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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 25, 2004
OR
(_) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER: 001-15046
NEW DRAGON ASIA CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 88-0404114
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
36/F, NEWS BUILDING, 2 SHEN NAN ZHONG ROAD,
SHENZHEN, PRC, 518027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(86 755) 2595-1100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT SECTION 12(b) OF THE EXCHANGE ACT:
NONE.
SECURITIES REGISTERED PURSUANT SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $ 0.0001 PAR VALUE
Indicate by check mark whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days.
Yes [X] No [_]
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K is not contained in this form, and no
disclosure will be contained to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [_] No [X]
State issuer's revenue for its most recent fiscal year: approximately $39
million
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
as sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter. As of June 25, 2004 the aggregate market value of the common equity
held by non-affiliates was approximately $7.9 million.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of March 23, 2005, there were
45,061,242 common shares outstanding.
Portions of the registrant's definitive proxy statement (the "Proxy Statement")
related to the 2004 annual meeting of shareholders are incorporated by reference
into Part III of this Form 10-K.
NEW DRAGON ASIA CORP.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 25, 2004
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. Business 1
ITEM 2. Properties 5
ITEM 3. Legal Proceedings 5
ITEM 4. Submission of Matters of a Vote of Security Holders 5
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters 6
ITEM 6. Selected Financial Data 7
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation 7
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk 17
ITEM 8. Financial Statements and Supplementary Data 18
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 18
ITEM 9A. Controls Procedures 18
ITEM 9B Other Information 19
PART III
ITEM 10. Directors and Executive officers of the Registrant 19
ITEM 11. Executive Compensation 19
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 19
ITEM 13. Certain relationships and Related Transactions 19
ITEM 14. Principal Accountant Fees and Services 19
PART IV
ITEM 15. Exhibits, List and Reports on Form 8-K 19
SIGNATURES 21
FINANCIAL STATEMENTS F-1
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This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These statements relate to future events or the
Company's future financial performance. The Company has attempted to identify
forward-looking statements by terminology including "anticipates", "believes",
"expects", "can", "continue", "could", "estimates", "expects", "intends", "may",
"plans", "potential", "predict", "should" or "will" or the negative of these
terms or other comparable terminology. These statements are only predictions,
uncertainties and other factors, including the risks outlined under Business
Risks contained in Part 1 of this Annual Report that may cause the Company's
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking statements. Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance or achievements. The Company expectations are as of the
date this Form 10-K is filed, and the Company does not intend to update any of
the forward-looking statements after the date this Annual Report on Form 10-K is
filed to confirm these statements to actual results, unless required by law.
The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and proxy and information statements and amendments
to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the
Securities Exchange Act of 1934, as amended. The public may read and copy these
materials at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, D.C. 20549. The public may obtain information on the operation of
the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding the Company and other
companies that file materials with the SEC electronically. You may also obtain
copies of reports filed with the SEC, free of charge, on our website at
http://www.newdragonasia.com
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PART I
ITEM 1. BUSINESS
1.1 OVERVIEW
New Dragon Asia Corp. ("NWD" or the "Company") is one of the largest flour and
instant noodle producers in Northern China. Our core business is twofold: (1)
the milling, sale and distribution of flour and related products, and (2) the
production of instant noodles, which we market and sell through distributors,
supermarkets and food stores. Our principal brand is "Long Feng". Long Feng
brand has been awarded the designation of a "Famous Brand" in China.
Our business was established in 1952 under the name "Long Feng Foods", as a
grain and oil processing enterprise in the Shandong Province of China and
developed as one of China's leading flour mills. In 1992, Long Feng established
a manufacturing operation for instant noodles in Shandong as the Chinese market
for "convenience foods" was entering a prolonged growth phase. Through rapid
increases in capacity and maintenance of consistent high quality, Long Feng has
established itself as one of China's leading manufacturers of flour and instant
noodles with seven manufacturing plants and nationwide distribution.
In 1998, Long Feng Foods and the Hong Kong based New World Group, together with
Hong Kong Maxim Group, one of the largest Hong Kong food groups, formed a
sino-foreign joint venture under the name "New Dragon Asia Food Limited" to
acquire a controlling interest in seven of Long Feng's largest manufacturing
subsidiaries. The objective of this venture was to combine Long Feng's
manufacturing capabilities and distribution network, New World Group's financial
strength and Maxim's food industry management expertise so as to capitalize on
the rapid growth potential available for the Chinese fast food industry, both
within China and internationally.
On December 13, 2001, NWD closed a reverse merger with Bio-Aqua Systems, Inc., a
Florida corporation, which is listed on the American Stock Exchange. As a result
of the transaction, NWD acquired from New Dragon Asia Food Limited all of its
equity interests in four companies organized under the laws of the British
Virgin Islands (each a "Subsidiary" and, collectively the "Subsidiaries"), each
of which in turn holds an interest in a separate sino-foreign joint venture in
the People's Republic of China ("PRC" or "China"), in exchange for 37,963,263
shares of common stock of the Company.
As a result of the acquisition, the Company continued the operations of the
sino-foreign joint ventures. Headquartered in the Shandong Province, PRC,
management of New Dragon also operates a corporate office in Shenzhen.
1.2 OUR PRODUCTS AND PRODUCTION
We produce and market a broad range of wheat flour for use in bread, dumplings,
noodles and confectionary products. Our flour products are marketed under the
"Long Feng" brand name and sold throughout the country at both wholesale and
retail levels.
-1-
We provide a wide range of instant noodle products to our customers. Our
products can be separated into two broad categories for selling and marketing
purposes: (i) packet noodles for home preparation and (ii) snacks and cup
noodles for outdoor convenience.
Our product breakdown for the year ended December 25, 2004 was approximately 67%
for flour products and 33% for instant noodles.
We believe that NWD has a reputation for producing some of the highest quality
food products in China. Our production plants operate to the highest level of
hygiene and efficiency and most of our plants are certified under the ISO9002
standards. Most of our "state of the art" manufacturing equipment is imported
from Switzerland, Japan and Korea. We also operate strict quality control
systems, resulting in a favorable customer perception of the "Long Feng" brand.
Flour and water are the two main ingredients used to produce a quality noodle
product. Flour is extracted from wheat through a milling process. Wheat sourced
by our milling operation in Shandong Province is generally regarded as being the
highest quality available in China. To produce our noodles, we mix flour with
water and other ingredients and then extrude or roll the mixture into the
desired shape of the noodle. The mixture then travels through a series of
state-of-the-art dryers before being stabilized at room temperature. After
stabilization, the noodles are steamed and cooked in deep fryers, cooled and
then mixed with various seasonings and freeze dried additives such as chicken,
vegetables or beef which are prepared from raw ingredients in a separate
building within our production complex. The finished product is then packed,
palletized and shipped.
We own and operate our manufacturing plants which have an annual aggregate
production capacity of approximately 110,000 tons of flour products and in
excess of 1.1 billion packets of instant noodles.
1.3 MARKETING AND SALES
Most of our products are regionally marketed and distributed. Our sales and
marketing strategy focuses on maintaining strong distribution relationships with
annual sales order meetings and regular distributor conferences and an excellent
quality/price dynamic.
The Company's distribution system is the key to its continued success in
developing "Long Feng" as one of the leading domestic brands in China. The
Company has more than 200 points of distribution of which 10 are our direct
sales offices, spread over 27 provinces in China. The remaining 190 sales points
are owned and managed by distributors. Most of our distributors have long-term
relationships with us and are loyal and efficient vendors of our products.
Our primary customer base for both our flour products and instant noodles
consists of stores in the rural areas throughout China, where, we believe, our
brand has long been recognized as the highest quality available for the price.
The rural market is rapidly growing benefiting from increases in rural consumer
income. We believe that brand loyalty is strongest in this sector. The Company
also sells to supermarkets mainly in urban areas.
In addition to domestic sales, the Company also exports noodles to other
countries such as Korea, Australia, Malaysia, Indonesia, etc. In 2004, export
sales accounted for approximately 5% of our instant noodle sales.
-2-
The Company also received orders from certain KFC Corporation locations in China
and KFC's intermediary suppliers for flour. KFC requires rigorous quality
control standards of at least the ISO9002 level. We believe that these orders
highlight the brand reputation and quality of Long Feng as well as the Company's
commitment to international standards.
1.4 COMPETITION
The flour industry is very competitive. Our largest competitors are Shandong
Guang Rao Ban Qiu Flour and Hebei Wu De Li Flour in the Northern market and
Shenzhen Nanshun Flour in the Southern market.
The instant noodle segment is also highly competitive. We compete against
well-established foreign companies, and many smaller companies. Our largest
competitors are "Master Kang" and "President", both based in Taiwan. Both are
focused predominately in the more developed and competitive urban markets.
1.5 STRATEGY
Our strategy is to capitalize on our strong brand name and pursue strategic
partnerships and acquisitions that will enhance our sales. The following are
some of the key elements of our business strategy: - Expand export sales -
Continue to enhance our distributor relationships - Continue to improve product
quality and diversify our product range with higher value-added products - Build
strategic joint venture relationships with multinational food groups to enhance
product range and capitalize on our China distribution network
1.6 EMPLOYEES
We employ approximately 1,500 employees. We believe our relations with our
employees are generally good and we have no collective bargaining agreements
with any labor unions.
1.7 GOVERNMENTAL REGULATIONS ON OUR OPERATIONS IN CHINA
All of our PRC subsidiary companies operate in facilities that are located in
China. Accordingly, our PRC subsidiaries' operations have to conform to the
governmental regulations and rules of China.
We are subject to various laws and regulations administered by various local
government bodies relating to the operation of our production facilities. We
believe that we are in compliance with all governmental laws and regulations
related to our products and facilities.
We are subject to the People's Republic of China's national Environmental
Protection Law, which was enacted on December 26, 1989, as well as a number of
other national and local laws and regulations regulating air, water, and noise
-3-
pollution and setting pollutant discharge standards. Violation of such laws and
regulations could result in warnings, fines, orders to cease operations, and
even criminal penalties, depending on the circumstances of such violation. We
believe that all manufacturing operations are compliance with applicable
environmental laws, including those laws relating to air, water, and noise
pollution.
THE CHINESE LEGAL SYSTEM
The practical effect of the People's Republic of China's legal system on our
business operations in China can be viewed from two separate but intertwined
considerations.
First, as a matter of substantive law, the Foreign Invested Enterprise laws
provide significant protection from government interference. In addition, these
laws guarantee the full enjoyment of the benefits of corporate Articles and
contracts to Foreign Invested Enterprise participants. These laws, however, do
impose standards concerning corporate formation and governance, which are not
qualitatively different from the General Corporation Laws of the several states.
Therefore, as a practical matter, a Foreign Invested Enterprise needs to retain
or have ready access to a local Chinese law firm for routine compliance
purposes.
Similarly, the People's Republic of China accounting laws mandate accounting
practices, which are not co-existent with U.S. Generally Accepted Accounting
Principles. The China accounting laws require that an annual "statutory audit"
be performed in accordance with People's Republic of China accounting standards
and that the books of account of Foreign Invested Enterprises are maintained in
accordance with Chinese accounting laws. Article 14 of the People's Republic of
China Wholly Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned
Enterprise to submit certain periodic fiscal reports and statements to
designated financial and tax authorities, at the risk of business license
revocation. As a practical matter, a Foreign Invested Enterprise must retain a
local Chinese accounting firm that has experience with both the Chinese
standards and U.S. Generally Accepted Accounting Principles. This type of
accounting firm can serve the dual function of performing the annual Chinese
statutory audit and preparing the Foreign Invested Enterprise's financial
statements in a form acceptable for an independent U.S. certified public
accountant to issue an audit report in accordance with Generally Accepted
Accounting Auditing Standards.
Second, while the enforcement of substantive rights may appear less clear than
United States procedures, the Foreign Invested Enterprises and Wholly Foreign-
Owned Enterprises are Chinese registered companies which enjoy the same status
as other Chinese registered companies in business-to-business dispute
resolution. Because the terms of the respective Articles of Association provide
that all business disputes pertaining to Foreign Invested Enterprises are to be
resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in
Stockholm, Sweden applying Chinese substantive law, the Chinese minority partner
in our joint venture companies will not assume a privileged position regarding
such disputes. Any award rendered by this arbitration tribunal is, by the
express terms of the respective Articles of Association, enforceable in
accordance with the "United Nations Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (1958)." Therefore, as a practical
matter, although no assurances can be given, the Chinese legal infrastructure,
while different in operation from its United States counterpart, should not
present any significant impediment to the operation of Foreign Invested
Enterprises.
-4-
CURRENCY CONVERSION AND EXCHANGE
The currency in China is designated as the Renminbi. Although the
Renminbi/United States dollar exchange rate has been relatively stable in the
past twenty years there can be no assurance that the exchange rate will not
become volatile or that the Renminbi will not be officially devalued against the
United States dollar by direction of the Chinese government.
Exchange rate fluctuations may adversely affect our financial performance
because of our foreign currency denominated assets and liabilities, and may
reduce the value, translated or converted, as applicable into United States
dollars, of our net fixed assets, our earnings and our declared dividends. We do
not engage in any hedging activities in order to minimize the effect of exchange
rate risks.
ITEM 2. PROPERTIES
Our corporate office is located in Shenzhen. Our five manufacturing plants
consist of 29 noodle production lines and 2 flour milling lines, located in
Yantai, Penglai and Beijing. Manufacturing operations are vertically integrated,
with the flour production utilized in the noodle manufacturing process. Most of
our manufacturing facilities have been awarded ISO9002 quality certification.
OWNED/ SIZE
FACILITY ADDRESS RENTED (SQ METERS)
----------------------- --------------------------------- ----------------- -----------------
Yantai Flour Mill & No. 10 Huangcheng Road (N), Owned 25,345
Yantai Noodle Factory Longkou, Shandong
Sanhe Noodle Factory 1 Yanjiao Jing Ha Road (N), Owned 26,274
Beijing
Penglai Flour Mill Xiao Men Town, Penglai, Shandong Owned 33,330
Longyuan Plant Huangcheng Beihuan Road, Rented 35,000
Longkou, Shandong ($ 0.1 million
per annual)
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending or, to the best of our knowledge, any
threatened legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended December 25, 2004.
-5-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
5.1 MARKET PRICES OF COMMON STOCK
Our common stock is traded on the American Stock Exchange under the symbol NWD.
The high and low bid prices of the common stock as reported on AMEX for the time
periods indicated are set forth on the table below.
PRICE RANGE OF COMMON STOCK
-------------------------------------
HIGH LOW
------------------ ---------------
Fiscal 2003:
First Quarter $ 0.43 $ 0.15
Second Quarter $ 0.97 $ 0.24
Third Quarter $ 1.65 $ 0.50
Fourth Quarter $ 0.95 $ 0.55
Fiscal 2004:
First Quarter $ 1.18 $ 0.74
Second Quarter $ 1.10 $ 0.50
Third Quarter $ 0.82 $ 0.55
Fourth Quarter $ 0.93 $ 0.61
5.2 SHAREHOLDERS
As of March 23, 2005, there were 45,061,242 shares of our common stock
outstanding and we had approximately 2,400 shareholders of record. American
Stock Transfer, Brooklyn, New York, is the registrar and transfer agent for our
common stock.
5.3 DIVIDENDS
We have never declared or paid any cash dividends on our common stock and we do
not anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will be based upon our
financial condition, operating results, capital requirements, plans for
expansion, restrictions imposed by any financing arrangements and any other
factors that the board of directors deems relevant.
5.4 RECENT SALES OF UNREGISTERED SECURITIES
There were no sales of common stock during the year ended December 25, 2004
-6-
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company is presented
as of and for the years ended December 25, 2004, 2003, 2002 and 2001. The
selected financial data should be read in conjunction with the Company's audited
Consolidated Financial Statements and the notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
YEARS ENDED DECEMBER 25,
-----------------------------------------------------
2004 2003 2002 2001
------------ -------------------------- -------------
(IN THOUSAND, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net Sales $ 39,221 $ 30,773 $ 33,704 $ 30,135
Operating expenses:
Selling and distribution 1,178 1,330 1,161 613
General and administrative 1,611 2,398 601 1,341
Income from operations 4,545 2,193 4,346 4,089
Income before tax and minority interests 5,900 3,174 4,762 4,619
Net income 4,645 2,727 4,153 866
Earnings per share:
Basic and diluted 0.10 0.06 0.10 0.02
Weighted average common shares outstanding:
Basic and diluted 45,061 42,108 40,911 40,911
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents 219 1,783 628 1,293
Total assets 34,246 34,357 40,354 38,643
Total stockholders' equity 26,835 22,190 17,686 13,533
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report includes forward-looking statements. Generally, the words
"believes," "anticipates," "may," "will," "should," "expect," "intend,"
"estimate," "continue," and similar expressions or the negative thereof or
comparable terminology are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, including the matters
set forth in this report or other reports or documents we file with the
Securities and Exchange Commission from time to time, which could cause actual
results or outcomes to differ materially from those projected. Undue reliance
should not be placed on these forward-looking statements which speak only as of
the date hereof. We undertake no obligation to update these forward-looking
statements.
The following discussion and analysis should be read in conjunction with "Item
6. Selected Consolidated Financial Data" and our consolidated financial
statements and the related notes thereto and other financial information
contained elsewhere in this Form 10-K.
-7-
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 LONG FENG, we market our well-established product line through
a countrywide network of more than 200 key distributors and 16 regional offices
in 27 Chinese provinces. We have five manufacturing plants in the PRC with an
aggregate production capacity of approximately 110,000 tons of flour and
approximately 1.1 billion packets of instant noodles.
OPERATION PLAN
Our current strategies are:
o to expand our customer base and production lines and
o 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
THE LONGYUAN PLANT
In March 2004, we established the Longyuan Plant together with a third party in
order to support our growth in the flour and instant noodles businesses and to
add additional revenue streams. The Longyuan Plant is engaged in the manufacture
and sale of packing material. We own 55% of the equity of the Longyuan Plant
THE DALIAN PLANT
The Dalian Plant was established ten years ago and its facilities needed to be
overhauled completely in order to meet PRC environmental requirements. In
consideration of the costs that would be incurred and the past performance of
the operation, management decided to temporarily cease its operations in
December 2003 in view of the fact that the local market can be satisfied by the
Yantai Plant. In May 2004, a sale agreement was signed with an independent buyer
where the buyer acquired the assets and certain liabilities of the Dalian Plant.
The loans made by the owners were not assumed in the transaction and remain as
liabilities of the Company. Accordingly, the Company has recorded a gain on
disposal of approximately US$162,000 of the loans in the second quarter of 2004.
On December 25, 2004, the Company sold its equity interest in the Dalian company
together with its holding company, Noble Point Limited, to its parent company
and assumed the outstanding loan due to the parent company, at a consideration
of US$20,000 which approximates the net asset value in aggregate after the
-8-
assignment of the loan. Management believes that the disposal of the Dalian
operation will improve the Company's profitability in the future and will not
result in no further liabilities to the Company.
THE PENGLAI PLANT
On May 25, 2004, the Company completed an asset purchase agreement with a third
party to purchase property, machinery and equipment, and land use rights of a
flour mill in Penglai, Shandong Province, (the "Penglai Plant") at a
consideration of approximately $1.3 million. The acquisition of the Penglai
Plant will expand the Company's production capacity by approximately 30% and
contribute additional sales in coming years. It currently serves the North,
Northeast and Central regions of China.
7.1 YEAR ENDED DECEMBER 25, 2004 COMPARED TO YEAR ENDED DECEMBER 25, 2003
RESULTS OF OPERATIONS
REVENUE
Revenue for the year ended December 25, 2004 was $39.2 million, an increase of
$8.5 million, or 27.7%, as compared to $30.7 million for the prior year. This
increase was primarily due to organic revenue growth, recovery from the negative
effects of Severe Acute Respiratory Syndrome, or SARS in 2003 and the revenue
contribution of $1.0 million and $0.3 million from the Longyuan Plant and the
Penglai Plant, respectively.
COST OF GOODS SOLD
For the year ended December 25, 2004, cost of goods sold was $31.9 million, an
increase of $7.1 million, or 29%, as compared to $24.8 million for 2003. The
increase was primarily to support the growth in related revenue.
For the year ended December 25, 2004, as a percentage of revenue, cost of goods
sold increased slightly to 81.3% as compared to 80.8% for that of the prior
year, which represents a stable gross margin of 19%.
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.
For the year ended December 25, 2004, selling and distribution expenses
decreased 11% to $1.2 million from $1.3 million in 2003. The decrease was
primarily due to cost savings from the closure of six sales offices.
GENERAL AND ADMINISTRATIVE EXPENSES
For the year ended December 25, 2004, general and administrative expenses
decreased $0.8 million to $1.6 million from $2.4 million of 2003. The decrease
was primarily due to cost control and provisions written-back on allowance for
doubtful accounts and inventory.
-9-
OTHER INCOME (EXPENSES)
Other income increased $0.2 million to $1.4 million for the year ended December
25, 2004 as compared to $1.2 million for the year ended December 25, 2003, this
was primarily due to the tax refund from the municipal government as an
encouragement for foreign investment which is recurring in nature.
NET INCOME
For the year ended December 25, 2004, net income was $4.6 million, or $0.10 per
share, an increase of $1.9 million, or 70% as compared to $2.7 million for 2003.
The increase was primarily due to the revenue growth and the earnings
contribution of the new plants.
For the year ended December 25, 2004, as a percentage of revenue, net income
increased to 11.8% as compared to 8.9% for that of the prior year. The
significant increase was primarily due to the improvement in expense controls,
and the recovery from the prior negative effects of SARS in 2003.
OFF BALANCE SHEET ARRANGEMENTS
We have never entered into any off-balance sheet financing arrangements and have
never established any special purpose entities. We have not guaranteed any debt
or commitments of other entities or entered into any options on non-financial
assets.
7.2 YEAR ENDED DECEMBER 25, 2003 COMPARED TO YEAR ENDED DECEMBER 25, 2002
The Company generated revenues of $30.8 million for the fiscal year ended
December 25, 2003, which was a $2.9 million or 8.7% decrease from $33.7 million
for the fiscal year ended December 25, 2002. The Company's operations were
adversely affected by the decrease in consumer demand for retail commodities
caused by widespread public concerns over the outbreak of SARS, during the year.
There was a substantial increase in the gross profit margin as the gross profit
for the fourth quarter of 2003 increased by $1 million over the same period for
the prior year. The increase is mainly due to the result of a change in product
sales mix and an increase in demand for our products at the end of the third and
fourth quarter of 2003.
The Company exported over 80,000,000 packets of noodles to Korea during 2003
which accounted for 3% of our instant noodle sales. We have also commenced
selling our products to supermarkets located in urban areas. Taken together,
this is expected to lengthen the collection of the receivables of the Company.
Selling and distribution expenses increased from $1.2 million for the fiscal
year ended December 25, 2002 to $1.3 million for the fiscal year ended December
25, 2003 due to increased transportation costs associated with more stringent
weight load restrictions. General and administrative expenses increased by $1.8
-10-
million primarily due to expenses associated with the closure of three factories
and the write off of inventory and deferred expenses, as well as additional
provisions for obsolete inventory and doubtful accounts.
Net income for 2003 was $2.7 million, or $0.06 per share, compared with $4.2
million in 2002. The 35% decrease in net income was mainly due to the impact of
SARS and closure of our plants.
7.3 CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
As of December 25, 2004, the Company had operating leases for manufacturing and
warehouse facilities expiring at various dates through March 2031. As of
December 25, 2004, the Company had no significant capital leases. Future minimum
rental commitments under operating leases are as follows:
PAYMENT DUE BY PERIOD
----------------------------------------------------------------------
LESS THAN 1-3 YEARS 3-5 YEARS MORE THAN 5 TOTAL
1 YEAR YEARS
------------- ------------- ------------- ------------- -------------
Operating lease obligations 123,000 123,000 123,000 47,000 662,000
============= ============= ============= ============= =============
7.4 FINANCIAL CONDITION, LIQUIDITY, 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 borrowings and advances from related companies.
The Company's working capital increased $5.3 million to $7.4 million at December
25, 2004 as compared to $2.1 million at December 25, 2003. The increase was
primarily due to the growth and profitability of the business and improved
collections of receivables during the year ended December 25, 2004.
Cash and cash equivalents were $0.2 million as of December 25, 2004, a decrease
of $1.6 million from that of December 25, 2003. The decrease was mainly due to
the repayment of short-term borrowings.
Net cash provided by operating activities for the year ended December 25, 2004
was $3.7 million 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 $6.6 million to $2.1 million in the year ended
December 25, 2004 as compared to $8.7 million for 2003. The primary use of funds
in financing activities in the year ended December 25, 2004 was the repayment of
short-term bank borrowings and settlement of related company balances.
7.5 INFLATION AND CHANGING PRICES
The Company does not foresee any adverse effects on its earnings as a result of
inflation or changing prices.
-11-
7.6 CRITICAL ACCOUNTING POLICIES
The preparation of the Company's financial statements and related disclosures in
conformity with generally accepted accounting principles in the United States
requires management to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expenses and related disclosures
of contingent assets and liabilities. On an on-going basis, management evaluates
the estimates and assumptions based upon historical experience and various other
factors and circumstances. Management believes that the Company's estimates and
assumptions are reasonable under the circumstances; however, actual results may
vary from these estimates and assumptions under different future circumstances.
Management has identified the following critical accounting policies that affect
the more significant judgments and estimates used in the preparation of the
Company's consolidated financial statements.
CONTRACTUAL JOINT VENTURES - A contractual joint venture is an entity
established between the Company and another joint venture partner, with the
rights and obligations of each party governed by a contract. If the Company owns
more than 50% of the joint venture and is able to govern and control its
financial and operating policies and its board of directors, such joint venture
is considered as a de facto subsidiary and is accounted for as a subsidiary.
REVENUE RECOGNITION - The Company recognizes sales in accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements".
Sales represent the invoiced value of goods, net of value added tax ("VAT"),
supplied to customers, and are recognized upon delivery of goods and passage of
title.
All of the Company's sales made in Mainland China are subject to Mainland
Chinese value-added tax at rates ranging from 13% to 17% ("output VAT"). Such
output VAT is payable after offsetting VAT paid by the Company on purchases
("input VAT").
INVENTORIES - Inventories are stated at the lower of cost, determined on a
weighted average basis, and net realizable value. Costs of work-in-progress and
finished goods are composed of direct material, direct labor and an attributable
portion of manufacturing overhead. Net realizable value is the estimated selling
price, in the ordinary course of business, less estimated costs to complete and
dispose.
In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a revision
to FIN 46, "Consolidation of Variable Interest Entities". FIN 46R clarifies some
of the provisions of FIN46 and exempts certain entities from its requirements.
FIN 46R is effective at the end of the first interim period ending after March
15, 2004. Entities that have adopted FIN 46 prior to this effective date can
continue to apply the provisions of FIN 46 until the effective date of Fin 46R.
The adoption of FIN 46R did not have any effect on our consolidated 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. We do not believe the adoption of SFAS No. 151
will have a material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which
establishes standards for transactions in which an entity exchanges its equity
instruments for goods or services. This standard requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. This
eliminates the exception to account for such awards using the intrinsic method
previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective
for interim or annual reporting periods beginning on or after June 15, 2005. We
do not believe the adoption of SFAS No. 123(R) will not have a material impact
on our financial statements.
7.7 RISKS FACTORS RELATED TO OUR BUSINESS
In addition to the other information in this annual 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:
RISKS ASSOCIATED WITH OUR BUSINESS.
OUR BUSINESS MAY RESULT IN ADVERSE EFFECTS FROM COMPETITION IN THE NOODLE AND
FLOUR PRODUCT MARKETS.
-12-
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.
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
-13-
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 its corporate and brand
image.
WE HAVE LIMITED BUSINESS INSURANCE COVERAGE.
The insurance industry in China is still in 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.
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 maintains 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
-14-
us that it 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:
- 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
-15-
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
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.
-16-
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.
WE MAY EXPERIENCE A RISK OF REVENUE REDUCTION DUE TO CURRENCY CONVERSIONS.
Most of our revenue is denominated in Renminbi which must be converted into
other currencies before remittance out of the PRC. Both the conversion of
Renminbi into foreign currencies and the remittance of foreign currencies abroad
require approval of the PRC government. To the extent future revenue is
denominated in foreign currencies, we would be subject to increased risks
relating to foreign currency exchange rate fluctuations that could have a
material adverse affect on our financial condition and operating results. To
date, we have not engaged in any hedging transactions in connection with our
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are 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
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
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 US dollar. Exchange rate fluctuations may adversely affect the
value, in US dollar terms, of the our net assets and income derived from its
operations in the PRC.
-17-
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and the footnotes thereto are included in the
section beginning on page F-1.
1. Report of Independent Registered Public Accounting Firm
2. Consolidated Balance Sheets as of December 25, 2004 and 2003
3. Consolidated Statements of Income for each of the three years ended December
25, 2004
4. Consolidated Statements of Stockholders' Equity for each of the three years
ended December 25, 2004
5. Consolidated Statements of Cash Flows for each of the three years ended
December 25, 2004
6. Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and
financial disclosure.
ITEM 9A. CONTROL PROCEDURES
(a) Under the supervision and with the participation of our management,
including our chief executive officer and the chief financial officer, we
conducted an evaluation of the effectiveness of the design and operation of
its disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as of December 25,
2004, the end of the period covered by this report (the "Evaluation Date").
Based on this evaluation, our chief executive officer and chief financial
officer concluded as of the Evaluation Date that our disclosure controls
and procedures were effective such that the material information required
to be included in our Securities and Exchange Commission ("SEC") reports is
recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms relating us, including our consolidating
subsidiaries, and was made known to them by others within those entities,
particularly during the period when this report was being prepared.
(b) Additionally, there were no significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent
to the Evaluation Date. We have not identified any significant deficiencies
or material weaknesses in our internal controls, and therefore there were
no corrective actions taken.
-18-
ITEM 9B. OTHER INFORMATION
(a) 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. This project is scheduled to be completed in late 2005.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is set forth in the Proxy Statement under
the caption "Election of Directors" and is incorporated herein by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is set forth in the Proxy Statement under
the caption "Executive Compensation" and is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 is set forth in the Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners and Management" and
is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is set forth in the Proxy Statement under
the caption "certain relationships and related transactions" and is incorporated
herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under by Item 14 is set forth in the Proxy Statement
under the caption "Principal accountant fees and services" and is incorporated
herein by this reference.
PART IV
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of, or are incorporated by
reference in, this Annual Report on Form 10-K.
EXHIBIT NO. DESCRIPTION
----------- -----------
31.1 Certification pursuant to Rule 13a-14
-19-
31.2 Certification pursuant to Rule 13a-14
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes - Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes - Oxley Act of 2002
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during 2004:
o Form 8-K (item 12), filed on May 10, 2004, covering a press release
announcing our financial results for the quarter ended March 25,
2004.
o Form 8-K (item 5.02), filed on November 8, 2004, covering a press
release announcing the departure and appointment of the Company's
Chief Financial Officer.
-20-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NEW DRAGON ASIA CORP.
Dated: March 23, 2005 By /s/ Heng Jing Lu
------------------------------
Name: Heng Jing Lu
Title: Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Dated: March 23, 2005 By /s/ Heng Jing Lu
------------------------------
Name: Heng Jing Lu
Title: Chief Executive Officer
& Director
Dated: March 23, 2005 By /s/ Peter Mak
------------------------------
Name: Peter Mak
Title: Chief Financial Officer
Dated: March 23, 2005 By /s/ Li Xia Wang
------------------------------
Name: Li Xia Wang
Title: Director
Dated: March 23, 2005 By /s/ Ling Wang
------------------------------
Name: Ling Wang
Title: Director
-21-
Dated: March 23, 2005 By /s/ De Lin Yang
------------------------------
Name: De Lin Yang
Title: Director
Dated: March 23, 2005 By /s/ Zhi Yong Jiang
------------------------------
Name: Zhi Yong Jiang
Title: Director
Dated: March 23, 2005 By /s/ Qi Xue
------------------------------
Name: Qi Xue
Title: Director
Dated: March 23, 2005 By /s/ Feng Ju Chen
------------------------------
Name: Feng Ju Chen
Title: Director
-22-
NEW DRAGON ASIA CORP.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
----
F-1
Report of Independent Registered Accounting Firm
Consolidated Balance Sheets as of December 25, 2004 and 2003 F-2
Consolidated Statements of Income for each of the three years ended
December 25, 2004 F-3
Consolidated Statements of Stockholders' Equity for each of the three years
ended December 25, 2004 F-4
Consolidated Statements of Cash Flows for each of the three years ended
December 25, 2004 F-5
Notes to Consolidated Financial Statements F-6
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
To the Stockholders and Board of Directors of New Dragon Asia Corp. and
Subsidiaries
We have audited the accompanying consolidated balance sheets of New Dragon Asia
Corp. and Subsidiaries (the "Company") as of December 25, 2004 and 2003 and the
related consolidated statements of income, stockholders` equity and cash flows
for each of the three years ended December 25, 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of New
Dragon Asia Corp. and Subsidiaries as of December 25, 2004 and 2003, and the
consolidated results of their operations and cash flows for each of the three
years ended December 25, 2004 in conformity with accounting principles generally
accepted in the United States of America.
GROBSTEIN, HORWATH & COMPANY LLP
Sherman Oaks, California
February 4, 2005
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 25, DECEMBER 25,
2004 2003
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 219 $ 1,783
Accounts receivable, net 6,414 6,936
Deposits and prepayments, net 2,520 1,282
Inventories, net 3,990 2,763
Due from related companies 1,183 124
---------- ----------
Total current assets 14,326 12,888
Property, machinery and equipment, net 16,098 17,471
Land use rights, net 3,822 3,998
---------- ----------
Total assets $ 34,246 $ 34,357
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ -- $ 2,845
Accounts payable 2,696 4,565
Other payables and accruals 1,898 1,234
Taxes payable 1,491 921
Due to related companies 831 1,202
---------- ----------
Total current liabilities 6,916 10,767
Due to New Dragon Asia Food Limited 303 196
Due to joint venture partners 110 1,204
---------- ----------
Total liabilities 7,329 12,167
---------- ----------
Minority interests 82 --
---------- ----------
Stockholders' equity:
Common stock, par value $0.0001; 107,000,000 shares
authorized; 45,061,242 shares issued and outstanding
at December 25, 2004 and 2003 4 4
Additional paid-in capital 9,909 9,909
Retained earnings 16,922 12,277
---------- ----------
Total stockholders' equity 26,835 22,190
---------- ----------
Total liabilities and stockholders' equity $ 34,246 $ 34,357
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 25,
--------------------------------------------------------
2004 2003 2002
---------------- ---------------- ----------------
Net sales $ 39,221 $ 30,773 $ 33,704
Cost of goods sold (31,887) (24,852) (27,596)
---------------- ---------------- ----------------
Gross profit 7,334 5,921 6,108
Selling and distribution expenses (1,178) (1,330) (1,161)
General and administrative expenses (1,611) (2,398) (601)
---------------- ---------------- ----------------
Income from operations 4,545 2,193 4,346
Other income (expenses):
Interest expense (72) (249) (265)
Interest income 3 4 194
Other income, net 1,424 1,226 487
---------------- ---------------- ----------------
Income before provision for income taxes and
minority interests 5,900 3,174 4,762
Provision for income taxes (1,296) (447) (609)
---------------- ---------------- ----------------
Income before minority interests 4,604 2,727 4,153
Minority interests 41 -- --
---------------- ---------------- ----------------
Net income $ 4,645 $ 2,727 $ 4,153
================ ================ ================
Basic and diluted earnings per common share $ 0.10 $ 0.06 $ 0.10
================ ================ ================
Weighted average common shares outstanding 45,061 42,108 40,911
================ ================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
------------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ---------- ---------- ---------- -------------
Balance at December 25, 2001 40,911 $ 4 $ 8,132 $ 5,397 $ 13,533
Net income for the year ended
December 25, 2002 -- -- -- 4,153 4,153
---------- ---------- ---------- ---------- ----------
Balance at December 25, 2002 40,911 4 8,132 9,550 17,686
Issuance of common stock in
connection with:
Private placement in September 3,300 -- 1,405 -- 1,405
Private placement in October 850 -- 372 -- 372
Net income for the year ended
December 25, 2003 -- -- -- 2,727 2,727
---------- ---------- ---------- ---------- ----------
Balance at December 25, 2003 45,061 4 9,909 12,277 22,190
Net income for the year ended
December 25, 2004 -- -- -- 4,645 4,645
---------- ---------- ---------- ---------- ----------
Balance at December 25, 2004 45,061 $ 4 $ 9,909 $ 16,922 $ 26,835
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 25,
-----------------------------------
2004 2003 2002
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,645 $ 2,727 $ 4,153
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for doubtful accounts (218) 578 134
Depreciation and amortization 1,187 1,425 1,251
Gain on disposal of PRC subsidiary (162) -- --
Loss (gain) on disposal of machinery and equipment 199 (346) 5
Minority interests (41) -- --
Changes in operating assets and liabilities:
Accounts receivable 735 (186) (2,352)
Deposits and prepayments (1,242) (216) 343
Inventories (1,313) 2,439 125
Accounts payable (1,583) (163) 1,288
Other payables and accruals 920 (48) 544
Taxes payable 573 32 420
--------- --------- ---------
Net cash provided by operating activities 3,700 6,242 5,911
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in amounts due from related companies (706) 2,357 (795)
Decrease (increase) in investment -- -- 72
Decrease (increase) in amounts due to related companies (371) 400 (2,982)
Purchases of property, machinery and equipment (2,207) (92) (978)
Proceeds from disposal of property, machinery and equipment 126 994 --
--------- --------- ---------
Net cash (used in) provided by investing activities (3,158) 3,677 (4,683)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 1,777 --
Decrease (increase) in restricted cash -- 181 (181)
Proceeds from short-term borrowings -- 4,325 6,988
Payments on short-term borrowings (2,676) (5,094) (6,928)
Increase (decrease) in due to parent company 1,127 (5,586) (1,262)
Decrease in due to joint venture partners (681) (4,367) (510)
Capital contribution from minority interests 124 -- --
--------- --------- ---------
Net cash used in provided by financing activities (2,106) (8,764) (1,893)
--------- --------- ---------
Net change in cash and cash equivalents (1,564) 1,155 (665)
Cash and cash equivalents at the beginning of the year 1,783 628 1,293
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 219 $ 1,783 $ 628
========= ========= =========
Supplemental disclosures of cash flows information:
Cash paid during the year for:
Interest $ 72 $ 249 $ 292
========= ========= =========
Income taxes $ 10 $ 380 $ 426
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTED IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS
New Dragon Asia Corporation, 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.
Details of the subsidiaries are as follows:
DOMICILE AND DATE PAID-IN PERCENTAGE OF
NAME OF INCORPORATION CAPITAL OWNERSHIP PRINCIPAL ACTIVITIES
- -------------------------------- ---------------------- --------------- ---------------- -----------------------
Mix Creation Limited ("MC") The British US$1,500,000 100% (a) Investment holding
Virgin Islands
November 7, 1997
Rich Delta Limited The British US$1,000,000 100% (a) Investment holding
("RD") Virgin Islands
October 28,1998
Keen General Limited The British US$1,500,000 100% (a) Investment holding
("KG") Virgin Islands
July 20,1998
New Dragon Asia Flour (Yantai) The PRC RMB28,500,000 90% (b) Manufacture, marketing
Company limited August 13, 1999 and distribution of
("NDAFLY") flour
New Dragon Asia Food (Yantai) The PRC RMB17,462,000 90% (c) Manufacture, marketing
Company Limited December 24,1998 and distribution of
("NDAFY") instant noodles
New Dragon Asia Food (Sanhe) The PRC RMB51,191,432 79.64% (c) Manufacture, marketing
Company Limited December 25, 1998 and distribution of
("NDAFS") instant noodles
Penglai New Dragon Jin Qiao Food The PRC US$850,000 100% (d) Manufacture, marketing
Company Limited December 5,2003 and distribution of
("PNDJQ") flour
Longkou City Longyuan Packing The PRC RMB2,280,000 55% (e) Manufacture and sale of
Materials March 2004 packing materials
Company Limited
("LCLPM")
F-6
(a) MC, RD and KG are wholly owned by the Company.
(b) NDAFLY is a contractual joint venture established in the PRC to be operated
for 50 years until August 13, 2049. In September 2000, MC contributed 90%
of the registered capital to NDAFLY. Under the joint venture agreement
dated June 1, 1999 and the supplemental agreement dated June 26, 1999, the
Chinese joint venture partner is entitled to receive a pre-determined
annual fee and all profits or loss, net of annual fees from the joint
venture are to be allocated to NDAFLY effective from June 26, 1999. In view
of the profit sharing arrangement NDAFLY is regarded as 100% owned by the
Company. The minority interest component has been included as a component
of General and Administrative Expenses for the years ended December 25,
2004, 2003 and 2002.
(c) NDAFY and NDAFS are contractual joint ventures established in the PRC to be
operated for 50 years until December 24, 2048. In March 1999, RD
contributed 90% of the registered capital to NDAFY, while KG contributed
79.64% of the registered capital to NDAFS. 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 and NDAFS effective from December 26, 1998. In view of the profit
sharing arrangements, NDAFY and NDAFS are regarded as 100% owned by the
Company.
(d) PNDJQ is a wholly owned subsidiary of MC established in the PRC.
(e) LCLPM is a 55% owned subsidiary of NDAFY established in the PRC in March
2004. The remaining 45% equity is owned by Longkou City Longyuan Factory,
our Chinese joint venture partner.
NOTE 2. BASIS OF PRESENTATION
The consolidated financial statements include the consolidated financial
statements of New Dragon Asia Corp. and its subsidiaries. All significant
intra-group balances and transactions have been eliminated in consolidation.
The consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States 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 Company, which
were prepared in accordance with the relevant accounting principles and
financial reporting regulations applicable to joint venture enterprises as
F-7
established by the Ministry of Finance of the PRC. Certain accounting principles
stipulated under U.S. GAAP are not applicable in the PRC.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes sales in accordance with the United States Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition." Sales represent the invoiced value of goods, net of value added
tax ("VAT"), supplied to customers, and are recognized upon delivery of goods
and passage of title.
All of the Company's sales made in Mainland China are subject to the Mainland
Chinese value-added tax at rates ranging from 13% to 17% ("output VAT"). Such
output VAT is payable after offsetting VAT paid by the Company on purchases
("input VAT").
Deposits or advance payments from customers prior to delivery of goods and
passage of title of goods are recorded as deposits from customers.
CASH AND CASH EQUIVALENTS
The Company considers cash on hand, deposits in banks, and short-term
investments purchased with an original maturity date of three months or less to
be cash and cash equivalents. The carrying amounts reflected in the consolidated
balance sheets for cash and cash equivalents approximate the fair values due to
the short maturities of these instruments.
FINANCIAL INSTRUMENTS
The Company accounts for financial instruments under the provisions of
Statements of Financial Accounting Standards ("SFAS") No. 133: "Accounting for
Derivative Instruments and Hedging Activities", which requires that all
derivative financial instruments be recognized in the consolidated financial
statements and maintained at fair value regardless of the purpose or intent for
holding them. Changes in fair value of derivative financial instruments are
either recognized periodically in income or stockholders' equity (as a component
of comprehensive income), depending on whether the derivative is being used to
hedge changes in fair value or cash flows. The adoption of SFAS 133 did not have
a material impact on the Company's consolidated financial position or its
results of operations because the Company does not currently hold any derivative
financial instruments and does not engage in hedging activities. The carrying
amounts for cash and cash equivalents, accounts receivable, deposits and
prepayments, short-term borrowings, accounts payable, other payables and
accruals approximate their fair values because of the short maturity of those
instruments.
F-8
ACCOUNTS RECEIVABLE
Accounts receivable is stated at cost, net of allowance for doubtful accounts.
Based on current practice in the PRC, management provides for an allowance for
doubtful accounts equivalent to those accounts that are not collected within one
year.
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist primarily of trade receivables. However, concentrations of
credit risk are limited due to the large number of customers comprising the
Company's customer base and their dispersion across different business and
geographic areas. The Company monitors its exposure to credit losses and
maintains an allowance for anticipated losses. To reduce credit risk, the
Company performs credit checks on certain customers.
INVENTORIES
Inventories are stated at the lower of cost, determined on a weighted average
basis, and net realizable value. Work-in-progress and finished goods are
composed of direct material, direct labor and an attributable portion of
manufacturing overhead. Net realizable value is the estimated selling price, in
the ordinary course of business, less estimated costs to complete and dispose.
Management has provided an allowance for obsolescence.
PROPERTY, MACHINERY AND EQUIPMENT
Property, machinery and equipment is stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization is computed using
the straight-line method over the estimated useful lives of the related assets
that range from 5 to 50 years. Leasehold improvements are amortized using the
straight-line method over the estimated useful life of the asset or the term of
the lease, whichever is shorter. Costs for normal repairs and maintenance are
expensed to operations as incurred, while renewals and major refurbishments are
capitalized.
Assessments of whether there has been a permanent impairment in the value of
property, machinery and equipment are periodically performed by considering
factors such as expected future operating income, trends and prospects, as well
as the effects of demand, competition and other economic factors. Management
believes no permanent impairment has occurred.
LAND USE RIGHTS
Land use rights are stated at cost, less accumulated amortization. Amortization
is computed using the straight-line method over the estimated useful lives
ranging from 27 to 50 years. In accordance with SFAS No.142, "Goodwill and Other
Intangible Assets," intangible assets with finite lives are subject to
amortization, and impairment reviews are performed in accordance with SFAS
No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets." No
event has occurred that would trigger an impairment assessment of the Company's
intangible assets with finite lives.
ADVERTISING EXPENSES
Advertising expenses are expensed in the period when incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under this method, deferred income taxes are
recognized for the estimated tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting
F-9
amounts and each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established to reduce deferred tax
assets to the amount expected to be realized when, in management's opinion, it
is more likely than not that some portion of the deferred tax assets will not be
realized. The provision for income taxes represents current taxes payable net of
the change during the period in deferred tax assets and liabilities.
OPERATING LEASES
Operating leases represent those leases under which substantially all the risks
and rewards of ownership of the leased assets remain with the lessors. Rental
payments under operating leases are charged to expense on the straight-line
basis over the period of the relevant leases.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is Renminbi ("RMB"). Transactions
denominated in foreign currencies are translated into RMB at the unified
exchange rates quoted by the People's Bank of China prevailing at the dates of
the transactions. Monetary assets and liabilities denominated in foreign
currencies are translated into RMB using the applicable unified exchange rates
prevailing at the balance sheet date. There are no material exchange differences
as a result of the stability of the RMB during the periods covered by the
consolidated financial statements.
Translations of amounts from RMB into United States dollars ("US$") were at US
$1.00 = RMB 8.3 for each of the years ended December 25, 2004, 2003 and 2002. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate or at any other rate.
EARNINGS PER SHARE
Basic earnings per common share ("EPS") is computed in accordance with SFAS No.
128: "Earnings Per Share" by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock.
F-10
RECENTLY ISSUED ACCOUNTING STANDARDS
(a) In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a
revision to FIN 46, "Consolidation of Variable Interest Entities". FIN 46R
clarifies some of the provisions of FIN46 and exempts certain entities from
its requirements. FIN 46R is effective at the end of the first interim
period ending after March 15, 2004. Entities that have adopted FIN 46 prior
to this effective date can continue to apply the provisions of FIN 46 until
the effective date of Fin 46R. The adoption of FIN 46R did not have any
effect on our consolidated financial statements.
(b) 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. We do not
believe the adoption of SFAS No. 151 will have a material impact on our
financial statements.
(c) In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment,
which establishes standards for transactions in which an entity exchanges
its equity instruments for goods or services. This standard requires a
public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of
the award. This eliminates the exception to account for such awards using
the intrinsic method previously allowable under APB Opinion No. 25. SFAS
No. 123(R) will be effective for interim or annual reporting periods
beginning on or after June 15, 2005. We do not believe the adoption of SFAS
No. 123(R) will not have a material impact on our financial statements.
RECLASSIFICATION FROM PRIOR YEAR AUDITED FINANCIAL STATEMENTS
Certain prior year comparative figures have been reclassified to conform to the
current year presentation.
NOTE 4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
DECEMBER 25, DECEMBER 25,
2004 2003
----------- -----------
Accounts receivable $ 7,189 $ 7,929
Less: Allowance for doubtful accounts (775) (993)
----------- -----------
$ 6,414 $ 6,936
=========== ===========
NOTE 5. DEPOSITS AND PREPAYMENTS
Deposits and prepayments consist of the following:
DECEMBER 25, DECEMBER 25,
2004 2003
----------- -----------
Deposits for raw materials $ 2,291 $ 1,508
Advances to staff 33 63
Others 303 11
Less: Allowance for deposits (107) (300)
----------- -----------
$ 2,520 $ 1,282
=========== ===========
Advances to staff are unsecured, non-interest bearing and repayable on demand.
F-11
NOTE 6. INVENTORIES
Inventories consisted of the following:
DECEMBER 25, DECEMBER 25,
2004 2003
----------- -----------
Raw materials (including packing materials) $ 2,812 $ 2,222
Finished goods 1,725 1,123
----------- -----------
4,537 3,345
Less: Provision for inventory obsolescence (547) (582)
----------- -----------
$ 3,990 $ 2,763
=========== ===========
NOTE 7. PROPERTY, MACHINERY AND EQUIPMENT
Property, machinery and equipment consisted of the following:
DECEMBER 25, DECEMBER 25,
2004 2003
----------- -----------
Buildings $ 9,415 $ 9,551
Machinery and equipment 11,940 12,818
----------- -----------
21,355 22,369
Less: Accumulated depreciation and amortization (5,257) (4,898)
----------- -----------
$ 16,098 $ 17,471
=========== ===========
Depreciation and amortization expense was approximately $1,187, $1,314 and
$1,141 for the years ended December 25, 2004, 2003 and 2002, respectively.
NOTE 8 LAND USE RIGHTS
Land use rights consisted of the following:
DECEMBER 25, DECEMBER 25,
2004 2003
----------- -----------
Land use rights $ 4,432 $ 4,575
Less: Accumulated amortization (610) (577)
----------- -----------
$ 3,822 $ 3,998
=========== ===========
Private ownership of land is not allowed in Mainland China. Rather, entities
acquire the right to use land for a designated term. As of December 25, 2004 and
2003, the land use rights consisted of three parcels of land located in Mainland
China with a net book value of approximately $3,822 and $3,998, respectively,
held under land use rights of 27 to 50 years through 2025 to 2047.
F-12
Amortization expense was approximately $103, $112 and $110 for the years ended
December 25, 2004, 2003 and 2002, respectively.
NOTE 9. SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following:
DECEMBER 25, DECEMBER 25,
2004 2003
----------- -----------
Bank loans $ -- $ 2,518
Bills payable -- 327
---------- ----------
$ -- $ 2,845
========== ==========
Bank loans were secured by corporate guarantees provided by a PRC joint venture
partner and a third party and bore interest at prevailing lending rates in the
PRC ranging from 6.01% to 6.435% per annum and were fully repaid during the year
ended December 25, 2004.
Bills payable are a form of bank borrowing with payment due within 180 days.
NOTE 10 OTHER PAYABLES AND ACCRUALS
Other payables and accruals consisted of the following:
DECEMBER 25, DECEMBER 25,
2004 2003
----------- -----------
Deposits from customers $ 554 $ 612
Accruals for staff salaries, bonus and benefit 515 510
Utilities and accrued expenses 829 112
---------- ----------
$ 1,898 $ 1,234
========== ==========
NOTE 11. TAXATION
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. The group companies that are incorporated under the International
Business Companies Act of the British Virgin Islands are exempt from payment of
the British Virgin Islands income tax.
For the years ended December 25, 2004, 2003 and 2002, substantially all of the
Company's income was generated in the PRC, which is subject to PRC income taxes
at rates ranging from 24% to a statutory rate of 33%. Two of the PRC
F-13
subsidiaries of the Company will be eligible to be exempt from income taxes for
a two-year period and then subject to a 50% reduction in income taxes, starting
from their first profitable year. Several PRC subsidiaries receive preferential
tax rates in regions in which they operate and are also entitled to partial tax
refunds from those tax bureaus.
As of December 25, 2004, 2003 and 2002, there are not any material deferred tax
assets or deferred tax liabilities.
A reconciliation of the provision for income taxes determined at the statutory
average state and local income tax rate to the Company's effective income tax
rate is as follows:
2004 2003 2002
------ ------ ------
Statutory income tax 33% 33% 33%
Reduction for preferential tax rate (9) -- --
Impact of effective tax holiday -- (21) (21)
Various differences (2) 2 1
------ ------ ------
Effective rate 22% 14% 13%
====== ====== ======
NOTE 12. COMMON STOCK
On September 4, 2003, the Company issued 3,300,000 shares of common stock for an
aggregate purchase amount of $1,650,000 or $0.50 per share. The shares were
issued pursuant to an exemption provided by Section 4(2) of the Securities Act.
The purchasers were also issued warrants to purchase 1,650,000 shares of the
Company's common stock which have a term of 5 years at an exercise price of
$0.99 per share. As of December 25, 2004, no warrants were exercised.
On October 7, 2003, the Company issued 850,000 shares of common stock for an
aggregate purchase amount of $425,000 or $0.50 per share. The shares were issued
pursuant to an exemption provided by Section 4(2) of the Securities Act. The
purchasers were also issued warrants to purchase 850,000 shares of the Company's
common stock which have a term of 5 years and an exercise price of $0.98 per
share. As of December 25, 2004, no warrants were exercised.
Transaction costs related to the private placements amounted to $298,000 and
have been presented as a reduction of the proceeds from the sale of shares.
No preferred stock has been authorized or issued.
F-14
NOTE 13. COMMITMENTS
LEASE COMMITMENTS
The Company leases manufacturing and warehouse facilities under operating leases
which expire at various dates through March 2031. At December 25, 2004, the
Company's future minimum lease payments under operating leases were as follows:
YEARS ENDING DECEMBER 25,
-------------------------
2005 $ 123
2006 123
2007 123
2008 123
2009 123
Thereafter 47
-----------
Total $ 662
===========
Total lease expenses were $187, $46 and $74 for the years ended December 25,
2004, 2003 and 2002, respectively.
ANNUAL FEES
Under the supplementary joint venture agreements, the Company has committed to
pay predetermined annual fees of $108 to the Chinese joint venture partners for
each of the years in the period from December 26, 1998 to 2049. As of December
25, 2004, total commitments under these arrangements were as follows:
Payable during the period:
Within one year $ 108
Over one year but not exceeding two years 108
Over two year but not exceeding three years 108
Over three year but not exceeding four years 108
Over four year but not exceeding five years 108
Over five years 4,234
----------
Total $ 4,774
==========
NOTE 14. RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operational decisions. Parties are also
considered to be related if they are subject to common control or common
significant influence.
Particulars of significant transactions between the New Dragon Asia Corp. and
related companies are summarized below:
F-15
2004 2003 2002
------- ------ ------
Sale of finished goods to:
A joint venture partner, Shandong Longfeng Group Company $ 2 $ -- $ 419
Related parties 33 113 1,334
------- ------ ------
$ 35 $ 113 $1,753
======= ====== ======
Sale of machinery to Shandong Longfeng Group Company $ -- $ 993 $ --
======= ====== ======
Purchasing of raw materials from:
A joint venture partner, Shandong Longfeng Group Company $ -- $ -- $ 8
Related parties 914 1,344 1,649
------- ------ ------
$ 914 $1,344 $1,657
======= ====== ======
Pre-determined annual fee charged by joint venture partners:
Shandong Longfeng Group Company $ 72 $ 78 $ 78
Shandong Longfeng Flour Company Limited 36 36 36
------- ------ ------
$ 108 $ 114 $ 114
======= ====== ======
Interest income from short-term advances to parent company $ -- $ -- $ 188
======= ====== ======
Interest expenses paid to a joint venture partner:
Shandong Longfeng Group Company $ 3 $ 17 $ 18
======= ====== ======
Rental expenses paid to related companies $ 120 $ -- $ --
======= ====== ======
Rental income from a joint venture partner:
Shandong Longfeng Group Company $ 64 $ 64 $ 64
======= ====== ======
A summary of related party balances is as follows:
DECEMBER 25, DECEMBER 25,
2004 2003
----------- -----------
Due to parent company $ 303 $ 196
--------- ---------
Due to joint venture partners, consisting of:
Shandong Longfeng Group Company 1,027 1,034
Shandong Longfeng Flour Company Limited (917) 170
--------- ---------
$ 110 $ 1,204
========= =========
Due from related companies $ 1,183 $ 124
========= =========
Due to related companies $ 831 $ 1,202
========= =========
The amounts due to parent company and joint venture partners are unsecured,
non-interest bearing and repayable upon demand.
F-16
NOTE 15. DISPOSAL OF SUBSIDIARY
On December 20, 2004, the Company sold its 100% shareholding in Noble Point
Limited ("NP") which in turn owned a 90% equity interest in New Dragon Asia Food
(Dalian) Company limited ("NDAFD"), to its parent company and assumed its loan
due to the parent company, at a consideration of US$20,000 which approximates to
the net asset value of NP and NDAFD in aggregate after the assignment of the
loan. NP had no business other than the investment holding in NDAFD whilst NDAFD
had ceased business in December 2003.
NOTE 16. SEGMENT INFORMATION
The Company classifies its products into two core business segments, namely
instant noodles and flour. In view of the fact that the Company operates
principally in Mainland China, no geographical segment information is presented.
Net Sales
2004 2003 2002
------- ------- -------
Instant noodles $12,909 $11,702 $10,847
Flour 26,312 19,070 22,857
------- ------- -------
$39,221 $30,773 $33,704
======= ======= =======
Income from Operations
2004 2003 2002
------- ------- -------
Instant noodles $ 607 $ 296 $ 1,621
Flour 3,938 1,897 2,725
------- ------- -------
$ 4,545 $ 2,193 $ 4,346
======= ======= =======
Interest Income
2004 2003 2002
------- ------- -------
Instant noodles $ 2 $ 2 $ 192
Flour 1 2 2
------- ------- -------
$ 3 $ 4 $ 194
======= ======= =======
F-17
Interest Expenses
2004 2003 2002
------- ------- -------
Instant noodles $ 6 $ 22 $ 18
Flour 66 227 247
------- ------- -------
$ 72 $ 249 $ 265
======= ======= =======
Depreciation and Amortization
2004 2003 2002
------- ------- -------
Instant noodles $ 587 $ 867 $ 703
Flour 600 557 548
------- ------- -------
$ 1,187 $ 1,424 $ 1,251
======= ======= =======
Identifiable Long-term Assets
2004 2003
------- -------
Instant noodles $12,031 $14,001
Flour 7,889 7,468
------- -------
$19,920 $21,469
======= =======
NOTE 17. MAJOR CUSTOMERS
No single customer accounted for more than 5%, 5% and 6% of sales for the years
ended December 25, 2004, 2003 and 2002, respectively.
NOTE 18. RETIREMENT PLAN
As stipulated by the regulations of the PRC government, companies of the Company
operating in the PRC have defined contribution retirement plans for their
employees. The PRC government is responsible for the pension liability to these
retired employees. Commencing January 1, 2002, the Company was required to make
specified contributions to the state-sponsored retirement plan at 20% of the
basic salary cost of their staff. Each of the employees of the PRC subsidiaries
is required to contribute 6% of his/her basic salary. For the year ended
December 25, 2004, 2003 and 2002, contributions made by the Company were
approximately $122, $151 and $97, respectively.
NOTE 19. OTHER INCOME
Other income consists primarily of VAT tax credits of approximately 1478, 699
and 0 for the years ended December 25, 2004, 2003 and 2002, respectively.
F-18