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U.S. SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: Commission File Number:
September 25, 2003
NEW DRAGON ASIA CORP.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
FLORIDA 88-0404114
- ----------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
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 September 25, 2003 was
44,211,342.
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
-------------------------
SEPTEMBER 25, DECEMBER 25,
A S S E T S 2003 2002
(Unaudited)
------------ -----------
Current Assets:
Cash and cash equivalents $ 2,135 $ 628
Restricted cash 181 181
Accounts receivable, net of allowance for doubtful accounts
of $493 at September 25, 2003 and $415 at December 25, 2002 8,408 7,328
Other receivables, deposits and prepayments 754 1,066
Inventories 3,128 5,202
Due from related companies 2,177 2,499
---------- ----------
Total current assets 16,783 16,904
Property, machinery and equipment, net 18,402 19,340
Land use rights, net 4,026 4,110
---------- ----------
Total assets $ 39,211 $ 40,354
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 4,325 $ 3,614
Accounts payable 4,608 4,728
Other payables and accruals 1,856 1,282
Taxes payable 922 889
Due to related companies 1,321 802
---------- ----------
Total current liabilities 13,032 11,315
Due to an immediate parent company 541 5,782
Due to joint venture partners 6,032 5,571
---------- ----------
Total liabilities 19,605 22,668
---------- ----------
Stockholders' equity:
Common stock, par value USD0.0001; authorized -
107,000,000 shares, issued and outstanding -
44,211,342 at September 25, 2003 and
40,911,342 at December 25, 2002 4 4
Additional paid-in-capital 9,538 8,132
Retained earnings 10,064 9,550
---------- ----------
Total stockholders' equity 19,606 17,686
---------- ----------
Total liabilities and stockholders' equity $ 39,211 $ 40,354
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
1
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 25,
----------------------- -----------------------
2003 2002 2003 2002
----------------------- -----------------------
Net sales $ 8,194 $ 8,443 $ 20,220 $ 22,834
Cost of goods sold (6,472) (7,167) (17,518) (18,789)
------- ------- -------- --------
Gross profit 1,722 1,276 2,702 4,045
Selling and distribution expenses (263) (224) (753) (780)
General and administrative
expenses (468) (227) (1,140) (654)
------- ------- -------- --------
Income from operations 991 825 809 2,611
Other income and expenses:
Interest expense (67) (48) (195) (197)
Interest income 60 52 168 143
Other income 19 - 50 -
------- ------- -------- --------
Income before provision for
income taxes 1,003 829 832 2,557
Provision for income taxes (217) (104) (318) (419)
------- ------- -------- --------
Net income $ 786 $ 725 $ 514 $ 2,138
======= ======= ======== ========
Basic and diluted earnings
per common share $ 0.02 $ 0.02 $ 0.01 $ 0.05
======= ======= ======== ========
Weighted average shares used
to compute basic and diluted
net income per common share 41,700 40,911 41,175 40,911
======= ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 25,
-------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 514 $ 2,138
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 84 83
Depreciation of property, machinery and equipment 982 1,129
Loss on disposal of machinery and equipment 23 2
Provision for bad debts 78 5
Changes in assets and liabilities:
Accounts receivable 1,158 (1,654)
Other receivables, deposits and prepayments 312 (501)
Inventories 2,074 321
Accounts payable and accrued liabilities 454 2,063
Taxes payable 33 629
--------- --------
Net cash provided by operating activities 3,396 4,215
--------- --------
Cash flows from investing activities:
Due from related companies 322 (783)
Due to related companies 519 (53)
Decrease in investment - 72
Proceeds from sale of machinery and equipment 11 4
Purchases of property, machinery and equipment (78) (250)
--------- --------
Net cash provided by (used in) investing activities 774 (1,010)
--------- --------
Cash flows from financing activities:
Issuance of common stock 1,406 -
Proceeds from short-term borrowings 2,771 3,735
Payments on short-term borrowings (2,060) (4,277)
Net decrease in due to an immediate parent company (5,241) (2,091)
Net increase (decrease) in due to joint venture partners 461 (310)
--------- --------
Net cash used in financing activities (2,663) (2,943)
--------- --------
Net increase in cash and cash equivalents 1,507 262
Cash and cash equivalents at the beginning of the period 628 1,293
--------- --------
Cash and cash equivalents at the end of the period $ 2,135 $ 1,555
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(ALL INTERIM INFORMATION RELATING TO THE THREE- AND NINE-MONTH PERIODS ENDED
SEPTEMBER 25, 2003 AND 2002 IS UNAUDITED)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
New Dragon Asia Corporation (formerly Bio-Aqua Systems, Inc.) and its
subsidiaries (the "Group" or "NDAC"), a United States corporation
incorporated in the State of Florida, is principally engaged in the
manufacturing, marketing and distribution of instant noodles and flour
in the People's Republic of China ("PRC"). NDAC has its principal
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 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
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.
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.
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.
4
NDAC has included these costs approximating $3,134,000 in other
expenses in the December 25, 2001 statements of consolidated operations
and comprehensive income, computed utilizing a 20% discount of the
above AMEX market quotation due to the restricted nature of the stock.
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:
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
5
(a) MC, RD, NP and KG are wholly owned by New Dragon Asia
Corporation.
(b) NDAFLY is a contractual joint venture established in the PRC
to be operated for 50 years until August 13, 2049. In
September 2000, MC contributed 90% of the registered capital
to NDAFLY. Under the joint venture agreement dated June 1,
1999 and the supplemental agreement dated June 26, 1999, the
Chinese joint venture partner is entitled to receive a
pre-determined annual fee and is not responsible for any
profit or loss to NDAFLY effective from June 26, 1999. In view
of the profit sharing arrangement, NDAFLY is regarded for
financial reporting purposes as 100% owned by the Group. The
minority interest component has been included with General and
Administrative expenses for the periods ended September 25,
2003 and 2002.
(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 minority interest component has been
included with General and Administrative expenses for the
periods ended September 25, 2003 and 2002.
NOTE 2 - BASIS OF PRESENTATION
The unaudited consolidated financial statements include the
consolidated financial statements of MC and its subsidiary (NDAFLY), RD
and its subsidiary (NDAFY), NP and its subsidiary (NDAFD) and KG and
its subsidiary (SNDAF), as they are enterprises controlled by NDAFL.
All significant intra-group balances and transactions have been
eliminated in consolidation.
The unaudited consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United
States of America ("U.S. GAAP"). The preparation of financial
statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of
revenues and expenses during the report period. Actual results could
differ from those estimates. U.S. GAAP differs from that used in the
statutory financial statements of the major operating subsidiaries of
the Group, which were prepared in accordance with the relevant
accounting principles and financial reporting regulations applicable to
joint venture enterprises as established by the Ministry of Finance of
the PRC. Certain accounting principles stipulated under U.S. GAAP are
not applicable in the PRC.
The accompanying unaudited consolidated financial statements, which are
for interim periods, do not include all disclosures provided in the
annual consolidated financial statements. These unaudited consolidated
financial statements should be read in conjunction with the
consolidated financial statements and the footnotes thereto contained
in the Annual Report on Form 10-K/A for the year ended December 25,
2002 of New Dragon Asia Corp. and Subsidiaries, as filed with the
Securities and Exchange Commission. The December 25, 2002 balance sheet
was derived from audited consolidated financial statements, but does
not include all disclosures required by U.S. GAAP.
6
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 (in thousands):
September 25, December 25,
2003 2002
--------- ---------
Raw materials $ 1,750 $ 2,981
Finished goods 1,378 2,221
--------- ---------
$ 3,128 $ 5,202
========= =========
NOTE 4 - ISSUANCE OF COMMON STOCK
The Company closed on a private placement with a select group of
institutional investors (the "Purchasers") on September 4, 2003. The
Company sold 3,300,000 shares of its Class A common stock for an
aggregate purchase amount of $1,650,000 or $0.50 per share. The
Purchasers of the Class A common stock were also issued five year
warrants to purchase up to 1,650,000 shares at an exercise price of
$0.99 per share.
The proceeds from this offering were originally intented for use in the
acquisition of an entity the Company had identified and was conducting
due diligence. Upon completion of due diligence, the Company choose not
to acquire the entity and has now decided to utilize the proceeds for
working capital needs.
The securities were offered to accredited investors in reliance on an
exemption from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"). In connection with the
offering, New Dragon Asia has agreed, subject to certain terms and
conditions, to file a registration statement under the Securities Act
covering the resale of the shares purchased and shares issuable upon
exercise of the warrants.
NOTE 5 - EARNINGS PER SHARE - BASIC
Basic earnings per common share ("EPS") is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. As of September 25, 2003 and 2002, the diluted share base
excludes incremental shares relating to stock options and warrants
since their effect was anti-dilutive. The weighted-average number of
common shares outstanding for computing basic EPS was 41,175,342 and
40,911,342 for the nine months ended September 25, 2003 and 2002,
respectively. The weighted-average number of common shares outstanding
for computing basic EPS was 41,700,472 and 40,911,342 for the three
months ended September 25, 2003 and 2002, 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, the PRC subsidiaries within the Group
are exempt from state income tax and local tax in respect of income
earned for the first two years of operation, and then subject to a 50%
reduction in state income tax and a full exemption of local income tax
for the following three years. The Company and its subsidiaries are in
different stages of enjoying the above tax incentive program.
The Group's companies that are incorporated under the International
Business Companies Act of the British Virgin Islands are exempt from
payment of the British Virgin Islands income tax.
7
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:
09/25/2003 09/25/2002
(US $ '000) (US $ '000)
Sale of finished goods to:
Joint Venture Partner:
Shandong Long Feng Group Company 184 121
Related Parties:
Shandong Long Feng Penglai Flour Company Limited - 2
Sanhe (Yantai) Food Company Limited 2 -
Penglai Jinhai Food Company Limited 12 237
----------------------
198 360
----------------------
Purchase of raw materials from:
Joint Venture Partner:
Shandong Long Feng Group Company - 5
Related Parties:
Sanhe (Yantai) Food Company Limited 8 19
Shandong Long Feng Penglai Flour Company Limited (1) - 35
Ningbo Hai Fu Sheng Penglai Jinhai Food Co Ltd 8 -
Longkou City Longfeng Soybean Food Co Limited 1 -
Longkou City Long Feng Packing Manufacturing Factory 913 -
Longkou City Long Feng Colour Printing Packing Factory - 514
Longkou City Long Feng Cartoon Printing Packing Factory - 369
----------------------
930 942
----------------------
NOTE 8 - CLOSURE OF OPERATIONS
There was a closure of a subcontracted factory in Xinxiang in January
2003 due to the end of the subcontracting agreement. Total assets of
the Xinxiang factory were approximately $33 thousand and $26 thousand
transferred to New Dragon Asia Flour (Yantai) Co Ltd and Xinxiang
Guoliang Flour Company Limited, the lessor of the factory. The rest of
the assets of the factory, in the amount of $27 thousand, have been
written off.
Due to the negative effects of SARS, the Company closed its Xinxian
factory in May 2003. Fixed assets of the Xinxian factory were
approximately $44 thousand, of which $26 thousand were transferred to
New Dragon Asia Flour (Yantai) Company Limited and the Taian factory.
Approximately $8 thousand of the fixed assets were sold to Shandong
Long Feng Flour Company Limited, a related entity, and the remaining
$10 thousand were written off. Inventory and related packaging
materials amounting to $45 thousand have been written off to operations
for period ended June 25, 2003. The Company also charged $30 thousand
of penalties and taxes related to the termination of the lease, $10
thousand of salaries and severance pay and $28 thousand of other
operating expenses to operations.
NOTE 9 - SUBSEQUENT EVENT
A second private placement with a select group of institutional
investors closed on October 7, 2003. The Company sold 850,000 shares of
its Class A common stock for an aggregate purchase amount of $425,000
or $0.50 per share. The Purchasers of the Class A common stock were
also issued five year warrants to purchase up to 425,000 shares of
common stock at an exercise price of $0.98 per share. This offering is
subject to the same terms and conditions as the September 4, 2003
private placement (Note 4).
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical information, this Quarterly Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to those
discussed in this section. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date thereof. Readers should carefully review the risks described in other
documents the Company files from time to time with the Securities and Exchange
Commission, including the Annual Report on Form 10-K/A for the fiscal year ended
December 25, 2002, the Quarterly Reports on Form 10-QSB filed by the Company and
Current Reports on Form 8-K by the Company.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto, included as part of
this Quarterly Report.
OVERVIEW
New Dragon Asia Corp., formerly Bio-Aqua Systems, Inc., a Florida corporation
(the "Company"), was incorporated in March 1999. On December 13, 2001, we
entered into a Share Exchange Agreement with Max Rutman, Flagship Import Export
LLC, a Nevada limited liability company and New Dragon Asia Food Limited, a
company organized under the laws of the British Virgin Islands. Pursuant to the
Share Exchange Agreement, on December 3, 2001 (the "Closing"), we acquired from
New Dragon Asia Food Limited all of the equity interests of four companies
organized under the laws of the British Virgin Islands (each a "Subsidiary" and,
collectively, the "Subsidiaries") each of which in turn hold an interest in a
separate sino-foreign joint venture, in exchange for 37,963,263 shares of common
stock of the Company. At the closing, the Company transferred all of the assets
of the Company immediately prior to the Closing to Mr. Rutman and Mr. Rutman
assumed all of the liabilities associated with the transferred assets.
The consolidated financial statements are presented in US dollars. Transactions
and monetary assets denominated in currencies other than the US dollars are
translated into US dollars at the respective applicable exchange rates. Monetary
assets and liabilities denominated in other currencies are translated into US
dollars at the applicable rate of exchange at the balance sheet date. The
resulting exchange gains or losses are credited or charges to the consolidated
statements of operations. Currency translation adjustments arising from the use
of different exchange rates from period to period are included in comprehensive
income.
PLAN OF OPERATIONS
Our current strategy is twofold: (1) to expand our customer sales base and
production lines; and (2) impose ongoing strict control on the factories'
hygiene in view of prevention of SARS (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.
9
RESULTS OF OPERATIONS
Nine months ended September 25, 2003 compared to nine months ended September 25,
2002
- --------------------------------------------------------------------------------
Net sales
Total revenue for the nine months ended September 25, 2003 was USD20.2
million as compared to USD22.8 million, a decrease of 11% for the comparable
period last year. Management believes that the SARS outbreak had a negative
impact on our business. However, as the epidemic has been contained, management
believes that our business will return to at least the pre-SARS levels.
Net income
Net income for the first nine months of 2003 decreased from $2.14
million for the corresponding period last year to $0.51 million. The results
were adversely affected by the deterioration in consumer demand on retail
commodities caused by the widespread public concerns over the outbreak of SARS
during the period from March to June.
SARS Effect
The outbreak of SARS negatively impacted our business as follows:
1) Blockage of Distribution Network
As our major markets are in rural areas, the transportation of our
products was adversely affected as some villagers tried to block the
roads and set up their own quarantine areas to prevent the spread of
SARS.
2) Incurred Additional Operating Expenses
Manufacturing expenses were increased because additional expenses were
incurred for preventative steps related to SARS such as using more
hygienic products.
3) Sales and Promotional Activities Halted
During that period, the provincial governments imposed strict control
on citizens traveling. Our staff was also prohibited from leaving the
factory area. These restrictions affected our sales activities, and
promotional events of our products were also cancelled.
4) Deterioration in Consumer Demand
As consumers were reluctant to go out, they had more time available at
home to prepare their meals resulting in less demand for convenience
food such as instant noodles.
Administrative and general expenses
Administrative and general expenses for the nine months ended September
25, 2003 increased by USD468 thousand to USD1,140 thousand, compared to USD654
thousand for the corresponding period in 2002. The increase was mainly due to
expenses related to the closure of two sub-contracting factories resulting in
the write off of inventory and deferred expenses. The Xinxiang factory was
closed due to the expiry of the contract. The Xinxian factory was closed due to
the sudden decrease in demand in the SARS period. The closure was designed to
help the Company utilize its internal resources more efficiently. Furthermore,
professional expenses related to the Company were 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 nine months ended September
25, 2003 were USD753 thousand, which was comparable to USD780 thousand for the
corresponding period of the prior year. During the current period, the Company
encountered abrupt disruption of its sales caused by the outbreak of the SARS.
Thus, selling and distribution expenses decreased accordingly.
10
Three months ended September 25, 2003 compared to three months ended September
25, 2002
- --------------------------------------------------------------------------------
Net sales
Net Sales for the second quarter of 2003 decreased slightly by 3% to
USD8.19 million compared to USD8.44 million for the corresponding quarter of
2002. The Company is recovering from the effect of SARS as the net sales
increased nearly 50% to USD8.19 million for the quarter ended September 25, 2003
compared to only USD5.48 million for the last quarter ended June 25, 2003. The
Company is expecting better sales performance by the end of this year.
Net income
The Company recorded a net income of USD0.79 million for the third
quarter of 2003 as compared to USD0.73 million for the corresponding quarter of
2002. The change in sale of product mix of flour products has improved the gross
profit margin of the Company.
Administrative and general expenses
Administrative and general expenses increased from USD227 thousand for
the third quarter of 2002 to USD468 thousand for the third quarter of 2003,
mainly due to recognition of the professional expenses of the Company and
additional provision for receivables in Dalian. The professional expenses
related to the Company were previously borne by the ultimate holding company in
group base but from this quarter period, such expenses were borne by the Company
itself.
Selling and distribution expenses
Selling and distribution expenses increased from USD224 thousand for
the third quarter of 2002 to USD263 thousand for the corresponding period this
year. The increase was attributable to additional shipping costs incurred on
export sales which commenced in the current year.
Income taxes
The income of the Company is subject to PRC income taxes at rates from
27% to 33% of which 24% to 30% is attributable to the central government and 3%
to the provincial government. On application and approval by the tax bureau, the
PRC subsidiaries within the Group are exempt from state income tax and local tax
in respect of income earned for the first two years of operation, and then
subject to a 50% reduction in state income tax and a full exemption of local
income tax for the following three years. The Company and its subsidiaries are
in different stages of enjoying the above tax incentive program.
The Group's companies that are incorporated under the International
Business Companies Act of the British Virgin Islands are exempt from payment of
the British Virgin Islands income tax.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are to fund inventories, accounts
receivable and capital expenditures. The Company has financed its working
capital requirements through a combination of internally generated cash,
short-term bank loans and advances from affiliates.
Cash and cash equivalents were USD2.1 million as of September 25, 2003.
This represents an increase of USD580 thousand from September 25, 2002. The
increase was mainly due to proceed from the issuance of 3,300,000 common stock
and five year warrants to purchase 1,650,000 shares of common stock on September
4, 2003. The Company has closed on a private placement with a select group of
institutional investors with gross proceeds of USD1.65 million. The proceeds
from this offering were originally intented for use in the acquisition of an
entity the Company had identified and was conducting due diligence. Upon
completion of due diligence, the Company choose not to acquire the entity and
has now decided to utilize the proceeds for working capital needs. Net cash
provided by operating activities for the nine months ended September 25, 2003
was approximately USD3.4 million as compared to net cash generated from
operating activities of approximately USD4.2 million for the corresponding
period in 2002. Net cash flows from the Company's operating activities are
attributable to the Company's income and changes in operating assets and
liabilities.
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Accounts receivable increased by 14.7% and accounts payable decreased
by 2.5%, from December 25, 2002 to September 25, 2003. There was an increase in
accounts receivable due to the additions of new customers. The Company evaluates
the allowance level from time to time by applying the Company's provision
policy. Apart from the above, there has been no other significant change in
financial condition and liquidity since the fiscal year ended December 25, 2002.
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.
See, Part II, Item 2.
INFLATION AND CHANGING PRICES
The Company does not foresee any adverse effects on its earnings as a
result of inflation or changing prices.
FOREIGN CURRENCY RISK
Substantially all of the revenues and expenses of the Company are
denominated in Renminbi, which is the official currency of China. However, we
use the United States dollar for financial reporting purposes. With effect from
January 1, 1994, conversion of Renminbi into foreign currencies is regulated by
The People's Bank of China through a unified floating exchange rate system.
Although the PRC government has stated its intention to support the value of
Renminbi, there can be no assurance that such exchange rate will not again
become volatile or that Renminbi will not devalue significantly against the US
dollar. Exchange rate fluctuations may adversely affect the value, in US dollar
terms, of the Group's net assets and income derived from its operations in the
PRC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any market risk with respect to such factors
as commodity prices, equity prices, and other market changes that affect market
risk sensitive investments.
With respect to foreign currency exchange rates, the Company does not
believe that a devaluation or fluctuation of the RMB against the USD would have
a detrimental effect on the Company's operations, since the Company conducts
virtually all of its business in China, and the sale of its products and the
purchase of raw materials and services is settled in RMB. The effect of a
devaluation or fluctuation of the RMB against the USD would affect the Company's
results of operations, financial position and cash flows, when presented in USD
(based on a current exchange rate) as compared to RMB.
The Company does not have any interest rate risk, as the Company's debt
obligations are primarily short-term in nature, with fixed interest rates.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures Disclosure
Controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed
in the reports filed under 0the Exchange Act is accumulated and
communicated to management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions
regarding disclosure.
Within 90 days prior to the filing of this report, the Group carried
out an evaluation, under the supervision and with the participation of
the Group's management, including the Group's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and
operation of the Group's disclosure controls and procedures. Based upon
and as of the date of that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Group's disclosure control
and procedures are effective to ensure that the information required to
be disclosed in the reports the Group files and submits under the
exchange act is recorded, processed, summarized and reported as and
when required.
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(b) Change in Internal Controls
There were no changes in the Group's internal controls or in the other
factors that could have significantly affected those controls
subsequent to the date of the Group's most recent evaluation.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds.
The Company sold 3,300,000 shares of its Class A common stock
and five year warrants to purchase 1,650,000 shares of common
stock through a private placement closed on September 4, 2003.
There was a secong placement on October 7, 2003. The Company
sold 850,000 shares of its Class A common stock and five years
warrants to purchase 425,000 shares of common stock.
The proceeds from these offerings will be used as working
capital of the Company.
The securities were sold pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as
amended, under Section 4(2) thereof. The Company has filed a
registration covering the resale of the shares of common stock
including shares issuable pursuant to the exercise of the
warrants. The registration statement became effective on
November 4, 2003. The Company paid to the placement agent
aggregate commissions of USD214 thousand.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 31.1: Section 302 Sarbanes Oxley Certification of
the Chief Financial Officer
Exhibit 31.2: Section 302 Sarbanes Oxley Certification of
the Chief 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.
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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: November 7, 2003
NEW DRAGON ASIA CORP.
By: /s/ Wing Leung Lai
-------------------------------
Name: Wing Leung Lai
Title: Chief Financial Officer
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