626)
Due to parent company 3 (188)
Due to joint venture partners (45) (825)
-------- --------
Net cash used in financing activities (42) (1,037)
-------- --------
Net increase (decrease) in cash and cash equivalents 48 (1,180)
Cash and cash equivalents at the beginning of the period 219 1,783
-------- --------
Cash and cash equivalents at the end of the period $ 267 $ 603
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTED IN THOUSANDS, EXCEPT SHARE DATA; UNAUDITED)
NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS
New Dragon Asia Corp., a United States corporation incorporated in the
State of Florida, is principally engaged in the milling, sale and
distribution of flour and related products, including instant noodles,
to retail and wholesale customers throughout China through its foreign
subsidiaries in China (collectively the "Company"). The Company is
headquartered in Shandong Province, the People's Republic of China
("PRC") and has its corporate office in Shenzhen, and five
manufacturing plants in Yantai, Beijing and Penglai.
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of New Dragon Asia Corp. and its subsidiaries. All significant
intra-group balances and transactions have been eliminated in
consolidation. These financial statements are unaudited. However, in
the opinion of management, the consolidated financial statements
include all adjustments, consisting of only normal, recurring
adjustments, necessary for their fair presentation. Interim results are
not necessarily indicative of results expected for a full year. The
accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and,
therefore, do not include all information and footnotes necessary for a
complete presentation of the operations, financial position and cash
flows of the Company in conformity with generally accepted accounting
principles. These statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 25,
2004.
The 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 amount of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Although management believes these
estimates and assumptions are adequate, actual results could differ
from the estimates and assumptions used. U.S. GAAP differs from that
used in the statutory financial statements of the major operating
subsidiaries of the Company, which were prepared in accordance with the
relevant accounting principles and financial reporting regulations in
the PRC. Certain accounting principles stipulated under U.S. GAAP are
not applicable in the PRC.
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.
-6-
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
MARCH 25, DECEMBER 25,
2005 2004
-------- -----------
(Unaudited)
Accounts receivable $ 7,058 $ 7,189
Less: Allowance for doubtful accounts (861) (775)
-------- --------
$ 6,197 $ 6,414
======== ========
NOTE 4. INVENTORIES
Inventories consisted of the following:
MARCH 25, DECEMBER 25,
2005 2004
-------- -----------
(Unaudited)
Raw materials (including packing materials) $ 3,377 $ 2,812
Finished goods 1,777 1,725
-------- --------
5,154 4,537
Less: Provision for inventory obsolescence (519) (547)
-------- --------
$ 4,635 $ 3,990
======== ========
NOTE 5. PROPERTY, MACHINERY AND EQUIPMENT
Property, machinery and equipment consisted of following:
MARCH 25, DECEMBER 25,
2005 2004
-------- -----------
(Unaudited)
Buildings $ 9,277 $ 9,415
Machinery and equipment 12,086 11,940
-------- --------
21,363 21,355
Less: Accumulated depreciation and
amortization (5,526) (5,257)
-------- --------
$ 15,837 $ 16,098
======== ========
NOTE 6. INCOME TAXES
The PRC subsidiaries within the Company are subject to PRC income taxes
on an entity basis on income arising in or derived from the tax
jurisdiction in which they operate, ranging from 27% to 33%. 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.
-7-
NOTE 7. EARNINGS PER SHARE
The Company follows SFAS No.128, "Earnings Per Share", which
establishes standards for the computation, presentation and disclosure
requirements for basic and diluted earnings per share for entities with
publicly held common shares and potential common stocks. Basic earnings
per share are computed by dividing net income by the weighted average
number of common shares outstanding. In computing diluted earnings per
share, the weighted average number of shares outstanding is adjusted to
reflect the effect of potentially dilutive securities, such as stock
options.
NOTE 8. 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:
THREE MONTHS ENDED
MARCH 25,
------------------------
2005 2004
----------- ------------
(Unaudited) (Unaudited)
PURCHASE OF RAW MATERIALS FROM:
----------- ------------
Longkou City Longfeng Packing Manufacturing
Factory $ 6 $ 84
=========== ============
The amounts due from and due to related companies are unsecured,
non-interest bearing and repayable upon demand.
NOTE 9. SUBSEQUENT EVENT
On April 27, 2005, the Company acquired a 10-year lease agreement of
plant and machinery utilized for the production for soy bean protein
powder and soy bean milk powder from a state-owned enterprise in
Shandong. The lease payment amounted to $176 per annum and the related
lease commitment for the 10-year term amounted to $1,760.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, the matters discussed in this Form 10-Q
contain forward-looking statements that involve risks or uncertainties.
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 filed 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
-8-
update these forward-looking statements. Readers should carefully review the
risks described in other documents the Company filed 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, 2004, the Quarterly Reports on Form 10-Q
filed by the Company and Current Reports on Form 8-K by the Company. References
in this filing to the "Company", "Group", "we", "us", and "our" refer to New
Dragon Asia Corp. and its subsidiaries.
OVERVIEW
Headquartered in Shandong Province, PRC, New Dragon Asia Corp. is engaged in the
milling, sale and distribution of flour and related products, including instant
noodles, to retail and wholesale customers throughout China. With a well known
brand name called LONGFENG, we market our well-established product line through
a countrywide network of 200+ key distributors and 16 regional offices in 27
Chinese provinces. We have five manufacturing plants in PRC with an aggregate
annual production capacity of approximately 110,000 tons of flour and
approximately 1.1 billion packets of instant noodles.
OPERATION PLAN
Our current strategies are: (1) to expand our customer base and production lines
and (2) to acquire additional plants with regional brand recognition to increase
our market share in China. Plans for expansion of the existing plants are
expected to be funded through current working capital from ongoing sales. A
significant acquisition will require additional funds in the form of debt or
equity, or a combination of both. However, there can be no assurance these funds
will be available.
SIGNIFICANT ESTABLISHMENT, ACQUISITION AND DISPOSAL
Soy Bean Plant Lease
On April 27, 2005, the Company acquired a 10-year lease agreement of plant and
machinery utilized for the production for soy bean - derived products from a
state-owned enterprise in Shandong. The Company commenced soy bean business
effective May 1, 2005.
RESULTS OF OPERATIONS
REVENUE
Revenue for the quarter ended March 25, 2005 was $8,282,000, representing an
increase of $884,000, or 11.9%, from $7,398,000 for the quarter ended March 25,
2004. The increase was primarily due to the growth in market demand for flour.
COST OF GOODS SOLD
For the quarters ended March 25, 2005 and 2004, as a percentage of revenue, cost
of goods sold remained at 82%.
-9-
SELLING AND DISTRIBUTION EXPENSES
Selling and distribution expenses consist primarily of salaries, commissions and
associated employee benefits, travel expenses of sales and marketing personnel
and promotional expenses.
Selling and distribution expenses were $121,000 for the quarter ended March 25,
2005, representing a decrease of $268,000 from $389,000 for the corresponding
quarter of 2004. The decrease was primarily due to the result of cost control
and change of advertising mix.
As a percentage of revenue, selling and distribution expenses decreased to 1.5%
in the first quarter of 2005 from 5.2% in the corresponding period in 2004 as a
result of cost control and change of advertising mix.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $88,000, or 13.3%, to $573,000
for the quarter ended March 25, 2005 as compared to $661,000 for the quarter
ended March 25, 2004. The decrease was primarily the result of cost controls.
OTHER INCOME (EXPENSES)
Other income decreased $326,000 to $2,000 for the quarter ended March 25, 2005
as compared to $328,000 for the quarter ended March 25, 2004. This was primarily
due to the timing difference in receiving and recognizing the income resulting
from the tax refund from the municipal government as an encouragement for
foreign investment which is recurring in nature.
NET INCOME
For the quarter ended March 25, 2005, net income increased $250,000, or 65% to
$588,000, as compared to $338,000 for the corresponding quarter of the prior
year. The increase was primarily due to the revenue growth and the earnings
contribution of the new plants.
For the quarter ended March 25, 2005, as a percentage of revenue, net income
increased to 7.1% as compared to 4.6% for the corresponding quarter of the prior
year. The increase was primarily due to the improvement in expense controls.
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
and advances from related companies.
The Company's working capital increased $794,000 to $8,204,000 at March 25,
2005 as compared to $ 7,410,000 at December 25, 2004. The increase was primarily
due to the growth and profitability of the business and improved collections of
receivables during the three months ended March 25, 2005.
Cash and cash equivalents were $267,000 as of March 25, 2005, a increase of
$48,000 from December 25, 2004. The increase was mainly due to the increase in
revenue.
-10-
Net cash provided by operating activities for the three months ended March 25,
2005 was $201,000 which was attributable to the growth and profitability of the
business and changes in operating assets and liabilities. Net cash used in
financing activities decreased $995,000 to $42,000 in the three months ended
March 25, 2005 as compared to $1,037,000 for the corresponding period of 2004.
The decrease was mainly due to the decrease in the repayments of short-term
borrowings and amounts due to joint venture partners.
CONTRACTUAL OBLIGATIONS
As of March 25, 2005, there are no material changes in New Dragon's contractual
obligations as disclosed in the Company's Annual Report on Form 10-K for the
year ended December 25, 2004.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any special purpose entities or off-balance sheet
financing arrangements.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values, beginning with the first
interim or annual period after June 15, 2005. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative to
financial statement recognition. The Company is required to adopt SFAS 123R in
its three months ending September 30, 2005. Under SFAS 123R, The Company must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. Under the retroactive options,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options and restricted stock at the
beginning of the first quarter of adoption of SFAS 123R, while the retroactive
methods would record compensation expense for all unvested stock options and
restricted stock beginning with the first period restated. The Company is
evaluating the requirements of SFAS 123, and it expects that the adoption of
SFAS 123R will have no material impact on the Company's financial statements.
In November 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 151, Inventory Costs, which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material.
SFAS No. 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not believe the adoption of SFAS
No. 151 will have a material impact on the Company's financial statements.
In September 2004, the EITF Issue No. 04-08, "The Effect of Contingently
Convertible Debt on Diluted Earnings per Share." ("EITF 04-08") was issued
stating that contingently convertible debt should be included in diluted
earnings per share computations regardless of whether the market price trigger
has been met. EITF 04-08 is effective for reporting periods ending after
December 15, 2004. The adopted EITF 02-14 will have no material impact on the
Company's financial statements.
-11-
RISKS RELATED TO OUR BUSINESS
In addition to the other information in this report, the following factors
should be considered carefully in evaluating the Company's business and
prospects. THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE
EFFECT ON THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR
PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY
STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE
DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT
OR STATEMENTS. We are subject to, among others, the following risks:
OUR BUSINESS MAY RESULT IN ADVERSE EFFECTS FROM COMPETITION IN THE NOODLE AND
FLOUR PRODUCT MARKETS.
The noodle and flour product markets are highly competitive. Competition in
these markets takes many forms, including the following:
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 retain outlets and sufficient shelf space.
Many of our competitors are larger and have greater financial resources,
including our primary competitors, Master Kang and President. We may not be able
to compete successfully with such competitors. Competition could cause us to
lose our market share, increase expenditures or reduce pricing, each of which
could have a material adverse effect on our business and financial results.
AN INABILITY TO RESPOND QUICKLY AND EFFECTIVELY TO NEW TRENDS WOULD ADVERSELY
IMPACT OUR COMPETITIVE POSITION.
Our failure to maintain the superiority of our technological capabilities or to
respond effectively to technological changes could adversely affect our ability
to retain existing business and secure new business. We will need to constantly
seek out new products and develop new solutions to maintain in our portfolio. If
we are unable to keep current with new trends, our competitors' technologies or
products may render us noncompetitive and our products obsolete.
INCREASES IN PRICES OF MAIN INGREDIENTS AND OTHER MATERIALS COULD ADVERSELY
AFFECT OUR BUSINESS.
The main ingredients that we use to manufacture our products are flour and eggs.
We also use paper products, such as corrugated cardboard, as well as films and
plastics, to package our products. The prices of these materials have been, and
we expect them to continue to be, subject to volatility. We may not be able to
pass price increases in these materials onto our customers which could have an
adverse effect on our financial results.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH JOINT VENTURES AND THIRD PARTY
AGREEMENTS.
-12-
We conduct our milling and sales operations through joint ventures established
with certain Chinese parties. Any deterioration of these strategic relationships
may have an adverse effect on our operation. Changes in laws and regulations, or
their interpretation, or the imposition of confiscatory taxation, restrictions
on currency conversion, imports and sources of supply, devaluations of currency
or the nationalization or other expropriation of private enterprises could have
a material adverse effect on our business, results of operations and financial
condition. Under its current leadership, the Chinese government has been
pursuing economic reform policies that encourage private economic activity and
greater economic decentralization. There is no assurance, however, that the
Chinese government will continue to pursue these policies, or that it will not
significantly alter these policies from time to time without notice.
We may have limited legal recourse under Chinese law if disputes arise under our
agreements with joint ventures or third parties. The Chinese government has
enacted some laws and regulations dealing with matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
However, their experience in implementing, interpreting and enforcing these laws
and regulations is limited, and our ability to enforce commercial claims or to
resolve commercial disputes is unpredictable. If our new business ventures are
unsuccessful, or other adverse circumstances arise from these transactions, we
face the risk that the parties to these ventures may seek ways to terminate the
transactions, or, may hinder or prevent us from accessing important information
regarding the financial and business operations of these acquired companies. The
resolution of these matters may be subject to the exercise of considerable
discretion by agencies of the Chinese government, and forces unrelated to the
legal merits of a particular matter or dispute may influence their
determination. Any rights we may have to specific performance, or to seek an
injunction under Chinese law, in either of these cases, are severely limited,
and without a means of recourse by virtue of the Chinese legal system, we may be
unable to prevent these situations from occurring. The occurrence of any such
events could have a material adverse effect on our business, financial condition
and results of operations.
THE COMPANY MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS AND PRODUCT RECALLS,
WHICH COULD NEGATIVELY IMPACT ITS PROFITABILITY.
We sell food products for human consumption, which involves risks such as
product contamination or spoilage, product tampering and other adulteration of
food products. We may be subject to liability if the consumption of any of its
products causes injury, illness or death. In addition, we will voluntarily
recall products in the event of contamination or damage. A significant product
liability judgment or a widespread product recall may negatively impact our
profitability for a period of time depending on product availability,
competitive reaction and consumer attitudes. Even if a product liability claim
is unsuccessful or is not fully pursued, the negative publicity surrounding any
assertion that company products caused illness or injury could adversely affect
our reputation with existing and potential customers and our corporate and brand
image.
WE HAVE LIMITED BUSINESS INSURANCE COVERAGE.
The insurance industry in China is still in an its early stage of development.
Insurance companies in China offer limited business insurance. As a result, we
do not have any business liability insurance coverage for our operations.
Moreover, while business disruption insurance is available, we have determined
that the risks of disruption and cost of the insurance are such that we do not
require it at this time. Any business disruption, litigation or natural disaster
might result in substantial costs and diversion of resources.
-13-
WE HAVE A LIMITED CONCENTRATION OF CREDIT RISK.
Concentration of credit risk with respect to customer receivables are limited
due to the large number of customers comprising our customer base, and their
dispersion across the PRC. In addition, we perform ongoing credit evaluations of
each customer's financial condition and maintain reserves for potential credit
losses. Such losses in the aggregate have not exceeded management's
expectations.
WE MAY EXPERIENCE RISKS RESULTING FROM OUR PLANS FOR EXPANSION.
We have acquired several companies and businesses and may continue to acquire
companies in the future. Entering into an acquisition entails many risks, any of
which could harm our business, including: (a) diversion of management's
attention from other business concerns; (b) failure to integrate the acquired
company with our existing business; (c) additional operating expenses not offset
by additional revenue; and (d) dilution of our stock as a result of issuing
equity securities.
If we are unable to implement our acquisition strategy, we may be less
successful in the future. A key component of our growth strategy is accomplished
by acquiring additional flour and noodle factories. While there are many such
companies, we may not always be able to identify and acquire companies meeting
our acquisition criteria on terms acceptable to us. Additionally, financing to
complete significant acquisitions may not always be available on satisfactory
terms. Further, our acquisition strategy presents a number of special risks to
us that we would not otherwise contend with absent such strategy, including
possible adverse effects on our earnings after each acquisition, diversion of
management's attention from our core business due to the special attention that
a particular acquisition may require, failure to retain key acquired personnel
and risks associated with unanticipated events or liabilities arising after each
acquisition, some or all of which could have a material adverse effect on our
business, financial condition and results of operations.
RISKS ASSOCIATED WITH DOING BUSINESS IN THE PEOPLE'S REPUBLIC OF CHINA.
WE ARE SUBJECT TO THE RISKS ASSOCIATED WITH DOING BUSINESS IN THE PEOPLE'S
REPUBLIC OF CHINA.
As most of our operations are conducted in the PRC, the Company 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. Our 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.
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:
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- - 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.
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 include 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. 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 operations.
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 and changes in the rate or
method of taxation.
On November 11, 2001, China signed an agreement to become a member of the World
Trade Organization ("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 and 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.
THE PRC LEGAL SYSTEM IS NOT FULLY DEVELOPED AND HAS INHERENT UNCERTAINTIES THAT
COULD LIMIT THE LEGAL PROTECTIONS AVAILABLE TO INVESTORS.
The PRC legal system is a system based on written statutes and their
interpretation by the Supreme People's Court. Prior court decisions may be cited
for reference but have limited precedential value. Since 1979, the PRC
government has been developing a comprehensive system of commercial laws, and
considerable progress has been made in introducing laws and regulations dealing
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with economic matters such as foreign investment, corporate organization and
governance, commerce, taxation and trade. Two examples are the promulgation of
the Contract Law of the PRC to unify the various economic contract laws into a
single code, which went into effect on October 1, 1999, and the Securities Law
of the PRC, which went into effect on July 1, 1999. However, because these laws
and regulations are relatively new, and because of the limited volume of
published cases and their non-binding nature, interpretation and enforcement of
these laws and regulations involve uncertainties. In addition, as the PRC legal
system develops, changes in such laws and regulations, their interpretation or
their enforcement may have a material adverse effect on our business operations.
ENFORCEMENT OF REGULATIONS IN CHINA MAY BE INCONSISTENT.
Although the Chinese government has introduced new laws and regulations to
modernize its securities and tax systems on January 1, 1994, China does not yet
possess a comprehensive body of business law. As a result, the enforcement,
interpretation and implementation of regulations may prove to be inconsistent
and it may be difficult to enforce contracts.
WE MAY EXPERIENCE LENGTHY DELAYS IN RESOLUTION OF LEGAL DISPUTES.
As China has not developed a dispute resolution mechanism similar to the Western
court system, dispute resolution over Chinese projects and joint ventures can be
difficult and there is no assurance that any dispute involving our business in
China can be resolved expeditiously and satisfactorily.
WE MAY EXPERIENCE AN IMPACT OF THE UNITED STATES FOREIGN CORRUPT PRACTICES ACT
ON OUR BUSINESS.
Compliance with the Foreign Corrupt Practices Act could adversely impact our
competitive position; failure to comply could subject us to penalties and other
adverse consequences. We are subject to the United States Foreign Corrupt
Practices Act, which generally prohibits United States companies from engaging
in bribery or other prohibited payments to foreign officials for the purpose of
obtaining or retaining business. Foreign companies, including some that may
compete with us, are not subject to these prohibitions. Corruption, extortion,
bribery, pay-offs, theft and other fraudulent practices occur from time-to-time
in mainland China. We have attempted to implement safeguards to prevent and
discourage such practices by our employees and agents. We can make no assurance,
however, that our employees or other agents will not engage in such conduct for
which we might be held responsible. If our employees or other agents are found
to have engaged in such practices, we could suffer severe penalties and other
consequences that may have a material adverse effect on our business, financial
condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in financial market conditions in the normal course of
business due to our 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
The majority of our operations are conducted in the PRC except for some minor
export business and limited overseas purchases of raw materials. Most of our
sales and purchases are conducted within the PRC in Chinese Renminbi. Hence, the
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effect of the fluctuations of exchange rate is considered minimal to our
operation.
Substantially all of our revenues and expenses 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 U.S. dollar. Exchange rate fluctuations may adversely affect the
value, in U.S. dollar terms, of the our net assets and income derived from its
operations in the PRC.
INTEREST RATE RISK
The Company does not have significant interest rate risk, as our debt
obligations are primarily short-term in nature, with fixed interest rates.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of March 25, 2005, the Company, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that, as of March
25, 2005, the Company's disclosure controls and procedures were effective in
ensuring that material information relating to the Company (including its
consolidated subsidiaries) required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
CHANGE IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in the
other factors that could significantly affect the Company's internal controls
over financial reporting during the three months ended March 25, 2005.
OTHER INFORMATION
In August 2004, the Company appointed a consulting firm to assist the management
team to strengthen and to document the internal controls and processes with the
objective of full compliance with the Sarbanes - Oxley Act.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 31.1 Section 302 Sarbanes Oxley Certification of the Chief
Executive Officer
Exhibit 31.2 Section 302 Sarbanes Oxley Certification of the Chief
Financial Officer
Exhibit 32.1 Section 906 Sarbanes Oxley Certification of both the
Chief Executive Officer and the Chief Financial Officer
(b) Reports on Form 8-K:
Form 8-K, filed on April 4, 2005, covering a press release announcing
the change of the Company's Chief Executive Officer.
Form 8-K, filed on April 29, 2005, covering the resignation and
nomination of the members of the Compensation Committee of the
Company.
Form 8-K, filed on May 2, 2005, covering a press release announcing
our financial results for the quarter ended March 25, 2005.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 4, 2005
NEW DRAGON ASIA CORP.
By: /s/ Peter MAK
------------------------------
Name: Peter MAK
Title: Chief Financial Officer
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