UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of earliest event reported: July 31, 2006
NEW FIBER CLOTH TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Charter)
Nevada 000-30021 84-1492104
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
PO Box 461029, Glendale, CO 80246
(Address of Principal Executive Offices) (Zip Code)
(303) 394-1187
(Registrant's Telephone Number, including Area Code)
PARK HILL CAPITAL III CORP.
(Former name or address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of
the following provisions (see General Instruction A.2 below):
[ ] Written communications pursuant to Rule 415 under the Securities Act
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this Form 8-K/A-1 Current Report which are not purely
historical are forward-looking statements with respect to our goals, plan
objectives, intentions, expectations, financial condition, results of
operations, future performance and business, including, without limitation,
(i) our ability to raise capital, and (ii) statements preceded by, followed by
or that include the words "may," "would," "could," "should," "expects,"
"projects," "anticipates," "believes," "estimates," "plans," "intends,"
"targets" or similar expressions.
Forward-looking statements involve inherent risks and
uncertainties, and important factors (many of which are beyond our Company's
control) that could cause actual results to differ materially from those set
forth in the forward-looking statements, including the following, general
economic or industry conditions, nationally and/or in the communities in which
we conduct business, changes in the interest rate environment, legislation or
regulatory requirements, conditions of the securities markets, our ability to
raise capital, changes in accounting principles, policies or guidelines,
financial or political instability, acts of war or terrorism, other economic,
competitive, governmental, regulatory and technical factors affecting our
operations, products, services and prices.
Accordingly, results actually achieved may differ materially from
expected results in these statements. Forward-looking statements speak only
as of the date they are made. We do not undertake, and specifically
disclaim, any obligation to update any forward-looking statements to reflect
events or circumstances occurring after the date of such statements.
Item 1.01. Entry into a Material Definitive Agreement.
Share Exchange Agreement
Effective January 26, 2006, Park Hill Capital III Corp. (the
"Registrant," "Park Hill," the "Company," "we," "our," "us" and words of
similar import), Deborah A. Salerno, Frank L. Kramer, John P. O'Shea (the
"Park Hill Controlling Shareholders"), Polara Global Limited, a British Virgin
Islands international business company ("Polara"), each of the Polara Global
Limited shareholders (the "Polara Global Limited Shareholders"), and WuJiang
DeYi Fashions Clothes Company Limited, a People's Republic of China limited
liability company ("DeYi") entered into a Share Exchange Agreement (the "Share
Exchange Agreement" or the "Agreement") pursuant to which the Registrant
agreed to acquire all of the outstanding capital stock and other equity
interests of Polara Global Limited from the Polar Global Limited Shareholders
by issuing 73,834,000 shares of the Registrant's common stock (the "Exchange
Shares") as consideration on the terms and subject to the conditions set forth
in the Share Exchange Agreement (the "Share Exchange"). The Registrant filed
a current report on Form 8-K on February 1, 2006, describing the material
terms of the Agreement. On July 31, 2006, the Registrant closed the Share
Exchange and the name of the Registrant is changed to New Fiber Cloth
Technology, Inc.
Pursuant to the Agreement, the Registrant issued to each of the Polara
Global Limited Shareholders and/or their designees an aggregate of 73,834,000
issued shares of our Common Stock or 1476.68 shares of our Common Stock for
each share of Polara Common Stock held by such Polara Global Limited
Shareholder. This aggregate of 73,834,000 issued shares of our Common Stock
constitutes ninety-five percent (95%) of our total issued and outstanding
Common Stock, the total being 77,720,000 shares.
Upon the consummation of the Share Exchange, Polara became our wholly-
owned subsidiary. Polara owns 100% of the membership interests of DeYi.
DeYi, organized in 2000, is a textile manufacturing company located in the
People's Republic of China. DeYi manufactures a variety of products using
polyester, cotton, nylon viscose, acetate, cupro and other materials.
The consummation of the Share Exchange was subject to certain terms and
conditions customary for transactions of this type. In addition, pursuant to
the terms of the Share Exchange Agreement, each party had agreed to indemnify
the other for an agreed upon period following the closing for losses arising
from, among other things, such party's breach of its representations,
warranties or covenants under the Agreement and certain other matters, subject
to limitation in accordance with an agreed upon deductible and cap on
indemnifiable losses. Prior to the closing, the Agreement required, among
other things, that we change our name to New Fiber Cloth Technology, Inc. and
effectuate an increase in the authorized number of shares of Park Hill Common
Stock from 25,000,000 to 200,000,000.
Escrow Agreement
Under the terms of the Share Exchange Agreement, we, the Park Hill
Controlling Shareholders, Polara and an escrow agent were required to enter
into an escrow agreement under which the Park Hill Controlling Shareholders
were required to place 2,379,184 shares of our common stock into escrow to
satisfy certain obligations under the Share Exchange Agreement.
In connection with the closing of the Share Exchange, we, the Park Hill
Controlling Shareholders, Polara and Vincent Lin, Esq. as "Escrow Agent,"
entered into an escrow agreement dated July 31, 2006. The parties agreed that
Park Hill Controlling Shareholders place an aggregate of 2,379,184 of the our
shares (the "Escrow Shares") in escrow with an escrow agent. While the shares
are in escrow, the shareholders of Park Hill who delivered the Escrow Shares
will have a right to vote the Escrow Shares and will also have a right to any
and all dividends paid to the holders of our Common Stock.
If we consummate a Private Placement Offering of our securities (post
Share Exchange) in which we raise not less than $5,000,000 (the "Financing")
within 120 days of the closing of the Share Exchange (subject to extension as
provided in the Agreement) (the "Escrow Term"), the escrow agent, at the end
of the Financing, shall deliver the Escrow Shares to Park Hill Controlling
Shareholders and/or other shareholders who delivered the Escrow Shares to the
escrow agent. In this event, the Park Hill Controlling Shareholders and/or
our other shareholders holding 3,886,000 shares of our Common Stock will own
five percent (5%) of Park Hill and the Polara Global Limited Shareholders
holding 73,834,000 shares of our Common Stock will own ninety-five percent
(95%) of Park Hill.
However, in the event that the Financing is not consummated in the
amount of not less than $5,000,000 during the Escrow Term, the escrow agent
shall deliver the Escrow Shares to us and the Escrow Shares shall be cancelled
on our stock transfer records. The Park Hill Controlling Shareholders and/or
our other shareholders will then own 1,506,816 shares of our Common Stock or
two percent (2%) of the issued and outstanding shares of our Common Stock.
Pursuant to the terms of the Agreement, our previous officers and
directors resigned on the closing date and were replaced by officers and
directors named by Polara.
Item 2.01. Completion of Acquisition or Disposition of Assets.
See item 1.01 above
Item 5.01. Changes in Control of Registrant.
See Items 1.01 and 2.01 above.
The source of the consideration used by the Polara Global Limited
Shareholders to acquire their interests in our Company was the exchange of
their respective Polara Common Stock as outlined above. Pursuant to the
Agreement and by virtue of the percentage of our Common Stock acquired under
the Agreement by the Polara Global Limited Shareholders, this Share Exchange
is deemed to have involved a "change of control" of our Company.
To the knowledge of our management and based upon a review of the stock
ledger maintained by our transfer agent and registrar, the following table
sets forth the beneficial ownership of persons who owned more than five
percent of our Common Stock prior to the closing of the Share Exchange, and
the share holdings of the then members of our management, such computations
being based upon the 3,886,000 shares of our Common Stock that were then
outstanding:
Name Positions Held Shares Owned Percentage
John P. O'Shea 1,000,000 30.16%
Deborah A. Salerno Director/President 1,000,000 30.16%
Frank L. Kramer Director/Secretary/Treasurer 1,150,000 34.68%
To the knowledge of our management and based upon a review of the stock
ledger maintained by our transfer agent and registrar, the following table
sets forth the beneficial ownership of persons who owned more than five
percent of our Common Stock following the closing of the Share Exchange, and
the share holdings of the new members of our management, such computations
being based upon the 77,720,000 shares of our Common Stock that are or will be
outstanding following the closing of the Share Exchange:
Shareholder
Shareholder Positions Held Shares Held in Polara Park Hill Percentage of
Name Prior to Share Exchange Shares Owned Park Hill
Yao DeRong Chief Executive 15,000 22,150,200 28.50%
Officer/Chairman
of the Board
Itochu Director/ 12,200 18,015,496 23.18%
Textile Shareholder
Materials
(Asia)
Limited
Yao YunZhen Management 4,000 5,906,720 7.6%
Yao YunHong Management 4,000 5,906,720 7.6%
Ren WeiRong Director/Secretary 4,000 5,906,720 7.6%
Tang ShengLi Management 4,000 5,906,720 7.6%
We have no knowledge of any arrangements, including any pledge by any
person of our securities, the operation of which may at a subsequent date
result in a change in our control.
DESCRIPTION OF BUSINESS, ORGANIZATION AND BUSINESS DEVELOPMENT
PARK HILL CAPITAL III CORP.
We were incorporated under the laws of the State of Nevada on March 2,
1999. Up until the Share Exchange, our only activities had been
organizational ones, directed at developing our business plan and raising the
initial capital for the Company. We had not commenced any commercial
operations, nor had we employed any full-time employees. We did not own any
real estate.
Our business plan prior to the Share Exchange was to seek, investigate,
and, if warranted, acquire one or more properties or businesses, and to pursue
other related activities intended to enhance shareholder value. Our search was
directed towards small and medium-sized enterprises which had a desire to
become public corporations and which were able to satisfy, or anticipate in
the reasonably near future being able to satisfy, the minimum asset
requirements in order to qualify shares for trading on NASDAQ or on an
exchange such as the American or Archipelago Stock Exchange.
Now that we have consummated the Share Exchange, we will be principally
engaged in the holding of investments. Our wholly owned subsidiary, Polara,
will in turn function as a holding company for DeYi, our operating arm, and
any other subsidiaries that we may later acquire.
Effect of Existing or Probable Governmental Laws and Regulations on Business
1. Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002 imposes a wide
variety of new regulatory requirements on publicly-held companies and their
insiders. Many of these requirements will affect us. For example:
- Our chief executive officer and chief financial officer must now
certify the accuracy of all of our periodic reports that contain financial
statements;
- Our periodic reports must disclose our conclusions about the
effectiveness of our disclosure controls and procedures; and
- We may not make any loan to any director or executive officer and we
may not materially modify any existing loans.
The Sarbanes-Oxley Act has required us to review our current procedures
and policies to determine whether they comply with the Act and the new
regulations promulgated thereunder. We will continue to monitor our
compliance with all future regulations that are adopted under the Sarbanes-
Oxley Act and will take whatever actions are necessary to ensure that we are
in compliance.
2. Reporting Obligations. Section 14(a) of the Exchange Act requires
all companies with securities registered pursuant to Section 12(g) of the
Exchange Act to comply with the rules and regulations of the Securities and
Exchange Commission regarding proxy solicitations, as outlined in Regulation
14A. Matters submitted to shareholders of our Company at a special or annual
meeting thereof or pursuant to a written consent will require our Company to
provide our shareholders with the information outlined in Schedules 14A or 14C
of Regulation 14; preliminary copies of this information must be submitted to
the Securities and Exchange Commission at least 10 days prior to the date that
definitive copies of this information are forwarded to our stockholders.
We are also required to file annual reports on Form 10-K and quarterly
reports on Form 10-Q with the Securities Exchange Commission, and will be
required to timely disclose certain material events (e.g., changes in
corporate control, acquisitions or dispositions of a significant amount of
assets other than in the ordinary course of business, and bankruptcy) in a
current report on Form 8-K.
3. Regulation of Penny Stocks. Our securities, when available for
trading, will be subject to a Securities and Exchange Commission rule that
imposes special sales practice requirements upon broker-dealers who sell such
securities to persons other than established customers or accredited
investors. For purposes of the rule, the phrase "accredited investors" means,
in general terms, institutions with assets in excess of $5,000,000, or
individuals having a net worth in excess of $1,000,000 or having an annual
income that exceeds $200,000 (or that, when combined with a spouse's income,
exceeds $300,000).
For transactions covered by the rule, the broker-dealer must make a
special suitability determination for the purchaser and receive the
purchaser's written agreement to the transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to sell our
securities and also may affect the ability of our Shareholders to sell their
securities in any market that might develop therefrom.
In addition, the Securities and Exchange Commission has adopted a number
of rules to regulate "penny stocks." Such rules include Rules 3a51-1, 15g-1,
15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities
Exchange Act of 1934, as amended. Because our securities may constitute
"penny stocks" within the meaning of the rules, the rules may apply to us and
our securities. The rules may further affect the ability of our Shareholders
to sell their Shares in any market that might develop for those securities.
Shareholders should be aware that, according to Securities and Exchange
Commission, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include (i) control of the market
for the security by one or a few broker-dealers that are often related to the
promoter or issuer; (ii) manipulation of prices through prearranged matching
of purchases and sales and false and misleading press releases; (iii) "boiler
room" practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and undisclosed
bid-ask differentials and markups by selling broker-dealers; and (v) the
wholesale dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, along with the resulting
inevitable collapse of those prices and with consequent investor losses. Our
management is aware of the abuses that have occurred historically in the penny
stock market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our securities.
POLARA GLOBAL LIMITED
Polara was incorporated in the British Virgin Islands on August 29, 2001
under the International Business Companies Act, British Virgin Islands. Prior
to the Share Exchange, Polara functioned as the holding company for the
membership interests in DeYi. Polara will still principally function as a
holding company for 100% of the membership interests in DeYi now that the
Share Exchange has been consummated.
To the knowledge of our management and based upon a review of the stock
ledger maintained by our transfer agent and registrar, the following table
sets forth the beneficial ownership of persons who owned Polara Common Stock
before the closing of the Share Exchange, such computations being based upon
the 50,000 shares of Polara Common Stock:
Name Shares Owned Percentage of Polara Common Stock
Yao DeRong 15,000 30.00%
Itochu Textile Materials (Asia)
Limited 12,200 24.40%
Yao YunZhen 4,000 8.00%
Yao YunHong 4,000 8.00%
Ren WeiRong 4,000 8.00%
Tang ShengLi 4,000 8.00%
Realty Century Management Ltd 1,000 2.00%
Good Result Investment Co. Ltd 1,000 2.00%
Ye GenZhen 1,000 2.00%
Gain For Success Enterprises Ltd 1,000 2.00%
Sheng MeiZhen 1,000 2.00%
Ma Binliang 900 1.80%
Ma Wenying 900 1.80%
WUJIANG DEYI
DeYi, a People's Republic of China ("China") textile company, with its
headquarters located in Wujiang City, Jiangsu Province, is principally engaged
in the manufacture and sale of finished fabrics targeted for sale towards the
middle to high-end overseas (including the United States, Europe, Hong Kong,
Japan and the Middle East) and Chinese markets. The company's products are
used for manufacturing men's and women's fashions (including outer garments,
eider down wear, trousers, windbreakers, multi-functional clothes and jackets
and sleepwear).
DeYi was founded by Yao DeRong in 2000 with the financial support from
Itochu Corporation ("Itochu"), a multinational conglomerate headquartered in
Osaka, Japan. Itochu has been ranked by Forbes Magazine as the 18th largest
corporation in the world, with more than 180 offices and almost 1,000
subsidiaries or associated companies in over 80 countries. Itochu's
operations cover a broad spectrum of industries ranging from textiles,
automobile and industrial machinery, aerospace, information technology,
electronics, multimedia, metals & minerals, energy and chemical, food, forest
products, general merchandise, finance, realty, insurance and logistics
services.
Polara, which is now wholly owned by us, holds one hundred percent
(100%) of DeYi. Itochu Textile Materials (Asia) Limited ("Itochu Asia") held
5,000 shares of Polara Common Stock prior to our Stock Exchange and currently
holds 7,383,400 shares of our Common Stock. Although Itochu Asia will not be
involved in the active management of DeYi, it has acted as a consultant for
DeYi in the past. Moreover, Itochu is one of DeYi's largest customers and
also provides raw material in relation to production of cuprammonium fabrics
to DeYi.
In addition to manufacturing and selling finished woven fabrics, DeYi
provides fabric-processing services to Chinese garment manufacturers. DeYi's
production processes and capabilities include research and development,
weaving, dyeing and setting, cloth finishing and calendaring. DeYi's range of
processing capabilities allows the company to meet customer specifications and
requirements with a wide variety of finished woven fabrics.
DeYi has an established and diversified network of customers within
China. Additionally, DeYi has successfully penetrated the United States,
Europe, Hong Kong and Japan markets, and has also established business
relationships with high profile clientele in those markets. With the
assistance of Itochu, DeYi successfully became the exclusive manufacturer of
cuprammonium fabric for Asahi Kasei Corporation, Japan.
DeYi maintains stringent and comprehensive quality control procedures
throughout the production process, from the purchase of superior raw materials
through product packaging. The following certifications, awards and
accreditations have been obtained by Deyi since its incorporation:
Accreditation Organization Date
ISO 9001/ANSI/ASQ Q9001 SGS International Certificate Services, Inc. 9/2002
ISO 14001:1996 SGS International Certificate Services, Inc. 3/2003
Quality Management China Light Industry Products Quality
Trustworthy Enterprise Guarantee Center (CQGC) 1/2004
Confidence in textiles Zurich Institute of the International 3/2004
certificate (Oeko-Tex Association for Research and Testing in the
Standard 100)- Fabrics Field of Textile Ecology
made of 100% polyester
and polyester/cotton,
mixtures, dyed, printed
and finished.
Confidence in textiles Zurich Institute of the International 3/2004
certificate (Oeko-Tex Association for Research and Testing in the
Standard 100)- Woven Field of Textile Ecology
fabrics made of 100%
cotton, dyed in a
limited range of 12
dyestuffs (excluding
the color black) and
finished.
Product Award Organization Date of award
Deyi fashion cloths Golden award China International Patent & 8/2003
Brand Expo
Deyi cloths - Famous brand Su Zhou Famous Brand Cognizance 12/2003
cuprammonium fabric certificate Committee
Suzhou
Deyi fashion cloths Quality China Light Industry Products 1/2004
assurance Quality Guarantee Center (CQGC)
certificate
Deyi fashion cloths Golden award China International Patent & 5/2004
Brand Expo
Deyi cloths - Hi-tech Science and Technology Bureau, 12/2005
cuprammonium fabric product award Jiangsu Province, China
Award Organization Date of award
Enterprise with good China Light Industry Products Quality 1/2004
quality management Assurance Centre
and reputation
Grade A Contract- People's Government of Wu Jiang City 2004
abiding Trustworthy
Enterprise
Top 100 Focal People's Government of Wu Jiang City 2/2005
Enterprise in Wu Jiang
City in 2004
DeYi currently owns one production plant. Its production plant in
Wujian, Suzhou has a gross floor area of 30,127 square meters and is operated
by three shifts for 24 hours per day, almost 350 days a year. DeYi is
currently in the process of expanding the production plant from one to three
storeys and once this expansion is completed in August 2006, the gross floor
area will increase by 10,000 square meters. A summary of the actual annual
production of this plant and the estimated maximum annual production after
completion of the plant's expansion follows:
Product type Actual annual Manimum annual
production in 2005 production after
completion of expansion
Cotton and Linen 420,000 meters 16,000,000 meters
Synthetic Fiber 73,000,000 meters 75,000,000 meters
Regenerated Cellulosic Fiber 600,000 meters 45,500,000 meters
DuPont Fire-Resistant Fabric
(Nomex) -
(production is made at the request of DuPont
only)
Throughout the production process, computerized machinery is used to
optimize productivity and to ensure product quality. Notwithstanding the
shortage of energy (electrical and thermal) supply in China, DeYi's production
plant has not been affected because it is located next to Yi Long Electrical
and Thermal Power Factory, which provides continuous supply of electrical and
thermal power to DeYi. The plant has never experienced any shortage of power
in the past.
DeYi also currently leases a dyeing plant, together with the machineries
therein. The production capacity of this leased production plant is forty
percent (40%) of the production plant owned by DeYi.
The major production machines used by DeYi are:
Machine Type Acquired Acquired Total number of
overseas in China machines
Flow-form dyeing machine 4 96 100
Stenter heat setting machine 5 4 9
Alkali peeling machine 0 8 8
Handle modifying machine 1 0 1
Air blowing sand washer 1 0 1
Jig dyeing machine 0 4 4
Color measuring and matching
machine 2 0 2
Automatic powder weighing system 2 0 2
Uniform squeezer 1 0 1
New products research and
development machines 0 15 15
Brushes for woven fabric
treatment machine 1 0 1
Specialized dyeing machine 1 0 1
Dryer machine 1 - 1
Combined dyeing machine 1 - 1
Shining machine 1 - 1
DeYi's Business Development
DeYi's long-term goal is to become an internationally recognized high
quality fashion cloths manufacturer. DeYi's plans for continued business
development involved the following:
Expansion of production capacity
DeYi intends to expand its production capacity through the leasing of
existing printing and dyeing plants and/or through the purchase of
computerised printing and dyeing machinery and equipment. DeYi will also
increase its purchase of raw materials to cope with its expanding production
facilities.
Vertical integration
To ensure the quality of DeYi's products and to adapt and respond to the
market in a timely manner, DeYi plans to vertically integrate by establishing
a fabrics manufacturing plant for the production of high quality raw fabrics
for its own use on 123 acres of land. Initial approval has been obtained from
the local government for the acquisition of this land but the sale of this
piece of real property has not been finalized. By vertically integrating,
DeYi hopes to realize higher profit margins and increase competitiveness.
Expansion of product range and enhancement in products quality
DeYi plans to widen its range of products and enhance the quality of its
products by focusing on research and development. DeYi intends to continue
its work with international industry experts while also seeking to work with
research professionals and academics in the textile industry in order to
invent new products and improve existing products and production processes.
Market expansion
DeYi also plans to extend its geographical coverage by: (1) expanding
markets in Asia, Europe and North America and opening up new markets in the
Southern hemisphere and the Middle East; (2) continuing to attend
international industry trade fairs; and (3) increasing the number of sale
offices in China and other geographic locations. DeYi intends to strengthen
its marketing force by providing further training to its staff and by hiring
additional experienced sales personnel.
DeYi's Intellectual Property Rights
DeYi owns or is in the process of acquiring the following intellectual
property rights:
Trademark Country of Class Registration Expiration date
registration Number
DEYI China 24 1810477 July 20, 2012
Dorita Italy - 0 February 9, 2015
Patent type and description Application date
Post-processing techniques in respect of regenerated
cellulosic cupro fibers August 2005
Dyeing and post-processing techniques for Nomex fibers August 2005
Competitive Business Conditions
The textile industry is highly competitive. Our competitors include
both domestic and foreign companies, a number of which are larger in size,
have significantly greater financial resources and, in the case of some
competitors, lower labor costs than we do. Competition in the form of imported
textile and apparel products, pricing strategies of domestic competitors and
the proliferation of newly styled fabrics competing for fashion acceptance
affect our business environment. The primary competitive factors in the
textile industry include price, product styling and differentiation, quality,
flexibility of production and finishing, delivery time and customer service.
The needs of particular customers and the characteristics of particular
products determine the importance of these factors. To the extent that one or
more of our competitors gains an advantage with respect to any key competitive
factor, our business could be materially adversely affected.
Notwithstanding this competition, DeYi's established reputation in the
fabric manufacturing and processing industry, as well as its close
relationship with Itochu and its customers allow DeYi to maintain its
competitiveness. Set out below are the names of a few of our customers:
Name or DeYi's direct and indirect customers
Dolce & Gabbana
DuPont
Nine West
NEXT
Tomen Corporation
Asahikasei
MARUBENI
Fubang Development (HK) Ltd
Kanematsu (Shanghai) Co. Ltd.
Camberley Enterprises Ltd
Tomen (Shanghai) Co., Ltd.
Sumikin Bussan Corporation - www.sumikinbussan.co.jp
Target Corporation
Beijing Garments Imp. & Exp.Corp. Inc.
Liz Claiborne International Ltd. - www.lizclaiborne.com
Sumitomo Corporation (Shanghai) Ltd
Lion Apparel
Quiksilver - www.quiksiver.com.cn
C & A
Redman S.R.L.
BEBE SPORT
REIMA
Cecile Co., Ltd.
Effect of Existing or Probable Governmental Laws and Regulations on Business
Environmental Regulations. Under the prevailing laws and regulations in
China, any enterprise that discharges sewage into water is required to
register with the relevant environmental protection authorities in regards to
the enterprise's sewage discharging facilities and sewage treatment
facilities, and is also required to provide information on sewage disposal and
the measures taken to prevent water pollution. Moreover, such an enterprise is
required to pay fees for the discharge of sewage into water. In cases where
the level of sewage exceeds the standard promulgated by the relevant
authorities, penalties are imposed.
Furthermore, new construction projects, expansion or reconstruction
projects that discharge pollutants into the air must comply with the
government's regulations on environmental protection for such projects.
Organizations that discharge pollutants into air must adhere to a reporting
requirement and must also pay a discharge fee. In cases where the level of
air pollution exceeds the standard promulgated by the relevant authorities,
penalties are imposed.
DeYi places significant emphasis on environmental protection. It
currently produces 4,000 tons of sewage per day which is processed by its
self-owned second level sewage treatment system, before the sewage is
transferred to the government operated Shengze Town composite sewage
processing plant for further processing.
Research and Development
DeYi has a research and development team of approximately 35 members.
Most employees of the research and development ("R&D") team have obtained
either diplomas or bachelor degrees and have years of experience in the
textile industry. The research and development team keeps abreast of the
latest market information through its sales network and develops products with
different texture and style to cater for the latest market trends. Apart from
developing new products, the R&D team also conduct research to improve the
quality and the production techniques of its existing products.
To strengthen its R&D capability, DeYi has since the second half of
2004 engaged Italian and Japanese industry experts as its consultants. It also
cooperates with China Textile Technology Institute and Shanghai Donghua
University, both in China, for the development of new products, and
improvement of product quality.
After years' efforts, DeYi's R&D team successfully invented two post-
processing techniques, the details of which are set out in the section headed
"DeYi's Intellectual Property Rights" of this Form.
Raw Materials
Raw materials used by us comprise principally various types of yarns,
raw fabrics, dyeing chemicals and fabrics processing chemicals. Except raw
fabrics, dyeing chemicals and fabrics processing chemicals for the production
of cuprammonium fabrics, which are acquired from Itochu, and raw materials for
production of viscose lining, which are supplied by ENKA in Germany, raw
materials are acquired in the PRC.
Before placing a purchase order for raw materials, we select suppliers
on the basis of price quotation and quality of the raw materials. Save for the
specialized materials supplied by Itochu and ENKA, all raw materials used in
the Group's production are readily available in the market. To maintain
flexibility in obtaining raw materials of good quality at a competitive price,
we have not entered into long-term supply contracts with its suppliers.
However, we have not experienced any difficulties in the sourcing of raw
materials or any shortage of raw materials that have affected its production
materially.
DeYi generally commences production after receiving a sales order. Raw
materials will then be purchased from suppliers. In order to satisfy urgent
orders from customers, it keeps stocks of popular products and raw materials.
Marketing and Distribution
The Group has sales offices in Shanghai, Beijing and Guangzhou with
approximately 20 employees. They are responsible for (i) promoting the Group's
products; (ii) soliciting purchase orders from customers; and (iii) liaising
with customers to ensure our ability to meet the latest market needs. Regular
visits and telephone communications are made to its customers. Business
meetings with major customers are held frequently in order to formulate the
production and sales plan.
The Group also participates in international fabric shows organized by
Interstoff (www.interstoff.com) held in Paris, Shanghai and Hong Kong on a
regular basis to promote its products and obtain purchase orders.
Advertisements are also placed in textile industry websites and in the form of
outdoor billboards.
DeYi owns an export right but its export sales are mainly conducted
and settled through an import and export company located in Nanjing since this
arrangement allows DeYi to get instant tax rebate.
Employees and Labor Relations
As of July 31, 2006, we have approximately 550 employees, all of them
are full-time staff working in the following departments:
Position Number of employees
Management 40
Technical and research and development staff (including engineers) 30
Sales and marketing 30
Production 450
---
550
===
DeYi's employees are members of a union, which is responsible for
negotiating with DeYi terms of employment and compensation benefits of its
members. DeYi has not experienced any difficulties with the union in the
past. DeYi is subject to certain national and local safety and health,
employment and environmental laws, regulations and ordinances that apply to
manufacturing businesses generally. It provide dormitory to those employees
who are willing to stay in such dormitory. DeYi pays approximately 2% of the
worker's monthly wage for social security (including but not limited to health
and retirement benefits). We have not made, and do not anticipate making
material expenditures with respect to such regulations.
We believe that DeYi has a good relationship with all of its employees.
RISK FACTORS
You should carefully consider the risks and uncertainties described
below before deciding whether to invest in shares of our Common Stock. Our
failure to successfully address the risks and uncertainties described below
would have a material adverse effect on our business, financial condition
and/or results of operations, and the trading price of our Common Stock may
decline and you may lose all or part of your investment. We cannot assure you
that we will successfully address these risks or other unknown risks that may
affect our business.
Risks Related to Business
Fluctuations in the price of raw materials or shortages of supply could
adversely affect our business.
Although we have not experienced any significant price fluctuations for
our major raw materials in the past, there is no assurance that such major raw
materials will be supplied in an adequate quantity to meet our production
needs or that they will not be subject to significant price fluctuations in
the future. The market prices of such raw materials may experience significant
upward adjustment if, for instance, there is a material shortage of these
materials in the market.
We have a limited operating history.
We have a limited operating history. DeYi was founded in 2000.
Although DeYi has been operating at a profit, there can be no assurance that
we will be able to continue to meet our business objectives, or that we will
continue to operate at a profit. Furthermore, as a holding company, we have
significant limitations on access to cash flow from our holding of Polara,
which in turn holds DeYi. We are a holding company that has no significant
business operations or assets other than our interest in Polara. Accordingly,
we must rely entirely upon distributions of DeYi and then Polara to generate
the funds necessary to meet our obligations and other cash flow needs,
including funds necessary for our working capital and compliance fees. Each of
DeYi and Polara is a separate and distinct legal entity that has no contingent
or other obligation to make any funds available to us, whether by dividends,
loans or other payments. Any failure to receive distributions from Polara or
DeYi would restrict our ability to pay dividends on our shares, prevent us
from having the funds necessary to operate as a public company, and could
otherwise have an adverse effect on our operations.
One stockholder's immediate family has majority control over our Company's
voting stock, which will allow him to influence the outcome of matters
submitted to stockholders for approval.
Upon the Share Exchange, Yao DeRong, our Chairman of the Board,
controlled approximately 30.40% of the combined voting power of our Common
Stock. Yao DeRong's immediate family, including Ren WeiRong, son-in-law, Tang
ShengLi, son-in-law, Yao YunZhen, daughter, and Yao YunHong, daughter,
together own approximately 58.90% of our issued Common Stock. As a result, Mr.
Yao DeRong can exercise substantial influence over our affairs and outcome of
matters submitted to stockholders for approval.
We rely on skilled labor.
Our production process relies, to a certain extent, on skilled labor.
This skilled staff may only give short-term notice when they decide to leave
us. If we fail to recruit suitable replacement staff in a timely manner, this
may have an adverse impact on our production process.
We rely on key management and officers.
Our success is dependent upon the talents and efforts of a small
number of key management personnel including Yao DeRong, our Chairman, Rei
WeiRong, our Assistant General Manger, and Parker Seto, our Chief Financial
Controller. The loss of such management personnel could have an adverse
effect on our business.
We rely on production facilities in China.
All of our production facilities are located in China. Any significant
interruption of production in these facilities arising from a change in
government regulations, a breakdown in production lines, an interruption to
the supply of electricity or water, any fires, or other accidents and
calamities will have an adverse impact on our business.
Our industry is highly competitive and our success depends on our ability to
compete effectively.
The textile industry is highly competitive. Our competitors include
both domestic and foreign companies, a number of which are larger in size,
have significantly greater financial resources and, in the case of some
competitors, lower labor costs than we do. Competition in the form of imported
textile and apparel products, pricing strategies of domestic competitors and
the proliferation of newly styled fabrics competing for fashion acceptance
affect our business environment. The primary competitive factors in the
textile industry include price, product styling and differentiation, quality,
flexibility of production and finishing, delivery time and customer service.
The needs of particular customers and the characteristics of particular
products determine the importance of these factors. To the extent that one or
more of our competitors gains an advantage with respect to any key competitive
factor, our business could be materially adversely affected.
We have several customers that account for a large portion of our net sales.
The loss of, or significant decline in our sales to, any of our large
customers could adversely affect our business.
We do not operate under a long-term supply contract with any of our
customers. The loss of any of our large customers could have a material
adverse effect on our net sales.
If we are unable to fund our capital expenditure requirements, we may fail to
remain competitive.
The textile manufacturing industry is capital intensive. Accordingly,
to maintain our competitive position, we must continually modernize our
manufacturing processes, plants and equipment. We expect to invest
approximately $5 million during the next few years in capital improvements
designed to:
* properly maintain our facilities;
* reduce manufacturing costs;
* expand manufacturing capacity;
* enhance manufacturing flexibility; and
* improve product quality and responsiveness to customers.
We expect to finance our capital improvements with cash from our Private
Placement Offering. To the extent these sources of funds are insufficient to
meet our ongoing capital improvement requirements, we would need to seek
alternative sources of financing or curtail or delay capital spending plans.
We cannot guarantee that we can obtain financing when needed or on terms
acceptable to us. If we fail to make capital improvements necessary to
continue modernizing our manufacturing operations and reduce costs, our
competitive position may suffer.
If we fail to identify fashion trends, we could lose market position and our
financial performance could be negatively impacted.
The success of many of our products depends upon early identification
of consumer preferences for fabric designs, colors and styles. A failure on
our part to identify fashion trends in time to introduce products and fabrics
consistent with those trends could have an adverse effect on acceptance of our
products by consumers and a corresponding adverse effect on our results of
operations due to costs associated with failed product introductions and
reduced sales.
Infringement of our trademark may adversely affect us.
Our operating arm, DeYi, uses certain trademarks to market and sell its
products. Trademark infringement in China is a significant problem and
concern for us. Although there are indications that the Chinese government has
been tightening its control over intellectual property rights infringement in
its major cities and although we are not aware of any material infringement of
DeYi's trademarks, any significant or uncontrolled infringement could have a
material adverse effect on our reputation and on our business and operating
results.
The war in Iraq and any future armed conflict or terrorist activities may
adversely affect the U.S. economy and our business.
The U.S. and other countries have been engaged in a war in Iraq. The
military action in Iraq could escalate geographically or prompt terrorist
attacks against the U.S. or other countries. The war in Iraq and any future
armed conflict or terrorist activities in the U.S. or abroad and any
consequent actions on the part of the U.S. government and others, including
further military action, may adversely affect general economic conditions in
the U.S. and other countries. Further deterioration of prevailing economic
conditions in the U.S. could reduce demand for our products.
Risks Related to China
Our business is subject to significant political and economic uncertainties
and may be adversely affected by political, economic and social developments
in China.
Over the past several years, the Chinese government has pursued
economic reform policies including the encouragement of private economic
activity and greater economic decentralization. The Chinese government may not
continue to pursue these policies or may significantly alter them to our
detriment from time to time with little, if any, prior notice. Changes in
China's policies, laws and regulations or in its interpretation or its
imposition of confiscatory taxation, restrictions on currency conversion,
restrictions or prohibitions on dividend payments to stockholders,
devaluations of currency or the nationalization or other expropriation of
private enterprises could have a material adverse effect on our business.
Nationalization or expropriation could even result in the total loss of our
investment in China and in the total loss of your investment.
If relations between the United States and China worsen, our stock price may
decrease and we may have difficulty accessing U.S. capital markets.
At various times during recent years, the United States and China have
had significant disagreements over political and economic issues.
Controversies may arise in the future between these two countries. Any
political or trade controversies between the United States and China, whether
or not directly related to our business, could adversely affect the market
price of our Common Stock and our ability to access U.S. capital markets.
It may be difficult to serve us with legal process or enforce judgments
against our management or DeYi.
All or a substantial portion of our assets are located in China. In
addition, all of our directors and officers are non-residents of the United
States, and all or substantial portions of the assets of such non-residents
are located outside the United States. As a result, it may not be possible to
effect service of process within the United States upon such persons.
Moreover, there is doubt as to whether the courts of China would enforce:
* judgments of United States courts against us, our directors or our
officers based on the civil liability provisions of the securities
laws of the United States or any state; or
* in original actions brought in China, liabilities against non-
residents or us based upon the securities laws of the United
States or any state.
The Chinese government could change its policies toward private enterprise or
even nationalize or expropriate it, which could result in the total loss of
our investment in that country.
The Chinese legal system is not fully developed and has inherent uncertainties
that could limit the legal protections available to you.
The Chinese 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
Chinese 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 China to unify the
various economic contract laws into a single code, which went into effect on
October 1, 1999, and the Securities Law of China, 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 Chinese legal system develops, changes in
such laws and regulations, their interpretation or their enforcement may have
a material adverse effect on our business operations.
We may experience lengthy delays in resolution of legal disputes.
As China has not fully developed a dispute resolution mechanism similar
to the Western court system, dispute resolution with Chinese customers over
contracts can be difficult and there is no assurance that any dispute
involving our business in China can be resolved expeditiously and
satisfactorily.
Any adverse changes in China's tax legislation may effect our profitability.
Under the applicable tax laws, regulations and notices in China, DeYi
is subject to income taxation at a preferential rate of twenty-four percent
(24%). If there are any adverse changes in the regulatory regime of China's
tax legislation or if the tax provisions turn out to be inadequate to meet our
actual tax liabilities, our profitability may be adversely affected.
We rely, to a certain extent, on the Chinese market
Sales in China represent a significant portion of our Company's total
sales. Accordingly, any changes in China's demand for our products, as well
as any changes in China's economic, political and social conditions, legal and
regulatory requirements, and taxation treatment will impact us. There is no
assurance that such changes will not affect our performance and the
profitability of our Company.
Currency conversion in China and fluctuations in exchange rates pose a risk to
our business.
We currently receive a substantial amount of our revenue and make
substantially all of our payments in RMB. The existing foreign exchange
regulations have significantly reduced foreign exchange controls of
transactions, including trade and service related foreign exchange
transactions and payment of dividends. Although the Chinese government has
publicly stated that it intends to make the RMB freely convertible in the
future, we cannot predict whether the Chinese government will continue its
existing foreign exchange policy or when the Chinese government will allow
free conversion of RMB to foreign currencies. Additionally, foreign exchange
transactions continue to be subject to foreign exchange controls and require
the prior approvals of the State Administration of Foreign Exchange of China.
Since 1994, the conversion of RMB into USD has been based on the exchange
rates published by the People's Bank of China from time to time. Fluctuation
in exchange rates may adversely affect the value, translated or converted into
USD, of our net assets, earnings and financial position.
We may be adversely affected by changes in China's legal, political, economic,
and social landscape.
Since 1978, the Chinese government has been undergoing a series of
political and economic reforms. Such reforms have resulted in significant
economic growth and social progress and many of the reforms are expected to be
refined and improved. In the past 20 years, the Chinese government has
implemented economic reforms for the purpose of transforming China from a
planned economy to a market economy with socialist characteristics. These
reforms have resulted in a more significant role played by market forces in
the allocation of resources, and enterprises have been given greater autonomy
in their operations. However, many of the regulations implemented by the
Chinese government are still in their initial stages of development and may be
subject to further refinement and revision aimed at optimizing the overall
economic system of China. Other political and social factors may also lead to
further readjustment and refinement of reform measures. Therefore, there can
be no assurance that such economic, political or social reforms will have a
favorable effect on our operations. Moreover, changes in China's legal,
political, economic and social landscape may have an adverse effect on us.
We must comply with numerous environmental laws and regulations, which could
involve substantial costs. If we fail to comply, we may have to pay large
penalties.
China has been tightening its environmental regulations. As a result
of China's admission to the WTO, it is possible that China will adopt
increasingly stringent environmental regulations to keep in line with other
developed countries. We must comply with various laws and regulations
limiting, among other things, the discharge of pollutants and the storage,
handling and disposal of a variety of substances, including some substances
that contain constituents considered hazardous under environmental laws. Our
dyeing and finishing operations result in the discharge of substantial
quantities of wastewater and emissions to the atmosphere. We have never
breached the relevant environmental protection laws and regulations since
DeYi's establishment. However, there is no assurance that we would be able to
comply with the relevant regulations should the Chinese government impose
stricter environmental protection standards and regulations in the future. We
cannot assure you that our environmental liabilities and costs will not
increase materially in the future and have a material adverse effect on our
cash flow.
China's Admission into the WTO may make it difficult for our products to
compete effectively against overseas competitors.
China became a member of the WTO on December 11, 2001. After the
Agreement on Textiles and Clothing (ATC) expired on January 1, 2005, all
quotas on textiles and clothing imposed on members of the WTO have been
abolished. The expiration of the ATC has attracted more overseas textile
manufacturers and producers to import into China and hence, has increased
competition from overseas competitors. This increase in competition has the
potential to adversely affect our business.
Future problems or strains in China's Trade Relations with the European Union
and the United States may impact our sales and profitability.
The increase in the number of imports from China has triggered recent
trade disputes between China and the European Union, and China and the U.S.
The disputes have resulted in calls by the textile and apparel producers in
Europe and the U.S. for the imposition of safeguard measures and new trade
barriers against China's textile industry. Under the global trade rules, the
European Union and the U.S. could restrict growth in Chinese imports to 7.5% a
year until 2008. The impact on China's textile industry under the proposed
investigations and re-imposition of quotas by the European Union and the U.S.
is still uncertain. The possible imposition of additional safeguard measures
and quotas towards the Chinese textile industry may have an adverse impact on
our sales and profitability.
Risks Related to Securities
New legislation, including the Sarbanes-Oxley Act of 2002, may make it
difficult for us to retain or attract officers and directors.
We may be unable to attract and retain qualified officers, directors and
members of board committees required to provide for our effective management
as a result of the recent and currently proposed changes in the rules and
regulations which govern publicly-held companies. Sarbanes-Oxley Act of 2002
has resulted in a series of rules and regulations by the Securities and
Exchange Commission that increase responsibilities and liabilities of
directors and executive officers. The perceived increased personal risk
associated with these recent changes may deter qualified individuals from
accepting these roles.
While we believe we have adequate internal control over financial reporting,
we are required to evaluate our internal controls under Section 404 of the
Sarbanes-Oxley Act of 2002. Any adverse results from such evaluation could
result in a loss of investor confidence in our financial reports and have an
adverse effect on the price of our shares of Common Stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we expect
that beginning with our annual report on Form 10-K for the fiscal year ended
December 31, 2006, we will be required to furnish a report by management on
our internal control over financial reporting. Such report will contain among
other matters, an assessment of the effectiveness of our internal control over
financial reporting, including a statement as to whether or not our internal
control over financial reporting is effective. This assessment must include
disclosure of any material weaknesses in our internal control over financial
reporting identified by our management. Such report must also contain a
statement that our auditors have issued an attestation report on our
management's assessment of such internal controls. Public Company Accounting
Oversight Board Auditing Standard No. 2 provides the professional standards
and related performance guidance for auditors to attest to, and report on, our
management's assessment of the effectiveness of internal control over
financial reporting under Section 404.
While we believe our internal control over financial reporting is
effective, we are still compiling the system and processing documentation and
performing the evaluation needed to comply with Section 404, which is both
costly and challenging. We cannot be certain that we will be able to complete
our evaluation, testing and any required remediation in a timely fashion.
During the evaluation and testing process, if we identify one or more material
weaknesses in our internal control over financial reporting, we will be unable
to assert that such internal control is effective. If we are unable to assert
that our internal control over financial reporting is effective as of December
31, 2006 (or if our auditors are unable to attest that our management's report
is fairly stated or they are unable to express an opinion on the effectiveness
of our internal controls), we could lose investor confidence in the accuracy
and completeness of our financial reports, which would have a material adverse
effect on our stock price.
Failure to comply with the new rules may make it more difficult for us
to obtain certain types of insurance, including director and officer liability
insurance, and we may be forced to accept reduced policy limits and coverage
and/or incur substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more difficult for us
to attract and retain qualified persons to serve on our board of directors, on
committees of our board of directors, or as executive officers.
You may lose your entire investment in our shares.
An investment in our Common Stock is highly speculative and may result
in the loss of your entire investment. Only investors who are experienced
investors in high risk investments and who can afford to lose their entire
investment should consider an investment in us.
There is no trading market for our securities.
Our Common Stock is not quoted for trading on any stock exchange or the
National Association of Securities Dealers over-the-counter bulletin board,
and there is currently no trading market for our Common Stock. There can be no
assurance that an active market will develop or be sustained. The lack of an
active public market for our common stock could have a material adverse effect
on the price and liquidity of the common shares.
Our officers and directors beneficially own approximately 59.28% of our issued
and outstanding common stock, which may limit your ability to influence
corporate matters.
As of July 31, 2006, our other officers and directors, collectively, as
a group, beneficially owned 46,072,416 shares of our Common Stock
(approximately 59.28%). These shareholders could control the outcome of any
corporate transaction or other matter submitted to our shareholders for
approval, including mergers, consolidations and the sale of all or
substantially all of our assets, and also could prevent or cause a change in
control. The interests of these shareholders may conflict with the interests
of our other shareholders.
Third parties may be discouraged from making a tender offer or bid to
acquire us because of this concentration of ownership.
Broker-dealers may be discouraged from effecting transactions in our Common
Shares because they are considered a penny stock and are subject to the penny
stock rules.
Rules 15g-1 through 15g-9 promulgated under the Exchange Act impose
sales practice and disclosure requirements on certain brokers-dealers who
engage in certain transactions involving a "penny stock." Subject to certain
exceptions, a penny stock generally includes any non-NASDAQ equity security
that has a market price of less than $5.00 per share. Our shares are
considered penny stock. The additional sales practice and disclosure
requirements imposed upon brokers-dealers may discourage broker-dealers from
effecting transactions in our shares, which could severely limit the market
liquidity of the shares and impede the sale of our shares in the secondary
market.
A broker-dealer selling penny stock to anyone other than an established
customer or "accredited investor," generally, an individual with net worth in
excess of $1,000,000 or an annual income exceeding $200,000, or $300,000
together with his or her spouse, must make a special suitability determination
for the purchaser and must receive the purchaser's written consent to the
transaction prior to sale, unless the broker-dealer or the transaction is
otherwise exempt. In addition, the penny stock regulations require the broker-
dealer to deliver, prior to any transaction involving a penny stock, a
disclosure schedule prepared by the United States Securities and Exchange
Commission relating to the penny stock market, unless the broker-dealer or the
transaction is otherwise exempt. A broker-dealer is also required to disclose
commissions payable to the broker-dealer and the registered representative and
current quotations for the securities. Finally, a broker-dealer is required to
send monthly statements disclosing recent price information with respect to
the penny stock held in a customer's account and information with respect to
the limited market in penny stocks.
In the event that your investment in our shares is for the purpose of deriving
dividend income or in expectation of an increase in market price of our shares
from the declaration and payment of dividends, your investment will be
compromised because we do not intend to pay dividends.
We have never paid a dividend to our shareholders, and we intend to
retain our cash for the continued development of our business. We do not
intend to pay cash dividends on our Common Stock in the foreseeable future. As
a result, your return on investment will be solely determined by your ability
to sell your shares in a secondary market.
DESCRIPTION OF PROPERTY
DeYi currently owns one production plant that is located in Wujian,
Suzhou, China, with a gross floor area of 30,127 square meters, and leases
another production plant located in the same city. DeYi leases its second
production facility in Wujian from Wujian De Long Clothing Materials Co.,
Ltd., a company entirely owned by our Chief Executive Officer and principal
shareholder Yao, DeRong. Pursuant to the terms of the land lease agreement
dated September 14, 2000, the 21,298.20 square meters land use right was
leased to DeYi for a period of 50 years in consideration of RMB $30,315.18
rent per year. DeYi also leases sales offices in Shanghai, Beijing and
Guangzhou.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth information as of July 31, 2006 regarding
the ownership of our Common Stock by:
* each person who is known by us to own more than 5% of our shares of
common stock; and
* each named executive officer, each director and all of our directors
and executive officers as a group.
The number of shares beneficially owned and the percentage of shares
beneficially owned are based on 77,720,000 shares of Common Stock outstanding
as of July 31, 2006.
Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. Shares subject to
options that are exercisable within 60 days following July 31, 2006 are deemed
to be outstanding and beneficially owned by the optionee for the purpose of
computing share and percentage ownership of that optionee but are not deemed
to be outstanding for the purpose of computing the percentage ownership of any
other person. Except as indicated in the footnotes to this table, and as
affected by applicable community property laws, all persons listed have sole
voting and investment power for all shares shown as beneficially owned by
them.
Officers, Directors and Principal Stockholders
Name and Address Prior to Share Exchange After giving effect to the
Share Exchange
Name/Position Address Number of Percentage Number of Percentage
Shares(1)(2) of issued shares (1)(3) of issued
and and
outstanding outstanding
Yao DeRong Shengze Town, -- -- 22,150,200 28.50 %
Wujiang City
Jiangsu Province,
Chief Executive 215228, China
Office
Chairman of
the Board
Itochu Textile Suites 2304-6
Materials (Asia)the Gateway
Limited Tower 2, 25-27
Canton Road,
Director Tsimshatsui,
Shareholder Kowloon,
Hong Kong -- -- 18,015,496 23.18 %
Shareholder
Ren WeiRong Shengze Town, -- -- 5,906,720 7.6 %
Director Wujiang City
Secretary Jiangsu Province
Management 215228, China
Tang ShengLi Shengze Town, -- -- 5,906,720 7.6 %
Shareholder Wujiang City
Management Jiangsu Province
215228, China
Yao YunZhen Shengze Town, -- -- 5,906,720 7.6 %
Shareholder Wujiang City
Management Jiangsu Province
215228, China
Yao YunHong Shengze Town, -- -- 5,906,720 7.6 %
Shareholder Wujiang City
Management Jiangsu Province
215228, China
Officers and Directors as -- 46,072,416 59.28 %
a Group (3 persons)
_________________
(1) Beneficial ownership is determined in accordance with the rules of the
SEC and includes voting and investment power with respect to shares. Unless
otherwise indicated, the persons named in this table have sole voting and sole
investment control with respect to all shares beneficially owned. Figures
shown are on a non-diluted basis.
(2) Based on 3,886,000 shares of the Registrant's Common Stock issued and
outstanding immediately prior to the Share Exchange.
(3) Based on 77,720,000 shares of the Registrant's Common Stock issued and
outstanding immediately following the Share Exchange.
The number of shares and the percentage of issued and outstanding shares
held by each of the listed shareholders is subject to adjustment based on the
number of shares placed into escrow and subject to cancellation. The Polara
Global Limited Shareholders received 1,476.68 of Park Hill Common Stock for
each share of Polara Common Stock tendered. The Park Hill Controlling
Shareholders placed a total of 2,379,184 of Park Hill Common Stock into escrow
(the "Escrow Shares") to secure certain obligations by the Registrant to raise
$5,000,000 at a minimum share price of $1.00 per share. The Park Hill
Controlling Shareholders have voting power over these shares pending release
from escrow.
We have no knowledge of any arrangements, including any pledge by any
person of our securities, the operation of which may at a subsequent date
result in a change in our control.
We are not, to the best of our knowledge, directly or indirectly owned
or controlled by another corporation or foreign government.
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
Directors and Executive Officers
Our directors hold office until the next annual meeting of the
stockholders and the election and qualification of their successors. Officers
are elected annually by the Board of Directors and serve at the direction of
the Board. The following table and information that follows sets forth the
names, ages and positions of the directors and officers of the Registrant:
Name and Current Office Principal Occupation Director Since Age
Municipality of
Residence
Yao DeRong Director, Chief Chief Executive Officer 7/31/06 62
Executive Officer of the Company; Managing
Director of Polara; and
Chairman for Wujiang DeYi
Fashions Clothes Co., Ltd.
Ren Wei Rong Director and Secretary of the Company; 7/31/06 44
Secretary Director of Polara; and
Assistant General Manager
of Wujiang DeYi Fashions
Clothes Co., Ltd.
Ikezoe Yoichi Director Director of the Company; 7/31/06 47
Director of Polara;
Managing Director at Itochu
Textile Materials (Asia)
Limited
Parker Seto Chief Financial Chief Financial Officer of 7/31/06 37
officer the Company; Chief Financial
Officer of Wujiang DeYi
Fashions Clothes Co., Ltd.
The following is a description of the business background of our directors and
executive officers.
Mr. Yao DeRong, aged 62, has served as the Chief Executive Officer and the
Chairman of the Board of Polara Global Limited since 1999. Mr. Yao founded
DeYi and has also served as DeYi's Chief Executive Officer and Chairman of the
Board of Directors since 2000.
Mr. Ren Wei Rong, aged 44, has served as a Director of Polara Global Limited
since 1999. Mr. Ren also has served as the General Manager, Director and the
Secretary of DeYi since May 2000. Prior to joining DeYi, Mr. Ren was the
manager of operations at Wu Jiang Art Weaving Factory. Mr. Ren is a son-in-law
of Mr. Yao and husband of Ms. Yao Yun Zhen.
Mr. Ikezoe Yoichi, aged 47, is the Managing Director of Itochu Textile
Materials (Asia) Limited and has held that position since April 2005. Before
becoming Managing Director at Itochu Textile Materials (Asia) Limited, Mr.
Yoichi acted as Section Manager at Itochu Corporation from 2002 to 2005.
Prior to taking on the role of Section Manager in 2002, Mr. Yoichi worked as a
staff in Beijing, Shanghai and Hong Kong for the Itochu Corporation from 1986
to 2002.
Mr. Parker Seto, aged 37, is the Chief Financial Officer of our Company and
has held this position since 2005. From 2000-2002, Mr. Seto was a principal
of the Corporate Finance Department of PKF, Certified Public Accountants in
Hong Kong. From 2003 to 2004, Mr. Seto was Chief Consultant for Joinwin
Capital Limited. Since 2005, Mr. Seto has acted as a Managing Director of
WestPark Capital, Inc. Mr. Seto holds a bachelor's degree in accounting from
the Chinese University of Hong Kong and is a member of the American Institute
of Certified Public Accountants, and Fellow Member of the Association of
Chartered Certified Accountants, United Kingdom and member of the Hong Kong
Institute of Certified Public Accountants.
Committees of the Board of Directors
Our Board of Directors plans has established one board committee, an
Audit Committee and plans to establish two Board Committees, a Compensation
Committee and a Corporate Governance and Nominating Committee.
Audit Committee
We have no standing audit committee. Our Board of Directors performs
the function of an audit committee. None of the members of our board of
directors satisfies the criteria for an audit committee financial expert under
Item 401(e) of Regulation S-B of the rules of the Securities and Exchange
Commission.
Our board of directors will meet with our management and our external
auditors to review matters affecting financial reporting, the system of
internal accounting and financial controls and procedures and the audit
procedures and audit plans. Our board of directors will review our significant
financial risks, will be involved in the appointment of senior financial
executives and will annually review our insurance coverage and any off-balance
sheet transactions.
Our board of directors will monitor our audit and the preparation of
financial statements and all financial disclosure contained in our SEC
filings. Our board of directors will appoint our external auditors, monitor
their qualifications and independence and determine the appropriate level of
their remuneration. The external auditors will report directly to the board of
directors. Our board of directors will have the authority to terminate our
external auditor's engagement and will approve in advance any services to be
provided by the external auditors which are not related to the audit.
Compensation
We have no Compensation Committee. Our board of directors will be
responsible for considering and authorizing terms of employment and
compensation of our senior management and providing advice on compensation
structures in the various jurisdictions in which we operate. In addition, our
board of directors will review both our overall salary objectives and
significant modifications made to employee benefit plans, including those
applicable to senior management, and will propose any awards of stock options.
Corporate Governance and Nominating
We have no Corporate Governance and Nominating Committee due to our
small size. Our board of directors is responsible for developing our approach
to corporate governance issues.
Code of Ethics
We are in the process of adopting a Code of Ethics for our senior
management. We expect to adopt such a Code of Ethics at our next regularly
scheduled Board of Directors meeting
Polara and DeYi also do not have a Code of Ethics, and as our wholly-
owned subsidiaries, any Code of Ethics adopted by us will apply to Polara and
DeYi.
Corporate Cease Trade Orders and Bankruptcies
Except as disclosed in this prospectus, none of our directors or
officers is, or has been within the ten years before the date of this
prospectus, a director or officer of any other company that, while such person
was acting in that capacity, was the subject of a cease trade or similar
order, or an order that denied the company access to any statutory exemptions
under applicable securities legislation, for a period of more than 30
consecutive days, or was declared bankrupt, made a proposal under any
legislation relating to bankruptcy or insolvency or was subject to or
instituted any proceedings, arrangements or compromise with creditors or had a
receiver, receiver manager or trustee appointed to hold the assets of that.
Penalties and Sanctions
None of our directors or officers has been subject to any penalties or
sanctions imposed by a court relating to any securities legislation or by any
securities regulatory authority or has entered into a settlement agreement
with any securities regulatory authority or been subject to any other
penalties or sanctions imposed by a court or regulatory body that would likely
be considered important to a reasonable investor in making an investment
decision.
Personal Bankruptcies
None of our directors or officers has been subject to any penalties or
sanctions imposed by a court relating to any securities legislation or by any
securities regulatory authority or has entered into a settlement agreement
with a any securities regulatory authority or been subject to any other
penalties or sanctions imposed by a court or regulatory body that would likely
be considered important to a reasonable investor in making an investment
decision.
Conflicts of Interest
To our knowledge, and other than as disclosed in this report, there are
no known existing or potential conflicts of interest among us, our promoters,
directors and officers, or other members of management, or of any proposed
director, officer or other member of management as a result of their outside
business interests except that certain of the directors and officers serve as
directors and officers of other companies, and therefore it is possible that a
conflict may arise between their duties to us and their duties as a director
or officer of such other companies.
Involvement in Certain Legal Proceedings
To the knowledge of our management and during the past ten (10) years, no
present or former director, person nominated to become a director, executive
officer, promoter or control person of our Company:
(1) Was a general partner or executive officer of any business by or
against which any bankruptcy petition was filed, whether at the time of such
filing or two years prior thereto;
(2) Was convicted in a criminal proceeding or named the subject of a
pending criminal proceeding (excluding traffic violations and other minor
offenses);
(3) Was the subject of any order, judgment, decree or consent
agreement, not subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining him from or
otherwise limiting, the following activities:
(i) Acting as a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker, leverage
transaction merchant, associated person of any of the foregoing, or as an
investment adviser, underwriter, broker or dealer in securities, or as an
affiliated person, director or employee of any investment company, bank,
savings and loan association or insurance company, or engaging in or
continuing any conduct or practice in connection with such activity;
(ii) Engaging in any type of business practice;
(iii) Engaging in any activity in connection with the purchase or sale
of any security or commodity or in connection with any violation of federal or
state securities laws or federal commodities laws;
(4) Was the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any federal or state authority
barring, suspending or otherwise limiting for more than 60 days the right of
such person to engage in any activity described above under this Item, or to
be associated with persons engaged in any such activity;
(5) Was found by a court of competent jurisdiction in a civil
action or by the Securities and Exchange Commission to have any federal or
state securities law, and the judgment in such civil action or finding by the
Securities and Exchange Commission has not been subsequently reversed,
suspended, or vacated; or
(6) Was found by a court of competent jurisdiction in a civil
action or by the Commodity Futures Trading Commission to have violated any
federal commodities law, and the judgment in such civil action or finding by
the Commodity Futures Trading Commission has not been subsequently reversed,
suspended or vacated.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth compensation paid to each of the
individuals who served as our Chief Executive Officer and our other most
highly compensated senior management for the fiscal years ended December 31,
2005 and 2004. The determination as to which executive officers were most
highly compensated was made in reference to the amounts required to be
disclosed under the "Salary" and "Bonus" columns in the table.
Long Term Compensation
Annual Compensation Awards Payouts
Common Restricted LTIP
Shares Shares or All
Name and Other Under Restricted Other
Principal Fiscal Salary Bonus Annual Option Share Units Pay- Comp-
Position Year ($) ($) Compen-SAR's outs ensat'n
($) granted (#) ($) ($) ($)
- ---------------------------------------------------------------------------
Yao DeRong(1) 2005 37,448 6,241 -- -- -- -- --
CEO & Chairman
Deborah A.
Salerno(2) 2004 0 0 0 0 0 0 0
President 2005 0 0 0 0 0 0 0
Ren WeiRong(3) 2005 -- -- -- -- -- -- --
Director, -- -- -- -- -- -- --
Secretary
Parker Seto(4) 2005 -- -- -- -- -- -- --
Chief Financial -- -- -- -- -- -- --
Officer
_________________
(1) Reflects compensation paid to Yao DeRong by DeYi prior to the
Share Exchange.
(2) Deborah Salerno resigned as our President and as a director on
July 31, 2006.
(3) Ren WeiRong was appointed as our secretary and a director on July
31, 2006. His total annual salary and bonus does not exceed
$100,000.
(4) Parker Seto was appointed as our Chief Financial Officer on July
31, 2006. His total annual salary and bonus does not exceed
$100,000.
Director and Officer Stock Option/Stock Appreciation Rights ("SARs") Grants
We have never granted any stock options or stock appreciation rights.
Aggregated Option/SAR Exercises in Last Fiscal Year- and Fiscal Year-End
Option/SAR Values
We have never granted any stock options or stock appreciation rights.
Long Term Incentive Plan Awards
No long-term incentive awards have been made by us to date.
Defined Benefit or Actuarial Plan Disclosure
We do not provide retirement benefits for the directors or officers.
Compensation of Directors
We had no arrangements pursuant to which our officers and directors
are compensated by us for their services in their capacity as directors or
officers, or for committee participation, involvement in special assignments
or for services as consultant or experts during the most recently completed
financial year.
Our officers and directors may be reimbursed for any out-of-pocket
expenses incurred by them on our behalf.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
None
Additional Information with Respect to Compensation Committee Interlocks and
Insider Participation in Compensation Decisions
None.
Board Compensation Committee Report on Executive Compensation
The primary objectives of our executive compensation program are to
enable us to attract, motivate and retain outstanding individuals and to align
their success with that of our shareholders through the achievement of
strategic corporate objectives and creation of shareholder value. The level of
compensation paid to an individual is based on the individual's overall
experience, responsibility and performance. Our executive compensation program
consists of a base salary, performance bonuses and stock options. Our board of
directors approves all compensation to our executive officers.
Number of Number of securities
securities remaining available
to be issued for future issuance
upon exercise Weighted-average under equity
of outstanding exercise price of compensation plans
Plan options, warrants outstanding options, excluding securities
category and rights warrants and rights reflected in column (a)
- -------- ---------- ------------------- -----------------------
(a) (b) (c)
Equity n/a n/a n/a
compen-
sation
plans
approved
by
security
holders
Equity n/a n/a n/a
compen-
sation
plans not
approved
by
security
holders
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as described below, there have been no material transactions
involving $60,000 or more between DeYi or Polara and/or its directors,
executive officers or five percent stockholders other than compensatory
arrangements set forth under the caption "Executive Compensation," above.
We acquired all of the issued and outstanding common stock of Polara in
a share exchange transaction. We appointed three new directors to our Board of
Directors: Yao DeRong, Ren Wei Rong and Ikezoe Yoichi. After Closing, our
Board of Directors consists of those three new members. Yao DeRong was
appointed as our Chairman of the Board of Directors and Chief Executive
Officer effective immediately upon Closing of the Share Exchange. Yao DeRong
is Ren Wei Rong's father-in-law.
DeYi had sales of fabricated Bemerg silk clothes to Shanghai Itochu
Company, a related company of Director Yoichi, during fiscal 2005 of
approximately $283,469, of which approximately $23,803 was included in trade
receivable as of December 31, 2005. The Bemerg silk materials used in the
sales to Shanghai Itochu Company during fiscal 2005 were purchased by DeYi
from Shanghai Itochu Company's parent, Japan Itochu Company, a related company
of Director Yoichi. During fiscal 2005, DeYi purchased approximately $253,171
of raw materials from Japan Itochu Company. The amount due to Japan Itochu
Company for fiscal 2005 ended as of December 31, 2005 was $200,553.
DeYi made purchases from Wujiang Delong Fashion Clothes Co., Ltd.
(WDFC), a company owned by Director Yao for the year 2005 in the amount of
$7,029. The amount due from WDFC for the year ended 2005 was $5,838.
A net land use right of $168,286 and $168,972 at December 31, 2005 and
2004, respectively is registered in the name of WDFC. WDFC has leased all of
the useful lives to DeYi at the cost of the land and DeYi paid all of the
rental payments to WDFC since the inception of the lease.
The amount due from Director Yao DeRong for the year ended December
31, 2005 was $189,359. Mr. Yao repaid the Company the entire amount on or
about June 30, 2006. The amount due from Director Ren WeiRong for the year
ended December 31, 2005 was $73,911. Mr. Ren repaid the Company the entire
amount or about June 30, 2006.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
We do not currently have an indemnification contracts or arrangement
under which any of the directors or officers in our Company will be insured or
indemnified against any liabilities that may occur against them in their
capacities as directors and officers.
INSURANCE
We have taken out insurance policies, including, without limitation,
general liability insurance, worker's compensation insurance, and property
insurance, to cover our production plants and facilities, inventories, and
assets, personnel, tracks, and cars.
LEGAL PROCEEDINGS
Neither we nor Polara nor DeYi are parties to any pending legal
proceeding and, to the knowledge of management, no federal, state or local
governmental agency is presently contemplating any proceeding against us,
Polara, or DeYi. Additionally, neither we, Polara, nor DeYi have ever been
parties to a bankruptcy or similar proceeding.
No director, executive officer or affiliate of ours, Polara, or DeYi, or
owner of record or beneficially of more than five percent of our Common Stock
is a party adverse to us, Polara or DeYi, or has a material interest adverse
to us, Polara, or DeYi in any proceeding.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
All reports required to be filed pursuant to Section 16(a) of the Exchange
Act have been filed.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 200,000,000 shares of common
stock, with a par value of $0.001 per share. As at July 31, 2006, there were
77,720,000 shares of our common stock issued and outstanding.
Common Stock
Our Common Stock is entitled to one vote per share on all matters
submitted to a vote of the stockholders, including the election of directors.
Except as otherwise required by law the holders of our common stock will
possess all voting power. Generally, all matters to be voted on by
stockholders must be approved by a majority (or, in the case of election of
directors, by a plurality) of the votes entitled to be cast by all shares of
our common stock that are present in person or represented by proxy. Holders
of our Common Stock representing 51% of our capital stock issued, outstanding
and entitled to vote, represented in person or by proxy, are necessary to
constitute a quorum at any meeting of our stockholders. A vote by the holders
of a majority of our outstanding shares is required to effectuate certain
fundamental corporate changes such as liquidation, merger or an amendment to
our Articles of Incorporation. Our Articles of Incorporation do not provide
for cumulative voting in the election of directors.
The holders of shares of our Common Stock will be entitled to such cash
dividends as may be declared from time to time by our board of directors from
funds available therefor. Upon liquidation, dissolution or winding up, the
holders of shares of our common stock will be entitled to receive pro rata all
assets available for distribution to such holders.
In the event of any merger or consolidation with or into another company
in connection with which shares of our Common Stock are converted into or
exchangeable for shares of stock, other securities or property (including
cash), all holders of our Common Stock will be entitled to receive the same
kind and amount of shares of stock and other securities and property
(including cash).
Holders of our Common Stock have no pre-emptive rights, no conversion
rights and there are no redemption provisions applicable to our Common Stock.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Following the termination of Quota restriction on garment industry from 2005,
many PRC garment manufacturers had expanded their market penetration and
increased demand on our fiber, as shown on the account of the Company , Since
Year 2005, the Company has taken an initiative to expand its clientele
Operational and Financial Review
The Group is principally engaged in the manufacture and sale of
finished fabrics targeting at mid to high-end markets both in the
PRC and overseas. The Group vertically integrates its production
process, which include research and development, raw fabric
weaving, dyeing and setting, cloth finishing such as pattern
pressing and calendaring. The Group's products are used for
manufacturing men's and women's fashions such as outer garments,
down wear, trousers, windbreakers, jackets and sports wears to
satisfy the market demand of different range of garment products
to overseas and domestic market.
To cope with the expected growth fabric as demanded in Asia after the
liberalization of Quota control system worldwide, especially for those garment
being manufactured in Asian countries for export to North America, which
would pave an opportunity to capture the high-growth demand for the Group's
products , the Group had commenced its weaving capacity expansion in the
previous period. The new plant and machinery were installed and completed test
run at the end of Year 2005 (Construction-in-progress in Year 2005 vs. Year
2004: US$2,863,196 vs. US$31,887) and is expected to begin production in
early July 2006. Consequently, the aggregated weaving production capacity
increased for more than 40% compared to the one before the addition of such
facilities for dyeing process. To certain extent, the new weaving factory
ensures steadier supply and better quality control of raw fabrics
for the dyeing process, which in turn, will reduce production costs and
shorten the production cycle.
To be in line with the Group's efforts in expanding markets, the
Group participated in the textile fair held in China and overseas
during the Period and had established an exhibition booth in
Shanghai Commercial City so as to promote and sell its products to
local and overseas customers.
Sales Revenue
For the year ended ended 31 December 2005, the Group
recorded a net sales of approximately $35,978,461 (2004:
$30,168,551), representing a increase of approximately 19% in
comparison to the Year 2004. The increase in turnover was
attributable to increased effort in market penetration to grasp
the market growth, especially in Asian countries as part of the
marketing strategy following the termination of Quota control
system in Year 2005.
Gross Profit
The gross profit margin of the Group slightly decreased from about
18.3% in the Year 2004 to about 15.5% in Year 2005 The slight
decrease was due to the intensive competition the Group is now
facing in the industry, coupled with the marketing strategy on
market expansion. The Management is of the view that the short-
term decrease in gross profits is a successful strategy to
penetrate into the market and build up the trading relationship
with customers would be beneficial to the Group's distribution of
various types of products in long term.
Consultancy Income
As in Year 2005, the Company has been in contact with different
suppliers in China to locate for the optimum price and quality
suppliers. With the matured and well-experienced industrial team
in the industry, the Company has been providing consulting
services to an independent third party, which is also one of its
supplier, for their factories in China for set up the production
work process and training with a consultancy income of
approximately $966,452 being derived thereform. The Management is
of the view that the consulting services provided to such third
parties which are not in direct competition with our products
would not just enhance efficiency in utilizing our current
resources for income generation for the Group but also as an
efficient way to establish network of reliable supplier and
customers with an in-depth understanding of their production flow
and human resource training according to the Group's production
and management policy which would enhance the business
opportunities for the Group.
Machinery Rental income
Since Year 2004, the Company has leased certain machinery to an
unrelated company with an annual rental income around $290,000
which is sufficient to cover the respective depreciation expenses
for a profit contribution of approximately $210,000 for each of
the Year 2004 and Year 2005. The Company views that the short-
term lease-out of such machinery provides the flexibility to the
Group for obtaining cash flow from asset being temporarily not
being utilized whereas in case of necessity, the machinery can be
taken back for our own production need to cater for the customer's
need.
Net Income
The Group's net income for Year 2005 was approximately $3,482,624
(2004: $3,135,236), approximately 12 % more than that in 2004. Net
profit margin for the Period was approximately 9.. 6% (2004: 10. 4
%). The decrease in net profit margin compared with previous
period was due to the increase in interest expenses incurred in
financing operation and expansion in Year 2005 of $418,641 (2004:
$109,009) of the Company to meet with its expansion plan. The
Management is of the view that the Group necessitates to obtain funding
from public through public offering or private placement aiming at
achieving a better debt-equity mix as the financing structure of the
Company.
Expenses
Selling and distribution costs, amounted to approximately
$681,056 for Year 2005 (2004: $894,678), representing
approximately 1.8% (2004: 2.9%) of sales revenue. Its
decline was a consequence of the successful strategy of
market expansion for large customer as focused and which
also causes the Selling and distribution cost per dollar
sales decreases.
Administrative expenses amounted to approximately $645,874
(2004: $568,052), representing approximately 1.8% (2004: 1.8%)
of sales revenuer for Year 2005. The Management has exercised
control on the administrative expenses of the Company to
maximize the administrative efficiency of the Group.
Interest expenses, net amounted to approximately $418,641 in
Year 2005 (2004: $109,009). The current period balance
comprises of interest payment of borrowings from various banks
in China. The financing of the rapid expansion of the
Company through short-term bank borrowing is in line with the
operating cycle of the Company for short-term cash demand and
does not create any pressure on the funding of the Group.
However, the Group would have a long term plan to optimize its
financing need through a combination of equity increase
coupled with short-term and long-term debt.
Future Plans and Prospects
As a result of the constant improvement of quality
of life in the PRC, the demand for fashionable clothes
and quality fabrics increases. In order to diversify the
customer base of the Group and tap the market potential, the
Group continuously strengthens its distribution and product
range, such as the development of cotton fabric from Year 2005
which has a higher margin (gross margin about: 25%)
The Group persists in its market expansion by maintaining
good and close relationship with existing distribution agents
and concreting its present sales and marketing team. Moreover,
it will participate in the textile fairs held in Shanghai of
the PRC and France in 2006 so as to promote its products to
worldwide customers.
On account of the continuous change in the trend of the textile and
garment markets, the Group keeps continuing to put effort in
research and development of new products and improvement of existing
products in order to meet the dynamic market needs. Consequently,
production capacity would be planned to increase via purchasing new
machineries for producing functional fabrics, or lease production
lines from other manufacturers or even through merger and
acquisition in case of necessities, but all have not been confirmed
yet as the Management opts to move steadily on its expansion with
mitigating the risk of overexpansion in short time whereas taking
the opportunity to gain good business as an effective mans to boost
the market expansion and raise profit margin in certain extent.
LIQUIDITY AND FINANCIAL RESOURCES
As at 31 December 2005, the Group had net current liabilities of
$528,865 (2004 net current asset: $ 1,901,214 ) and net asset of
$14,858,703 (2004:$8,887,991) The net liabilities position of the
Group for Year ended December 31, 2005 is of a temporary nature as
the Group maintains a strong financial position with strong net
asset and growth in equity and positive earnings.
As at 31 December 2005, the Group had cash and cash
equivalents of approximately $ 5,514,937 (2004: $
6,850,222 ). The decrease in the Group's cash and cash equivalents
is because of the amount of cash being employed for business
development and normal operation. Whereas the Group consider the
cash position of Group is healthy and sufficient to finance its
operation, which is evidenced by a net positive cash flow provided
by operating activities, the Management would continue to keep a
close watch on the Company's financial liquidity to ensure the
business expansion would be financed in the most optimum combination
of resources that enhance shareholders' value.
The financial health of the Group has been strong throughout the
Year 2005 and Year 2004 as indicated by the above figures.
FINANCING
As at 31 December 2005, the total amount of short-term bank loan for the Group
in Year 2005 is $6,966,086 (2004: $2,389,431) reflecting the Group's strong
demand for its business that requires significant amount of financing to
sustain the business operation and expansion in light of the competitive
business environment. However, the Management views such increase in short-
term bank loan with respect to the increase in business being in line with its
short-term strategy of rapid and far-reaching market penetration and
expansion, though in long term a more well-balanced source of funding in
different combination in a more favorable terms will be sought to mitigate the
risk of over-application in short-term finance to fuel up the business growth,
as the Company goes into the direction of becoming a public company.
BRIEF OVERVIEW FOR THE 1ST QUARTER RESULT OF YEAR 2006
Following the signing of a Share Exchange Agreement between Polara Global
Limited and Park Hill Capital III, Inc., the Company has prepared a Pro-Forma
Financial Statements for the first quarter ended March 31st , 2006, the
Company has achieved a 2006 first-quarter revenue of $7,511,947 (2005 1Q:
$5,320,352) The Gross Profits of the Company Is $599,155 for 2006 1Q
($419,476 for 2005 1Q). The gross profits margin for Year 2006 1Q is 9.44%
(2005 1Q: 12.98 %) and the net profit for Year 2006 1Q is 7.98% (Year 2005 1Q:
7.8 % ). The maintenance of similar gross profit margin with significant
increase in sales revenue has shown the intensive competition in the industry
.. To cope with such competitive environment, the Company has already started
the production of cotton fabric (which is about 25% gross profit margin
comparing to the 13% gross profit margin of the polyester fabric which
accounts for more than 60% of the total sales in Year 2005) and the planned
expansion in the production and distribution of the higher margin products
would be another factor expected to bring up the business performance of the
Company for Year 2006.
In terms of financial strength, the Company is still having a net current
asset for 2006 1Q of $ 5,141,339 (2005 1Q: $4,674,837 ) with the approximate
same current ratio slightly above. The net asset of the Group for period
ended 2006 1Q is about $15,634,760 in comparison with the amount of $9,341,979
as for 2005 1Q shows a solid financial strength of the Company while the
Company is having its financial strength in such competitive business
environment that provide a solid support to its business strategy of market
expansion and penetration.
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
Our shares of Common Stock are not traded on any stock exchange or the
NASD Over the Counter or Pink Sheet Electronic Board. There has never been a
publicly-traded market for the securities of Polara or DeYi. No assurance can
be given that any "established trading market" will ever commence, or
continue, if one does commence. The resale of "restricted securities" and
other securities of our Company that are currently outstanding or that may be
issued in the future could have an adverse effect on any such market that may
commence or exist in the future.
Holders
The number of record holders of our Common Stock as of July 31, 2006, was
approximately 50.
Dividends
We have not declared any cash dividends with respect to our Common Stock
and do not intend to declare dividends in the foreseeable future. Our future
dividend policy cannot be ascertained with any certainty; however, there are
no material restrictions limiting, or that are likely to limit, our ability to
pay dividends on our Common Stock.
Planned Sales of Unregistered Securities
Pursuant to the Agreement and under the post Share Exchange Financing,
we will issue additional shares of our "restricted securities" in a Private
Placement Offering to raise not less than $5 million. We intend this proceed
of not less than $5 million for general working capital, research and
development and facilities expansion purposes.
These securities will be issued to persons who are either "accredited
investors," or "sophisticated investors" or investors who are not "U.S.
Persons" who, by reason of education, business acumen, experience or other
factors, are fully capable of evaluating the risks and merits of an investment
in our Company; and who have had prior access to all material information
about us. We believe that the offer and sale of these securities will be
exempt from the registration requirements of the Securities Act pursuant to
Sections 4(2) thereof and Rule 506 of Regulation D of the Securities and
Exchange Commission, and with respect to the those whom are not "U.S.
Persons," pursuant to Regulation S of the Securities and Exchange Commission.
Generally, "restricted securities" can be resold under Rule 144 once
they have been held for at least one year (subparagraph (d) thereof), provided
that the issuer of the securities satisfies the "current public information"
requirements (subparagraph (c)) of the Rule; no more than one percent (1%) of
the outstanding securities of the issuer are sold in any three month period
(subparagraph (e)); the seller does not arrange or solicit the solicitation of
buyers for the securities in anticipation of or in connection with the sale
transaction and does not make any payment to anyone in connection with the
sales transaction except to the broker/dealer whom executes the trade or
trades in the securities (subparagraph (f)); the shares are sold in "brokers'
transactions" only (subparagraph (g)); the seller files a Notice on Form 144
with the Securities and Exchange Commission at or prior to the sales
transaction (subparagraph (h)); and the seller has a bona fide intent to sell
the securities within a reasonable time of the filing of such Form. Once two
years have lapsed, assuming the holder of the securities is not an "affiliate"
of the issuer, unlimited sales can be made without further compliance with the
terms and provisions of Rule 144.
RECENT SALES OF UNREGISTERED EQUITY SECURITIES
We did not issue any unregistered securities during the years ended
December 31, 2004 and December 31, 2005.
Subsequent to December 31, 2005, on July 31, 2006, we completed the
acquisition of Polara Global Limited in accordance with the terms of the Share
Exchange Agreement. Pursuant to the Share Exchange Agreement, we acquired all
of the outstanding capital stock and other equity interests of Polara from the
Polara Global Limited Shareholders by issuing 73,834,000 shares of Common
Stock as consideration on the terms and subject to the conditions set forth in
the Share Exchange Agreement. The shares of Common Stock were issued to Yao
De Rong, Itochu Textile Materials (Asia) Limited, Yao Yun Zhen, Yao Yun Hong,
Ren Wei Rong, Tang Sheng Li, Realty Century Management Ltd., Good Result
Investment Company Limited, Ye Gen Zhen, Gain for Success Enterprises Limited,
Sheng Mei Zhen, Ma Bin Liang, and Ma Wen Ying in a private transaction not
involving a public offering pursuant to an exemption from registration
available under Section 4(2) of the Securities Act of 1933 as amended.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company
The Articles of Incorporation and the Bylaws of the Company do not
provide for indemnification of officers, directors or controlling persons.
The General Corporation Law of the State of Nevada (NRS 78.7502) provides
that, "to the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense
of any action, suit or proceeding...or in defense of any claim, issue
or matter therein, the corporation shall indemnify him against expenses,
including attorney's fees, actually and reasonably incurred by him in
connection with the defense."
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company
has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed
in that Act and is,
therefore, unenforceable.
Exclusion of Liabilities. Nevada Statutes exclude personal liability
of its directors to the Company and its stockholders for monetary damages for
breach of fiduciary duty except in certain specified circumstances.
Accordingly, the Company will have a much more limited right of action against
its directors than otherwise would be the case. This provision does not
affect the liability of any director under federal or applicable state
securities laws.
Item 5.02 Departure of Directors of Principal Officers; Election of
Directors; Appointment of Principal Officers.
See Items 1.01, 2.01 and 5.01 above.
Pursuant to the Share Exchange Agreement with Polara, the current
officers and directors of Polara became members of our Board of Directors and
our executive officers, to serve until the next respective annual meetings of
our stockholders and our Board of Directors and until their respective
successors are elected and qualified or until their prior resignations or
terminations. Effective on July 31, 2006, they were: Yao DeRong, President and
Director; Ren Wei Rong, Secretary and Director; Parker Seto, Chief Financial
Officer; and Ikezoe Yoichi, Director. Our directors and executive officers,
Deborah A. Salerno and Frank L. Kramer, resigned, in seriatim, on closing of
the Share Exchange.
The following delineates certain information concerning our newly
designated directors and executive officers:
Name and Current Office Principal Occupation Director Since Age
Municipality of
Residence
Yao DeRong Director, Chief Chief Executive Officer 7/31/06 62
Executive Officer of the Company; Managing
Director of Polara; and
Chairman for Wujiang DeYi
Fashions Clothes Co., Ltd.
Ren Wei Rong Director and Secretary of the Company; 7/31/06 44
Secretary Director of Polara; and
Assistant General Manager
of Wujiang DeYi Fashions
Clothes Co., Ltd.
Ikezoe Yoichi Director Director of the Company; 7/31/06 47
Director of Polara;
Managing Director at Itochu
Textile Materials (Asia)
Limited
Parker Seto Chief Financial Chief Financial Officer of 7/31/06 37
officer the Company; Chief Financial
Officer of Wujiang DeYi
Fashions Clothes Co., Ltd.
The following is a description of the business background of our directors and
executive officers.
Mr. Yao DeRong, aged 62, has served as the Chief Executive Officer and the
Chairman of the Board of Polara Global Limited since 1999. Mr. Yao founded
DeYi and has also served as DeYi's Chief Executive Officer and Chairman of the
Board of Directors since 2000.
Mr. Ren Wei Rong, aged 44, has served as a Director of Polara Global Limited
since 1999. Mr. Ren also has served as the General Manager, Director and the
Secretary of DeYi since May 2000. Prior to joining DeYi, Mr. Ren was the
manager of operations at Wu Jiang Art Weaving Factory. Mr. Ren is a son-in-law
of Mr. Yao and husband of Ms. Yao Yun Zhen.
Mr. Ikezoe Yoichi, aged 47, is the Managing Director of Itochu Textile
Materials (Asia) Limited and has held that position since April 2005. Before
becoming Managing Director at Itochu Textile Materials (Asia) Limited, Mr.
Yoichi acted as Section Manager at Itochu Corporation from 2002 to 2005.
Prior to taking on the role of Section Manager in 2002, Mr. Yoichi worked as a
staff in Beijing, Shanghai and Hong Kong for the Itochu Corporation from 1986
to 2002.
Mr. Parker Seto, aged 37, is the Chief Financial Officer of our Company and
has held this position since 2005. From 2000-2002, Mr. Seto was a principal
of the Corporate Finance Department of PKF, Certified Public Accountants in
Hong Kong. From 2003 to 2004, Mr. Seto was Chief Consultant for Joinwin
Capital Limited. Since 2005, Mr. Seto has acted as a Managing Director of
WestPark Capital, Inc. Mr. Seto holds a bachelor's degree in accounting from
the Chinese University of Hong Kong and is a member of the American Institute
of Certified Public Accountants, and Fellow Member of the Association of
Chartered Certified Accountants, United Kingdom and member of the Hong Kong
Institute of Certified Public Accountants.
There are no family relationships among the directors and executive
officers, except as set forth below. Ren Wei Rong is Yao DeRong's son-in-law.
There are no formal employment agreements entered by the Company with
any officer or director.
Each of the newly appointed directors were appointed under the term of
the Share Exchange Agreement. Yao DeRong is the Chief Executive Officer and
was a principal shareholder of Polara. Yao DeRong, Ren Wei Rong, and Itochu
Textile Materials (Asia) Limited, at which Ikezoe Yoichi is a Managing
Director, were shareholders of Polara. Parker Seto is a financial consultant
to Polara.
Item 5.03. Amendment to Articles of Incorporation or Bylaws; Change in
Fiscal Year
On May 25, 2006, the board of directors of the Registrant approved the
change of our name from Park Hill Capital III Corp. to New Fiber Cloth
Technology, Inc. The board also approved an amendment to our Articles of
Incorporation effecting such change. Following the board's approval of the
name change, the Registrant's shareholders, by written consent, who hold a
majority of the issued and outstanding shares of the Corporation's common
stock, approved the amendment to the Registrant's Articles of Incorporation to
change the name of the Registrant from Park Hill Capital III Corp. to New
Fiber Cloth Technology, Inc.
On May 25, 2006, the board of directors of the Registrant approved an
increase the number of shares that are authorized for issuance under the
Articles of Incorporation from 25,000,000 shares of $0.001 par value common
stock to 200,000,000 shares of $0.001 par value common stock (the "Increase in
the Authorized Shares") and the authority to issue Twenty Million (20,000,000)
shares of $0.001 par value Preferred Stock (the "Authorization of the
Preferred Stock"). Following the board's approval of the Increase in the
Authorized Shares and the Authorization of the Preferred Stock, shareholders,
by written consent, who hold a majority of the issued and outstanding shares
of the Registrant's common stock, approved the amendment to the Registrant's
Articles of Incorporation to increase the number of shares that are authorized
for issuance under the Articles of Incorporation from 25,000,000 shares of
$0.001 par value common stock to 200,000,000 shares of $0.001 par value common
stock and the authorization of 20,000,000 shares of $0.001 par value Preferred
Stock.
ACCESS TO OUR REPORTS
The public may read and copy any materials that we have filed with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., 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. For electronic filings,
the SEC maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC. The address of that site is http://www.sec.gov.
Item 8.01. Other Events
Item 9.01 Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
POLARA GLOBAL LIMITED
FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(Stated in US dollars)
POLARA GLOBAL LIMITED
CONTENTS PAGES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1
CONSOLIDATED BALANCE SHEETS 2 - 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6 - 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 - 26
To: The Board of Directors and Stockholders of
Polara Global Limited
Independent Auditor's Report
We have audited the accompanying consolidated balance sheets of Polara Global
Limited as of December 31, 2005 and 2004 and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Polara Global Limited as of
December 31, 2005 and 2004 and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/S/Samuel H. Wong & Co. LLP
South San Francisco Samuel H. Wong & Co. LLP
June 28, 2006 Certified Public Accountants
POLARA GLOBAL LIMITED
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
Note 2005 2004
ASSETS
Current assets
Cash and Cash Equivalents $ 986,485 $ 4,055,416
Restricted Cash 4,528,452 2,794,806
Marketable Securities 12,247 60,339
Accounts Receivable 3,337,949 2,226,462
Other Receivables 7 5,154,020 2,128,305
Inventories 3 4,020,840 3,979,524
Advances to Suppliers 2,946,201 1,712,505
Prepaid Expenses - 29,929
------------ ------------
Total current assets $ 20,986,194 $ 16,987,286
Fixed Assets
Land Use Rights 4 279,362 278,397
Plant and Equipment 6 7,433,901 7,719,290
Construction in progress 2,863,196 31,887
Long Term Assets
Notes Receivable 5 4,811,109 2,521,329
------------ ------------
TOTAL ASSETS $ 36,373,762 $ 27,538,189
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-Term Bank Loans 9 6,966,086 2,389,431
Notes Payable 10 6,298,462 4,786,098
Accounts Payable 5,052,220 3,092,597
Other Payables 8 635,637 3,689,471
Income Tax Payable 564,127 -
Lease Obligations-current 11 38,398 37,410
Customers' Deposits 1,925,018 1,045,530
Accrued Liabilities 35,111 45,535
------------ ------------
Total current liabilities $ 21,515,059 $ 15,086,072
============ ============
See accompanying notes to the consolidated financial statements.
F-2
POLARA GLOBAL LIMITED
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
Note 2005 2004
Long Term Liabilities
Capital Lease Obligations 11 - 37,410
------------ ------------
TOTAL LIABILITIES $ 21,515,059 $ 15,123,482
------------ ------------
MINORITY INTERESTS - 3,526,716
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock Capital 12 $ 50,000 $ 50,000
Capital Reserves 8,465,327 5,918,207
Surplus Reserves 635,420 -
Accumulated Other Comprehensive income/<loss> (56,475) 2,557
Retained earnings 5,764,431 2,917,227
------------ ------------
$ 14,858,703 $ 8,887,991
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 36,373,762 $ 27,538,189
============ ============
See accompanying notes to the consolidated financial statements.
F-3
POLARA GLOBAL LIMITED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
Note 2005 2004
Net Sales $ 35,978,461 $ 30,168,551
Cost of Sales (30,393,967) (24,644,771)
------------ ------------
Gross Profit $ 5,584,494 $ 5,523,780
Selling and Distributing Costs (681,056) (894,678)
Administrative and General Operating Expenses (645,874) (568,052)
------------ ------------
Income from Operations $ 4,257,564 $ 4,061,050
Other Income 13 1,181,315 212,687
Interest Expenses, net (418,641) (109,009)
------------ ------------
Income before Taxes $ 5,020,238 $ 4,164,728
Income Tax 14 (627,719) -
------------ ------------
Income after Taxes $ 4,392,519 $ 4,164,728
Minority Interests (909,895) (1,029,492)
------------ ------------
Net Income $ 3,482,624 $ 3,135,236
============ ============
See accompanying notes to the consolidated financial statements.
F-4
POLARA GLOBAL LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
Additional Accumulated
Common Capital Surplus Paid-in Comprehensive Retained
Stock Reserve Reserves Capital Income Earnings Total
Balance,
January 1,
2004 $50,000 $3,054,029 $ - $ - $ 220 $3,600,461 $6,704,710
Net income - - - - - 3,135,236 3,135,236
Stock dividend
received - 2,864,178 - - - (2,864,178) -
Stock dividend
paid to
minority
interest - - - - - (954,292) (954,292)
Foreign
currency
translation
adjustment - - - - 2,337 - 2,337
------- ---------- ------ --------- ----- --------- ----------
Balance,
December 31,
2004 $50,000 $5,918,207 $ - -$2,557 $2,917,227 $8,887,991
======= ========== ====== ========= ===== ========= ==========
Balance,
January 1,
2005 $ 50,000 $5,918,207 $ - -$2,557 $2,917,227 $8,887,991
Net income - - - - - 3,482,624 3,482,624
Shareholder's
Contribution - - - 2,547,120 - - 2,547,120
Appropriations
to statutory
revenue reserves - - 635,420 - - (635,420) -
Transfer to
Capital Reserve - 2,547,120 -(2,547,120) - - -
Foreign
currency
translation
Adjustment - - - -(59,032) - (59,032)
------- --------- ------- --------- ------ --------- ----------
Balance,
December 31,
2005 $50,000$8,465,327$635,420 -$(56,475)$5,764,431$14,858,703
======= ========= ======= ======== ======= ========= ==========
F-5
See accompanying notes to the consolidated financial statements.
POLARA GLOBAL LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
2005 2004
Cash flows from operating activities
Net income $ 3,428,624 $ 3,135,236
Depreciation 953,562 731,759
Amortization 6,837 6,219
Appropriation to minority interests 909,895 1,029,492
(Increase)/decrease in accounts receivable (1,036,049) 1,168,203
Decrease/(increase) in inventories 62,716 (1,013,901)
(Increase)/decrease in advance to suppliers (1,169,675) 535,498
(Increase)/decrease in other receivables (2,922,519) 4,535,663
Decrease/(increase) in prepaid expenses 30,233 (29,926)
Increase/(decrease) in accounts payable 1,848,255 (369,342)
Increase in taxation payable 555,195 -
Increase/(decrease) in customer deposits 838,402 (182,479)
(Decrease)/increase in accruals and other
payables (3,112,765) 835,818
------------ ------------
Net cash provided by operating activities $ 446,711 $ 10,382,240
------------ ------------
Cash flows from investing activities
Purchases of intangible assets $ - $ (24,028)
Payment in construction in progress (2,785,650) 1,233,753
Granting in notes receivable (2,188,026) (2,521,107)
Investment in a subsidiary (2,119,335) -
Sales/<Investment> in marketable securities 48,898 (60,334)
Purchase of plant and equipment (472,165) (3,327,044)
------------ -----------
Net cash used in investing activities $ (7,516,278) $(4,698,760)
------------ -----------
Cash flows from financing activities
Proceeds from short-term bank loans $ 4,442,120 $ 748,139
Increase in restricted cash (1,633,595) (475,609)
(Repayment)/inception of capital lease (37,790) 74,814
Proceeds/(repayment) of notes payable 1,364,087 (1,368,370)
Appropriation of statutory reserves and
payment of stock dividends to minority
shareholders (208,453) (954,292)
------------ -----------
Net cash provided by/(used in) financing
activities $ 3,926,369 $(1,975,318)
------------ -----------
F-6
See accompanying notes to the consolidated financial statements.
POLARA GLOBAL LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
2005 2004
Net (decrease)/increase in cash and cash
equivalents $ (3,143,198) $ 3,708,162
Effect of foreign currency translation on
cash and cash equivalents 74,267 36,144
Cash and cash equivalents - beginning of year 4,055,416 311,110
------------ -----------
Cash and cash equivalents - end of year $ 986,485 $ 4,055,416
============ ===========
Supplementary cash flow information
Interest paid $ 457,500 $ 430,154
============ ===========
F-7
See accompanying notes to the consolidated financial statements.
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Polara Global Limited (the Company) was incorporated in the British Virgin
Islands on January 20, 1999 under the International Business Companies Act,
British Virgin Islands.
The Company is principally engaging in the holding of investments, and the
selling of fashion clothes materials.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Method of Accounting
The Group maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The consolidated financial
statements and notes are representations of management. Accounting
policies adopted by the Group conform to generally accepted accounting
principles in the United States of America and have been consistently
applied in the presentation of consolidated financial statements, which are
compiled on the accrual basis of accounting.
(b) Consolidation
The consolidated financial statements include the accounts of Polara Global
Limited (the Company) and its subsidiary (the Group). Significant
intercompany transactions have been eliminated in consolidation.
As of December 31, 2005, the particulars of the subsidiaries are as
follows:
Place of Date of Attributable
Name of company incorporation incorporation equity interest % Issued capital
Wujiang Deyi People's 4/29/2000 100 RMB 10,250,000
Fashions Cloths Republic of
Company Limited China
(Deyi)
Deyi manufactures, dyes and sells fashion clothes materials. The products
are distributed in Asia, Europe, North America, Australia and Africa.
(c) Use of estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Management makes these estimates using the best information
available at the time the estimates are made; however actual results could
differ materially from those estimates.
F-8
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
(d) Economic and political risks
The Group's operations are conducted in the PRC. Accordingly, the Group's
business, financial condition and results of operations may be influenced by
the political, economic and legal environment in the PRC, and by the general
state of the PRC economy.
The Group's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Group's results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among
other things.
(e) Concentrations
The Group has three major markets which accounted for the following
percentages of total sales and total accounts receivable as of and for the
years ended December 31, 2005 and 2004:
Revenue Accounts receivable
2005 2004 2005 2004
Asia 53% 37% 93% 98%
Europe 43% 60% 6% 2%
Others 4% 3% 1% -
Total 100% 100% 100% 100%
(f) Land Use Rights
Land use rights are being amortized by the straight-line method over the
respective lease terms ranging from 44 to 50 years.
(g) Plant and equipment
Plant and equipment are carried at cost less accumulated depreciation.
Depreciation is provided over their estimated useful lives, using the
straight-line method. Estimated useful lives of the plant and equipment
are as follows:
Buildings 20 years
Machinery 10 years
Motor vehicles 5 years
Office equipment 5 years
Other equipment 5 years
F-9
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
The cost and related accumulated depreciation of assets sold or otherwise
retired are eliminated from the accounts and any gain or loss is included
in the statement of income. The cost of maintenance and repairs is
charged to income as incurred, whereas significant renewals and
betterments are capitalized.
(h) Accounting for the Impairment of Long-Lived Assets
The long-lived assets held and used by the Group are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of assets may not be recoverable. It is reasonably possible that
these assets could become impaired as a result of technology or other
industry changes. Determination of recoverability of assets to be held
and used is by comparing the carrying amount of an asset to future net
undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
During the reporting years, there was no impairment loss.
(i) Construction in progress
Construction in progress represents direct costs of construction or
acquisition and design fees incurred. Capitalization of these costs
ceases and the construction in progress is transferred to plant and
equipment when substantially all the activities necessary to prepare the
assets for their intended use are completed. No depreciation is provided
until it is completed and ready for intended use. Capital commitments in
respect of these projects are $150,000 at December 31, 2005.
(j) Inventories
Inventories consisting of raw materials, work-in-progress and finished goods
are stated at the lower of weighted average cost or market value.
Finished goods are comprised of direct materials, direct labor and an
appropriate proportion of overhead.
(k) Trade Receivables
Trade receivables are recognized and carried at the original invoice amount
less allowance for any uncollectible amounts. An estimate for doubtful
accounts is made when collection of the full amount is no longer
probable. Bad debts are written off as incurred.
Doubtful debt included in administrative and other operating expenses
were $124,398 and nil for the years ended December 31, 2005 and 2004
respectively.
(l) Advances to suppliers
F-10
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Advances to suppliers represent the cash paid in advance for purchasing
raw materials.
(m) Cash and cash equivalents
The Group considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Group
maintains bank accounts only in the PRC. The Group does not maintain any
bank accounts in the United States of America.
(n) Restricted Cash
Restricted cash represents time deposits on account to secure notes payable.
(o) Marketable Securities
The Group's investment in marketable securities consists of an investment in
a Chinese open-ended fund that invests in Chinese corporate equity
securities. The Group's investment is classified as available-for-sale.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", unrealized gains and losses on this investment are included
in other comprehensive income, a separate component of shareholders'
equity. Realized gains and losses from the sales of marketable securities
and declines in value considered to be other than temporary are to be
included in other income (expense).
(p) Foreign currency translation
The accompanying consolidated financial statements are presented in United
States dollars. The functional currency of the Group is the Renminbi
(RMB). The consolidated financial statements are translated into United
States dollars from RMB at year-end exchange rates as to assets and
liabilities and average exchange rates as to revenues and expenses.
Capital accounts are translated at their historical exchange rates when
the capital transactions occurred.
2005 2004
Year end RMB : US$ exchange rate 8.0734 8.2865
Average yearly RMB : US$ exchange rate 8.2033 8.2872
The RMB is not freely convertible into foreign currency and all foreign
exchange transactions must take place through authorized institutions. No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rates used in translation.
(q) Revenue recognition
Revenue represents the invoiced value of goods sold recognized upon the
delivery of goods to customers. Revenue is recognized when all of the
following criteria are met:
F-11
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
-Persuasive evidence of an arrangement exists,
-Delivery has occurred or services have been rendered,
-The seller's price to the buyer is fixed or determinable, and
-Collectibility is reasonably assured or payments have been established.
(r) Income taxes
The Group accounts for income tax using an asset and liability approach and
allows for recognition of deferred tax benefits in future years. Under the
asset and liability approach, deferred taxes are provided for the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire before
the Group is able to realize their benefits, or that future realization is
uncertain.
The Company is operating in the Hong Kong. In accordance with the relevant
tax laws and regulations of Hong Kong, the corporation profits tax of 17.5%
on the assessable profits of the Company is $57,432 and nil for the years
2005 and 2004.
Deyi is operating in the PRC, and in accordance with the relevant tax laws
and regulations of PRC, the corporation income tax rate is 33%. However,
also in accordance with the relevant taxation laws in the PRC, from the
time that a company has its first profitable tax year, a foreign investment
company is exempt from corporate income tax for its first two years and is
then entitled to a 50% tax reduction for the succeeding three years. The
Company's first profitable tax year was 2003. The Company will be levied at
the 33% tax rate in 2008. As such, the Company's income tax expense for
2005 and 2004 was $570,287 and nil respectively.
(s) Advertising
The Group expensed all advertising costs as incurred. Advertising expenses
included in selling and distribution expenses were $129,125 and $144,235
for the years ended December 31, 2005 and 2004 respectively.
(t) Shipping and handling
All shipping and handling are expensed as incurred and outbound freight is
not billed to customers. Shipping and handling expenses included in
selling and distribution expenses were $258,549 and $410,944 for the years
ended December 31, 2005 and 2004 respectively.
(u) Retirement benefits
Retirement benefits in the form of contributions under defined contribution
retirement plans to the relevant authorities are charged to the statements of
income as incurred. The retirement benefit expenses included in general and
administrative expenses were $28,667 and $20,822 for the years
F-12
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
ended December 31, 2005 and 2004.
(v) Surplus reserves
Surplus reserves for foreign investment enterprises are referring to the
amount appropriated from the net income in accordance with laws or
regulations, which can be used to recover losses and increase capital, as
approved, and are to be used to expand production or operations.
Surplus reserves consist of the following as of December 31,
2005 2004
Enterprise reserve fund $ 235,105 $ -
Enterprise expansion fund 235,105 -
Employee welfare fund 165,210 -
--------- -------
$ 635,420 $ -
========= =======
(w) Comprehensive income
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among
other disclosures, all items that are required to be recognized under
current accounting standards as components of comprehensive income are
required to be reported in a financial statement that is presented with the
same prominence as other consolidated financial statements. The Group's
current components of other comprehensive income is the foreign currency
translation adjustment.
(x) Recent accounting pronouncements
In May 2005, the FASB issued a SFAS 154, "Accounting Changes and Error
Corrections" to replace APB Opinion No. 20, "Accounting Changes" and SFAS
3, "Reporting Accounting Changes in Interim Financial Statements" requiring
retrospective application to prior periods consolidated financial
statements of changes in accounting principle, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of
the change. When it is impracticable to determine the period-specific
effects of an accounting change on one or more individual prior periods
presented, SFAS 154 requires the new accounting principle be applied to the
balances of assets and liabilities as of the beginning of the earliest
period for which retrospective application is practicable and that a
corresponding adjustment be made to the opening balance of retained
earnings (or other appropriate components of equity or net assets in the
statement of financial position) for that period rather than being reported
in an income statement. When it is impracticable to determine the
cumulative effect of applying a change in accounting principle to all prior
periods, SFAS 154 requires that the new accounting
F-13
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
principle be applied as if it were adopted prospectively from the earliest
date practicable. The effective date for this statement is for accounting
changes and corrections of errors made in fiscal year beginning after
December 15, 2005.
(x) Recent accounting pronouncements (Continued)
In February 2006, the FASB issued a SFAS 155, "Accounting for Certain Hybrid
Financial Instruments" to amend FASB Statements No. 133, Accounting for
Derivative Instruments and Hedging Activities, and No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. This statement permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise
would require bifurcation and eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments
acquired or issued after the beginning of an entity's first fiscal year
that begins after September 15, 2006.
The Group does not anticipate that the adoption of these two standards will
have a material impact on these consolidated financial statements.
3. INVENTORIES
2005 2004
Raw materials $ 2,177,674 $ 1,735,944
Work in progress - 235,251
Semi finished goods 1,423,106 1,083,046
Finished goods 420,060 925,283
----------- -----------
$ 4,020,840 $ 3,979,524
=========== ===========
4. LAND USE RIGHTS
2005 2004
Cost of land use rights $ 303,393 $ 295,591
Less: Accumulated amortization (24,031) (17,194)
----------- -----------
Land use rights, net $ 279,362 $ 278,397
=========== ===========
F-14
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
4. LAND USE RIGHTS (CONT'D)
Amortization expense for the years ended 2005 and 2004 was $6,282 and $6,219
respectively.
A net land use right of $168,286 and $168,972 at December 31, 2005 and 2004,
respectively is registered in the name of Wujiang Delong Fashion Clothes Co.,
Ltd. (WDFC), a company owned by the Company's director. WDFC has leased all
of the useful lives of the land to the Company at the cost of the land.
The Company has paid all of rental payment since the inception of the capital
lease.
5. LONG-TERM NOTES RECEIVABLE
Long-term notes receivable represent unsecured loans to two unrelated
companies, with interest payable annually at 5.544% per annum. Interest
income for 2005 and 2004 was $406,300 and $280,950 respectively, and is
included in interest expense, net in the accompanying statement of income.
All the amounts are unsecured, and have no fixed repayment terms.
6. PLANT AND EQUIPMENT
Plant and equipment consist of the following as of December 31:
2005 2004
At cost
Building $ 1,653,875 $ 1,611,343
Machinery 7,883,393 7,296,983
Motor vehicles 367,119 302,758
Office equipment 328,605 291,328
Other equipment 23,814 23,202
----------- -----------
$ 10,256,806 $ 9,525,614
----------- -----------
Less: Accumulated depreciation
Building $ 280,655 $ 192,870
Machinery 2,259,470 1,463,163
Motor vehicles 152,373 88,428
Office equipment 117,892 54,309
Other equipment 12,515 7,554
------------ -----------
$ 2,822,905 $ 1,806,324
------------ -----------
$ 7,433,901 $ 7,719,290
============ ===========
F-15
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
6. PLANT AND EQUIPMENT (CONT'D)
Depreciation expense for the years ended 2005 and 2004 was $953,562 and
$731,759 respectively.
The net book value of machinery pledged as collateral for short-term bank
loans and a capital lease agreement with the Bank of China at December 31,
2005 and 2004 was $2,423,693 and $2,767,845 respectively.
The Group leases certain machinery to an unrelated company with a term from
January 1, 2004 through December 31, 2006. The annual rental income for the
years ended 2005 and 2004 amounted $292,566 and $ 289,602 respectively. The
depreciation of the leased machinery for the years ended 2005 and 2004
amounted to $77,703 and $76,915 respectively. The net amount of $214,863 and
$212,687 was included in other income in the accompanying consolidated
statements of income for years ended 2005 and 2004. The total net book value
of the machinery at December 31, 2005 and 2004 was $592,146 and $662,387.
7. OTHER RECEIVABLES
Other receivables consist of the following as of December 31,
2005 2004
Amounts due from directors $ 263,270 $ 24,041
Amounts due from employees 38,509 105,557
Sundry receivables 4,852,241 1,998,707
--------- ---------
$ 5,154,020 $ 2,128,305
========= =========
All the amounts due from directors/employees are unsecured, interest free,
and have no fixed repayment terms.
F-16
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
8. OTHER PAYABLES
Other payables consist of the following as of December 31,
2005 2004
Amounts due to employees $ 64,394 $ 538
Taxes payable 390,073 103,028
Sundry payables 181,170 3,585,905
-------- ---------
$635,637 $3,689,471
======== =========
All the amounts due to employees are unsecured, interest free, and have no
fixed repayment terms.
F-17
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
9. SHORT-TERM BANK LOANS
Short-term bank loans are as follows:
2005 2004
Loans from Bank of China, interest rates at 5.84% per
annum
Due August 29, 2005 $ - $ 349,967
Due October 20, 2005 - 422,374
Due October 18, 2005 - 482,713
Due September 7, 2005 - 193,085
Due March 19, 2006 433,522 -
Due February 25, 2006 359,204 -
Due March 7, 2006 198,182 -
Due March 28, 2006 247,727 -
Due March 29, 2006 247,727 -
Due April 15, 2006 495,454 -
Due May 1, 2006 247,727 -
Due June 5, 2006 247,727 -
----------- -----------
$ 2,477,270 $ 1,448,139
----------- -----------
Loans from Wujiang Country Commercial Bank,
interest rate at 8.06% per annum
Due April 8, 2005 $ - $ 241,358
Due January 4, 2006 210,568 -
Due April 7, 2006 247,727 -
Due April 24, 2006 61,932 -
----------- -----------
$ 520,227 $ 241,358
----------- -----------
F-18
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
9. SHORT TERM BANK LOANS (CONT'D)
2005 2004
Loan from China Ever Bright Bank, interest rate at
4.62% and 5.31% per annum, respectively
Due March 19, 2006 $ - $ 699,934
Due April 17, 2006 718,409 -
Due May 15, 2006 438,477 -
Due April 24, 2006 346,818 -
Due June 5, 2006 222,954 -
Due June 7, 2006 371,591 -
Due June 16, 2006 594,545 -
Due June 23, 2006 656,477 -
---------- ---------
$ 3,349,271 $ 699,934
---------- ---------
Loan from China CITIC Bank, interest rate at 7.25%
per annum
Due January 13, 2006 $ 619,318 $ -
---------- ---------
$ 619,318 $ -
---------- ---------
$ 6,966,086 $2,389,431
========== =========
All of the short-term bank loans due in 2005 were paid on their due dates.
Interest expense was $440,666 and $414,174 in 2005 and 2004, respectively.
The principal amounts of the short-term bank loans were paid at the due
dates whereas interest was being paid quarterly.
The short-term bank loans from Bank of China were secured by the Company's
machinery and a guarantee provided by Mr. Yao Derong, a director of the
Company. The short-term bank loans from China Ever Bright Bank and Wujiang
Country Commercial Bank were secured by a corporate guarantee provided by
Wujiang Zhongchun Weaving Company, a customer of the Company. The
short-term bank loan from China CITIC Bank was secured by the property of
Wujiang Delong Fashion Clothes Co., Limited, a company owned by Mr. Yao
Derong.
F-19
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
10. NOTES PAYABLE
Notes payable are as follows:
2005 2004
Secured notes to Bank of China, bank commission
charge at 0.05% each transaction
Due January 14, 2005 $ - $ 362,035
Due January 14, 2005 - 306,523
Due January 14, 2005 - 362,035
Due March 28, 2005 - 521,330
------- ---------
$ - $1,551,923
------- ---------
Secured notes to China Ever Bright Bank, bank
commission charge at 0.05% each transaction
Due April 10, 2005 $ - $ 784,408
Due April 8, 2005 - 724,069
Due May 18, 2005 - 567,188
Due May 10, 2005 - 543,052
Due May 24, 2005 - 362,035
Due May 9, 2005 - 168,949
Due June 22, 2005 - 84,474
Due March 24, 2006 433,522 -
Due March 21, 2006 371,591 -
Due April 8, 2006 309,659 -
Due April 18, 2006 520,227 -
---------- ----------
$ 1,634,999 $3,234,175
========== ==========
F-20
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
10. NOTES PAYABLE (Continued)
2005 2004
Secured notes to China Merchant's Bank, bank
commission charge at 0.05% each transaction
Due March 30, 2006 $ 247,727 $ -
Due April 12, 2006 1,362,499 -
Due April 30, 2006 371,591 -
Due May 3, 2006 495,454 -
Due June 25, 2006 371,591 -
--------- ---------
$ 2,848,862 $ -
--------- ---------
Secured notes to Shengze Rural Commercial Bank,
bank commission charge at 0.05% each transaction
Due December 18, 2006 $ 123,864 $ -
---------- ----------
$ 123,864 $ -
---------- ----------
Secured notes to China CITIC Bank, bank
commission charge at 0.05% each transaction
Due January 26, 2006 $ 495,454 $ -
Due January 16, 2006 408,750 -
Due January 20, 2006 334,432 -
Due March 28, 2006 371,591 -
Due January 21, 2006 80,510 -
----------- ----------
$ 1,690,737 $ -
----------- ----------
$ 6,298,462 $4,786,098
=========== ==========
All of the notes due on June 25, 2006 and in 2005 were paid on their due
date. The bank charges 0.05% of the principal as a commission on each loan
transaction. The bank commission charges were $14,089 and $10,760 in 2005
and 2004, respectively, and are included in interest expense, net in the
accompanying consolidated statements of income.
F-21
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
11. CAPITAL LEASE OBLIGATIONS
The Group leases a motor vehicle under a non-cancelable lease classified as
a capital lease. The following is a schedule of future minimum lease
payments for the capital leases together with the present value of the net
minimum lease payments:
2005 2004
Year ending December 31:
2005 $ - $ 37,410
2006 38,398 37,410
--------- -----------
Total minimum lease payments $ 38,398 $ 74,820
Less: Capital lease charges (2,895) (5,640)
--------- -----------
Present value of lease payments $ 35,503 $ 69,180
Less: Current portion (35,503) (34,590)
--------- -----------
$ - $ 34,590
========= ===========
F-22
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
12. COMMON STOCK
The common stock of the company is as follows:
2005 2004
Yao DeRong (YDR) $ 15,000 30.00% $ 16,000 32.00%
Itochu Textile Materials (Asia) Ltd
(ITMA) 12,200 24.40% 5,000 10.00%
Yao YunZhen (YYZ) 4,000 8.00% 5,000 10.00%
Yao YunHong (YYH) 4,000 8.00% 5,000 10.00%
Ren WeiRong (RWR) 4,000 8.00% 5,000 10.00%
Tang Shengli (TSL) 4,000 8.00% 5,000 10.00%
Realty Century Management Ltd (RCM) 1,000 2.00% 1,800 3.60%
Good Result Investment Co. Ltd (GRI) 1,000 2.00% 1,800 3.60%
Ye GenZhen 1,000 2.00% 1,000 2.00%
Gain For Success Enterprises Ltd 1,000 2.00% 1,000 2.00%
Sheng MeiZhen (SMZ) 1,000 2.00% 1,600 3.20%
Ma Binliang 900 1.80% 900 1.80%
Ma Wenying 900 1.80% 900 1.80%
-------- ------- ------- -------
$ 50,000 100.00% $50,000 100.00%
======== ======= ======= =======
Pursuant to an equity trust and swap agreement dated November 17, 2005 and
made between the Company and ITMA, it was agreed between the parties that all
of the equity interest of Deyi controlled by ITMA be held in trust for the
Company, and in consideration, ITMA was entitled to certain percentage of
equity interest of the Company on the condition that the Company should become
a public company in the United States of American. The percentage of equity
interest of the Company which ITMA is entitled shall be equal to the
percentage of equity interests of Deyi which ITMA is contributed.
F-23
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
13. SUNDRY INCOME
Sundry income consists of the following as of December 31,
2005 2004
Machines rental income $ 214,863 $ 212,687
Technical consultancy fee income 966,452 -
--------- ---------
$ 1,181,315 $ 212,687
========= =========
14. INCOME TAXES
The following table accounts for the differences between the actual tax
provision and the amounts obtained by applying the relevant applicable
corporation income tax rate to income before tax for the year ended December
31, 2005 and 2004:
2005
PRC Hong Kong Total
Income before tax $ 4,692,058 $ 328,180 $ 5,020,238
----------- --------- -----------
Tax at the domestic income tax rate $ 1,548,379 $ 57,432 $ 1,605,811
Effect of tax exemption granted (978,092) - (978,092)
----------- --------- -----------
Income tax $ 570,287 $ 57,432 $ 627,719
=========== ========= ===========
2004
PRC Hong Kong Total
Income/(loss) before tax $ 4,335,189 $ (170,461) $ 4,164,728
----------- ---------- -----------
Tax at the domestic income tax rate $ 1,430,612 $ (29,831) $ 1,400,781
Effect of tax exemption granted (1,430,612) - (1,430,612)
Tax losses not recognized - 29,831 29,831
----------- ---------- -----------
Income tax $ - $ - $ -
=========== ========== ===========
F-24
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
15. RELATED PARTIES TRANSACTIONS
The following material transactions with related parties during the years were
in the opinion of the directors, carried out in the ordinary course of
business and on normal commercial terms:
2005 2004
Sales of goods to a related company (a) $ 283,469 $ 807,982
Purchases of raw materials from related companies (b) $2,134,495 $4,160,886
========== ==========
(a) Sales to Shanghai Itochu Company (SIC), a related company of a director,
for the years 2005 and 2004 was $283,469 and $807,982 respectively. The
amount due from SIC for the years 2005 and 2004 was $23,803 and nil
respectively.
(b) Purchases from Japan Itochu Company (JIC), a related company of a
director, for the years 2005 and 2004 were $253,171 and $140,441 respectively.
The amount due to JIC for the years ended December 31, 2005 and 2004 was
$200,553 and $53,999 respectively. Purchases from Wujiang Delong Fashion
Clothes Co., Ltd (WDFC), a company owned by a director, for the years 2005 and
2004 were $7,029 and $361,643 respectively. The amount due from/(to) WDFC for
the years ended December 31, 2005 and 2004 was $5,838 and ($3,956)
respectively.
(c) The amounts due from directors for the years ended December 31, 2005 and
2004 were $263,270 and $24,041 respectively. The directors settled all the
amounts due to the group as at June 28, 2006.
2005 2004
Yao DeRong $ 189,359 24,041
Ren WeiRong 73,911 -
--------- ---------
$ 263,270 24,041
========= =========
All of the above amounts due with related parties are unsecured, interest
free, and have no fixed repayment terms.
F-25
POLARA GLOBAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Stated in US Dollars)
16. COMMITMENTS
The Group leased office spaces for trade promotion purposes from third
parties. Accordingly, for the years ended December 31, 2005 and 2004, the
Group recognized rental expenses for these spaces of $50,290 and $56,526
respectively.
As of December 31, 2005, the Group had commitments with respect to non-
cancelable operating leases for these offices, as follows:
2006 $ 7,586
========
17. BUSINESS SEGMENT
For management purposes, the Group is currently organized into four major
production activities - dye to process outward, polyester fabric, cupro fabric
and cotton fabric. These principal operating activities are the basis on
which the Group reports its primary segment information.
Dye to
Process Polyester Cupro Cotton
2005 outward fabric fabric fabric Total
Sales 6,124,101 25,946,139 2,309,755 1,598,466 35,978,461
Cost of sales 4,822,602 22,520,691 1,855,477 1,195,197 30,393,968
---------- ----------- ---------- ---------- -----------
Segment result 1,301,499 3,425,448 454,278 403,269 5,584,493
========== =========== ========== ========== ===========
Dye to
Process Polyester Cupro Cotton
2004 outward fabric fabric fabric Total
Sales 5,335,811 24,186,638 646,102 - 30,168,551
Cost of sales 4,402,297 19,733,843 408,632 - 26,644,771
---------- ----------- ---------- ---------- -----------
Segment result 933,514 4,452,795 137,470 - 5,523,780
========== =========== ========== ========== ===========
F-26
POLARA GLOBAL LIMITED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1, 2006 TO MARCH 31, 2006
(Stated in US Dollars)
2006 2005
Net sales $ 7,511,947 $ 5,320,352
Cost of sales (6,427,658) (4,352,069)
----------- -----------
Gross profit $ 1,084,289 $ 968,283
Selling and distributing costs (167,205) (185,924)
Administrative and other operating
expenses (121,110) (299,147)
----------- -----------
Income from operations $ 795,974 $ 483,212
Interest expenses, net (136,397) (78,529)
Other income 54,763 291,758
----------- -----------
Income before taxes $ 714,340 $ 696,441
Income tax (87,330) (96,831)
----------- -----------
Income after taxes $ 627,010 $ 599,610
Minority interests - (180,135)
----------- -----------
Net income $ 627,010 $ 419,475
=========== ===========
POLARA GLOBAL LIMITED
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31, 2006 AND 2005
(Stated in US Dollars)
2006 2005
ASSETS
Current assets
Cash and cash equivalents $ 527,940 $ 740,025
Restricted cash 5,287,214 2,856,787
Marketable securities 12,480 60,412
Accounts receivable 6,000,517 8,288,310
Inventories 4,447,187 4,492,644
Advances to suppliers 3,087,923 3,904,084
Prepaid expenses - 29,965
Other receivables 11,062 2,586
----------- -----------
Total current assets $30,425,617 $22,958,493
Land use rights 281,474 278,734
Long-term notes receivable 5,838,395 6,729,051
Construction in progress 2,889,028 612,110
Plant and equipment, net 7,322,918 7,524,833
----------- -----------
TOTAL ASSETS $46,757,432 $ 15,144,728
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 6,206,905 $ 5,179,223
Short-term bank loans 6,734,520 4,195,312
Notes payable 7,344,480 5,028,696
Accrued liabilities 38,678 113,256
Customers' deposits 1,772,567 4,164,844
Other payables 8,370,519 6,293,960
Income tax payable 599,856 -
Current portion of capital
lease obligations 38,688 37,456
----------- -----------
Total current liabilities $ 31,106,213 $ 25,012,747
Capital lease obligations - 37,456
----------- -----------
TOTAL LIABILITIES $ 31,106,213 $ 25,050,203
POLARA GLOBAL LIMITED
CONSOLIDATED BALANCE SHEETS (Continued)
AS AT MARCH 31, 2006 AND 2005
(Stated in US Dollars)
2006 2005
MINORITY INTERESTS - 3,711,079
STOCKHOLDERS' EQUITY
Common stock $ 50,000 $ 50,000
Capital reserves 8,529,328 5,925,358
Surplus reserves 640,224 -
Accumulated other comprehensive
income 50,941 2,364
Retained earnings 6,380,726 3,364,217
----------- -----------
$ 15,651,219 $ 9,341,939
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 46,757,432 $ 38,103,221
============ ============
(b) Proforma Financial Information
The following pro forma consolidated statement of operations is presented for
illustrative purposes only and is not necessarily indicative revenue and
results of the operations of the consolidated group that actually would have
been achieved had the acquisition been completed on January 1, 2006 (Three
months ended March 31, 2005: January, 2005).
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 (Stated in US Dollars)
Pro forma Pro forma
Company Polara Adjustment Combined
$ $ $ $
Net sales - 7,511,947 - 7,511,947
Cost of sales - (6,427,658) - (6,427,658)
-------- ---------- --------- -----------
Gross profit - 1,084,289 - 1,084,289
Selling and
distributing costs - (167,205) - (167,205)
Administrative and
other operating expenses (27,856) (121,110) - (148,966)
-------- ---------- --------- -----------
Income (loss) from
operations (27,856) 795,974 - 768,118
Interest expenses, net - (136,397) - (136,397)
Other income - 54,763 - 54,763
-------- ---------- --------- -----------
Income (loss) before taxes (27,856) 714,340 - 686,484
Income taxes - (87,330) - (87,330)
-------- ---------- --------- -----------
Net income (loss) (27,856) 627,010 - 599,154
======== ========== ========= ===========
Earnings per share 0.008
===========
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 (Stated in US Dollars)
Pro forma Pro forma
Company Polara Adjustment Combined
$ $ $ $
Net sales - 5,320,352 - 5,320,352
-------- ---------- --------- -----------
Cost of sales - (4,352,069) - (4,352,069)
-------- ---------- --------- -----------
Gross profit - 968,283 - 968,283
Selling and distributing
costs - (185,924) - (185,924)
Administrative and
other operating expenses - (299,147) - (299,147)
-------- ---------- --------- -----------
Income from operations - 483,212 - 483,212
Interest expenses, net - (78,529) - (78,529)
Other income - 291,758 - 291,758
-------- ---------- --------- -----------
Income before taxes - 696,441 - 696,441
Income taxes - (96,831) - (96,831)
-------- ---------- --------- -----------
Income after taxes - 599,610 - 599,610
Minority interests - (180,135) - (180,135)
-------- ---------- --------- -----------
Net income - 419,475 - 419,475
======== ========== ========= ===========
Earnings per share 0.005
(a) Income tax
Deyi is operating in the PRC and is eligible for tax concession rate of
12% for the PRC income tax during the period.
(b) Earnings per share
For the three months ended
March 31,
2006 2005
Net profit available to common shareholders
(numerator) 599,154 419,475
Weighted average number of common shares
Outstanding used in profit per share
for the period (denominator) 77,720,000 77,150,000
PRO FORMA CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 2006 (Stated in US Dollars)
Pro forma Pro forma Pro forma
Company Polara Adjustment 1 Adjustment 2 Combined
$ $ $ $ $
current assets
Cash and cash
equivalents 11,271 527,940 - - 539,211
Restricted cash - 5,287,214 - - 5,287,214
Marketable securities - 12,480 - - 12,480
Accounts receivable - 6,000,517 - - 6,000,517
Inventories - 4,447,187 - - 4,447,187
Advances to suppliers - 3,087,923 - - 3,087,923
Prepaid expenses - - - - -
Other receivables - 11,062,356 - - 11,062,356
-------- ---------- --------- ---------- -----------
Total current assets 11,271 30,425,617 - - 30,436,888
-------- ---------- --------- ---------- -----------
Long term investments - - 15,651,219 (15,651,219) -
Land use rights - 281,474 - - 281,474
Long-term notes receivable - 5,838,395 - - 5,838,395
Construction in progress - 2,889,028 - - 2,889,028
Plant and equipment, net - 7,322,918 - - 7,322,918
-------- ---------- --------- ---------- -----------
- 16,331,815 - - 16,331,815
-------- ---------- --------- ---------- -----------
Total assets 11,271 46,757,432 46,768,703
======== ========== ==========
Liabilities and stockholder's equity
Current liabilities
Accounts payable 27,731 6,206,905 - - 6,234,636
Short-term bank loans - 6,734,520 - - 6,734,520
Notes payable - 7,344,480 - - 7,344,480
Accrued liabilities - 38,678 - - 38,678
Customers' deposits - 1,772,567 - - 1,772,567
Other payables - 8,370,519 - - 8,370,519
Income tax payable - 599,856 - - 599,856
Current portion of
capital lease obligations - 38,688 - - 38,688
-------- ---------- --------- ---------- -----------
Total current
liabilities 27,731 31,106,213 - - 31,133,944
-------- ---------- --------- ---------- -----------
Total Liabilities 27,731 31,106,213 - - 31,133,944
-------- ---------- --------- ---------- -----------
Minority Interests - - - - -
Stockholders' Equity
Common stock 3,886 51,648 73,834 (51,648) 77,720
Additional paid in
capital 89,830 - 15,577,385 (15,577,385) 89,830
Capital reserves - 8,529,328 - - 8,529,328
Surplus reserves - 640,224 - - 640,224
Accumulated other
comprehensive income 461 49,293 - - 49,754
Retained earnings (110,637) 6,380,726 - (22,186) 6,247,903
-------- ---------- --------- ---------- -----------
(16,460)15,651,219 15,634,759
-------- ---------- --------- ---------- -----------
Total liabilities and
shareholders' equity 11,271 46,757,432 46,768,703
======== ========== ===========
PRO FORMA CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 2005 (Stated in US Dollars)
Pro forma Pro forma Pro forma
Company Polara Adjustment 1 Adjustment 2 Combined
$ $ $ $ $
current assets
Cash and cash
equivalents 42 740,025 - - 740,067
Restricted cash - 2,856,787 - - 2,856,787
Marketable securities - 60,412 - - 60,412
Accounts receivable - 8,288,310 - - 8,288,310
Inventories - 4,492,644 - - 4,492,644
Advances to suppliers - 3,904,084 - - 3,904,084
Prepaid expenses - 29,965 - - 29,965
Other receivables - 2,586,266 - - 2,586,266
-------- ---------- --------- ---------- -----------
Total current assets 42 22,958,493 22,958,535
Long term investments
Land use rights - 278,734 - - 278,734
Long-term notes receivable - 6,729,051 - - 6,729,051
Construction in progress - 612,110 - - 612,110
Plant and equipment, net - 7,524,833 - - 7,524,833
-------- ---------- --------- ---------- -----------
- 15,144,728 15,144,728
-------- ---------- --------- ---------- -----------
Total assets 42 38,103,221 38,103,263
-------- ---------- --------- ---------- -----------
Liabilities and stockholder's equity
current liabilities
Accounts payable - 5,179,223 - - 5,179,223
Short-term bank loans - 4,195,312 - - 4,195,312
Notes payable - 5,028,696 - - 5,028,696
Accrued liabilities - 113,256 - - 113,256
Customers' deposits - 4,164,844 - - 4,164,844
Other payables - 6,293,960 - - 6,293,960
Income tax payable - - - - -
Current portion of
capital lease obligations - 37,456 - - 37,456
-------- ---------- --------- ---------- -----------
Total current
liabilities - 25,012,747 25,012,747
-------- ---------- --------- ---------- -----------
Capital lease obligations - 37,456 - - 37,456
-------- ---------- --------- ---------- -----------
Total Liabilities - 25,050,203 - - 25,050,203
-------- ---------- --------- ---------- -----------
Minority Interests - 3,711,079 - - 3,711,079
Stockholders' Equity
Common stock 3,316 50,003 73,834 (50,003) 77,150
Additional paid in
capital 67,250 - 9,268,105 (9,268,105) 67,250
Capital reserves - 5,925,358 - - 5,925,358
Accumulated other
comprehensive income - 2,361 - - 2,361
Retained earnings (70,524) 3,364,217 - (23,831) 3,269,862
-------- ---------- --------- ---------- -----------
42 9,341,939 9,341,981
-------- ---------- --------- ---------- -----------
Total liabilities and
shareholders' equity 42 38,103,221 38,103,263
======== ========== ===========
Adjustment 1 represents the issue of shares as if the proposed share exchange
(under the Share Exchange Agreement between the Company and the controlling
shareholders of the Company, Polara Global Limited, a British Virgin Islands
international business company, each of the Polara Global Limited
Shareholders,and WuJiang DeYi Fashions Clothes Company Limited, a People's
Republic of China limited liability company) was already effected as of the
incorporation of Polara.
Adjustment 2 represents the intra-group elimination as if the proposed share
exchange (under the Share Exchange Agreement between the Company and the
controlling shareholders of the Company, Polara Global Limited, a British
Virgin Islands international business company, each of the Polara Global
Limited Shareholders,and WuJiang DeYi Fashions Clothes Company Limited, a
People's Republic of China limited liability company) was already effected as
of the incorporation of Polara.
Exhibits
Exhibit
Number Description
3.1 Articles of Incorporation
3.2 Certificate of Amendment of Articles of Incorporation
3.3 Bylaws
99.1 Share Exchange Agreement dated January 26, 2006
99.2 Escrow Agreement dated July 31, 2006
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
NEW FIBER CLOTH TECHNOLOGY, INC.
By:/S/Yao De Rong
Yao DeRong
Chief Executive Officer and Director
Dated: July 31, 2006