U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under
the Securities Exchange Act of 1934
For Quarter Ended: September 30, 2004
Commission File Number: 000-23485
DRAGON INTERNATIONAL GROUP CORP.
--------------------------------
(Exact name of small business issuer as specified in its charter)
RETAIL HIGHWAY.COM, INC.
------------------------
(Former Name)
Nevada
(State or other jurisdiction of incorporation or organization)
98-0177646
(IRS Employer Identification No.)
Bldg 14
Suite A09, International Trading Center,
29 Dongdu Road
Ningbo, China 315000
--------------------
(Address of principal executive offices)
225 Macpherson Ave.
Unit B
Toronto, Ontario, Canada M4V 1A1
--------------------------------
(Former Address)
86-574-56169308
---------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days: Yes
X No .
- ----- -----
The number of shares of the registrant's only class of common stock issued and
outstanding, as of November 12, 2004 was 28,915,513 shares.
Documents incorporated by reference: none
PART I
ITEM 1. FINANCIAL STATEMENTS.
Our unaudited financial statements for the three month period ended
September 30, 2004, are attached hereto.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following analysis of the results of operations and financial condition
of the Company should be read in conjunction with the financial statements of
Retail Highway.com, Inc. for the year ended June 30, 2004, and notes thereto
contained in Report on Form 10-KSB of Retail Highway.com, Inc. as filed with the
Securities and Exchange Commission.
This report on Form 10-QSB contains forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those discussed in the forward-looking statements and from
historical results of operations. Among the risks and uncertainties which could
cause such a difference are those relating to our dependence upon certain key
personnel, our ability to manage our growth, our success in implementing the
business strategy, our success in arranging financing where required, and the
risk of economic and market factors affecting us or our customers. Many of such
risk factors are beyond the control of the Company and its management.
The following discussion should be read in conjunction with our unaudited
Financial Statements and notes thereto included herein. In connection with, and
because we desire to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not
in future filings with the Securities and Exchange Commission. Forward looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward looking
statements made by, or on our behalf. We disclaim any obligation to update
forward looking statements.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates based on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
2
A summary of significant accounting policies is included in Note 1 to the
audited financial statements included Form 10-KSB as filed with the Securities
and Exchange Commission for our year ended June 30, 2004. Management believes
that the application of these policies on a consistent basis enables us to
provide useful and reliable financial information about our operating results
and financial condition.
We record property and equipment at cost. Depreciation and amortization are
provided using the straight-line method over the estimated economic lives of the
assets, which are from five to ten years. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred.
We account for stock options issued to employees in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation cost is measured on the date of grant as the excess of the current
market price of the underlying stock over the exercise price. Such compensation
amounts, if any, are amortized over the respective vesting periods of the option
grant. We adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", which permits entities to provide pro
forma net income (loss) and pro forma earnings (loss) per share disclosures for
employee stock option grants as if the fair-valued based method defined in SFAS
No. 123 had been applied. We account for stock options and stock issued to non-
employees for goods or services in accordance with the fair value method of SFAS
123.
We follow the guidance of the Securities and Exchange Commission's Staff
Accounting Bulletin 104 for revenue recognition. In general, we record revenue
when persuasive evidence of an arrangement exists, services have been rendered
or product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectability is reasonably assured. Our revenues from the
sale of products are recorded when the goods are shipped, title passes, and
collectability is reasonably assured.
OVERVIEW
We were incorporated on February 17, 1993, under the name "LBF Corporation"
pursuant to the laws of the State of Nevada to engage in any lawful corporate
purpose. In December 1997, we filed a registration statement with the United
States Securities and Exchange Commission on Form 10-SB, registering our common
stock under the Securities Exchange Act of 1934, as amended (the "34 Act"). Our
intention at that time was to seek to acquire assets or shares of an entity
actively engaged in business which generated revenues or provided a business
opportunity, in exchange for our securities. In effect, this filing caused us to
be a full "reporting company" under the 34 Act.
Effective April 17, 1999, we acquired certain assets, including a proposed
electronic commerce web site and the right to certain business names, including
"Shopshopshopping.com," "Retailhighway.com" and "Greatestmall on earth.com" (the
"Assets"). We issued 2,500,000 shares of our common stock equal to ownership of
approximately 33% of our then outstanding shares, in exchange for all of the
Assets. In addition, our shareholders approved an amendment to our Articles of
Incorporation changing our name to "Retail Highway.com, Inc." As described
hereinbelow, as well as in our Form 10-KSB for our fiscal year ended June 30,
2004, we have abandoned this business plan and have successfully merged with an
unaffiliated entity subsequent to September 30, 2004.
Effective October 4, 2004, pursuant to an Agreement and Plan of
Reorganization dated on
3
or about August 13, 2004, as amended on September 30, 2004, we issued 24,625,000
"restricted" shares of our Common Stock, including (i) 22,750,000 "restricted"
Common Shares to the Dragon International Group Corp. shareholders on a pro rata
basis, and (ii) 1,875,000 "restricted" Common Shares to those entities
designated by Dragon pursuant to contractual obligations of Dragon in exchange
for all of the outstanding capital stock of Dragon International Group Corp.,
("Dragon") a Florida corporation. In connection with the merger, the Company
effected a reverse stock split of the Company's common stock, whereby one (1)
share of common stock was issued in exchange for every eight (8) shares of
common stock outstanding immediately prior to October 4, 2004, the effective
date. All share and per-shares information has been restated to reflect this
reverse stock split. For financial accounting purposes, this exchange of stock
will be treated as a recapitalization of Retail with our former shareholders
retaining 1,280,234 shares, or approximately 5% of our outstanding stock.
Additionally, as part of the Merger, we have amended our Articles of
Incorporation, whereby we have changed our name to "Dragon International Group
Corp.," as well as reestablishing our capitalization to the authorized capital
immediately prior to the Merger, which consists of 25,000,000 shares of
Preferred Stock, par value $0.001 per share, and 50,000,000 Common Shares, par
value $.001 per share. Further, our prior management resigned their respective
positions with our company and have been replaced by management of Dragon.
Dragon was founded in June 2004. On June 30, 2004, Dragon acquired 70%
ownership interest of Ningbo Anxin International Co. Ltd. ("Anxin"). Anxin is
located in Ningbo, Zhejiang Province, China, 200 miles south of Shanghai, and
was established in 1997. It is a company operating in international trade as
well as a manufacturer in the integrated packaging paper industry. It holds an
ISO9000 certificate and national license to import and export. In addition to
its own operations, Anxin operates three subsidiaries, including: (i) Shanghai
Anhong Paper Co. Ltd., ("Anhong"), a trading company located in Shanghai, with
another manufacturing facility in Ningbo; Anhong's main products are "Federal"
SBS and "Hang Kong" CCB; (ii) Ningbo Long'an Industry and Trade Co. Ltd
("Long'an"), which has been set up to begin the business of Indonesia `Hang
Kong" CCB. It holds the national license to import and export; and (iii)
Jiangdong Yonglongxin Special Paper Co., Ltd. ("Yonglongxin"). Yonglongxin holds
an ISO9000 certificate and has five series of products, including golden and
silver paperboards, aluminum foil paperboards, pearl paperboards, laser
paperboards and mirror-like paperboards Anxin has a distribution network
covering east and central China. The Merger between Dragon and Anxin has been
accounted for as a reverse acquisition under the purchase method for business
combinations. Accordingly, the combination of the two companies is recorded as a
recapitalization of Dragon, pursuant to which Anxin is treated as the continuing
entity.
Results of Operations
Comparison of Results of Operations for the three month periods ended
September 30, 2004 and 2003
We generated no revenues during the three month periods ended September 30,
2004 and 2003. We had no costs of sales. For the three months ended September
30, 2004, general and administrative expenses were $8,673, as compared to $3,406
for the three months ended September 30, 2003, an increase of $5,267. The
expenses incurred during 2004 and 2003 arose primarily from professional fees
relating to our being a reporting company pursuant to the Securities Exchange
Act of 1934, as amended, and office costs.
For the three months ended September 30, 2004, we wrote off $3,665 of
accounts payable. We recognized a gain of $3,665 in this transaction.
As a result, we reported a net loss of $5,322 (less than $.01 per share)
for the three months
4
ended September 30, 2004, as compared to a net loss of $3,406 (less than $.01
per share) for the three months ended September 30, 2003.
Plan of Operation
At September 30, 2004, our business plan provided for us to seek to acquire
assets or shares of an entity actively engaged in business which generates
revenues, in exchange for its securities. We accomplished this goal by engaging
in the merger with Dragon, described above, effective October 4, 2004.
Our purpose was to seek, investigate and, if such investigation warrants,
acquire an interest in business opportunities presented to us by persons or
firms who or which desire to seek the perceived advantages of an Exchange Act
registered, trading corporation. We did not restrict our search to any specific
business, industry, or geographical location. This discussion of the proposed
business is purposefully general and is not meant to be restrictive of our
virtually unlimited discretion to search for and enter into potential business
opportunities.
The analysis of new business opportunities was undertaken by, or under the
supervision of, our officers and directors, none of whom is a professional
business analyst. In analyzing prospective business opportunities, our former
management considered such matters as the available technical, financial and
managerial resources; working capital and other financial requirements; history
of operations, if any; prospects for the future; nature of present and expected
competition; the quality and experience of management services and the depth of
that management; the potential for further research, development, or
exploration; specific risk factors not now foreseeable but which then may be
anticipated to impact our proposed activities; the potential for growth or
expansion; the potential for profit; the perceived public recognition of
acceptance of products, services, or trades; name identification; and other
relevant factors.
Former management, while not especially experienced in matters relating to
our then business, relied upon their own efforts in accomplishing our business
purposes. Other than our legal counsel, we did not utilize any outside
consultants or advisors to effectuate our business objectives as of September
30, 2004. We did not restrict our search for any specific kind of firms.
Risk Factors
As a result of the merger with Dragon described herein, investors should be
aware that our business is now subject to new risks not previously attributable
to us. Following is a list of certain risks which prospective investors should
be aware.
A downturn or stagnation in the economic environment of the People's
Republic of China could have a material adverse effect on our financial
condition. Effective October 4, 2004, our revenues will be mainly derived from
sale of paper products in the Peoples Republic of China ("PRC"). Our new
management hopes to expand operations to countries outside the PRC. However,
such expansion has not been commenced and there are no assurances that we will
be able to achieve such an expansion successfully. Therefore, a downturn or
stagnation in the economic environment of the PRC could have a material adverse
effect on our financial condition.
There is a risk of increased competition within the PRC. In addition to
competing with other companies, we may have to compete with larger US companies
who have greater funds available for expansion, marketing, research and
development and the ability to attract more qualified personnel if access is
allowed into the PRC market. If US companies do gain access to the PRC markets,
they may be able to offer products at a lower price. There can be no assurance
that
5
we will remain competitive should this occur.
Fluctuation in the current exchange rate could have a negative impact on
our earnings. We cannot provide any assurances or otherwise guarantee that the
current exchange rate will remain steady. Therefore, there is a possibility that
we could post the same amount of profit for two comparable periods and because
of a fluctuating exchange rate actually post higher or lower profit depending on
exchange rate of Chinese Remnibi converted to US dollars on that date. The
exchange rate could fluctuate depending on changes in the political and economic
environments without notice.
Liquidity and Capital Resources
At September 30, 2004 we had limited working capital and cash and cash
equivalents to conduct our operations.
Net cash used in operating activities for the three months ended September
30, 2004 was $10,260 as compared to $2,336 for the three months ended September
30, 2003. Net cash provided by financing activities for the three months ended
September 30, 2004 was $8,074, as compared to net cash provided by financing
activities for the three months ended September 30, 2003, of $2,496 and related
to advances received from a related party.
We currently have no material commitments for capital expenditures.
At September 30, 2004, we had four (4) outstanding loans payable, including
notes in the amounts of $10,000 and $31,124, payable to our former President and
two other convertible notes in the aggregate amount of $26,575. These notes are
convertible into shares of our common stock at a conversion price of $0.0075 per
share. The notes aggregating $26,575 were converted subsequent to September 30,
2004. See "Part II, Item 2, Subsequent Events," below. The remaining notes are
due on or before on or before September 6, 2005 and April 1, 2005, respectively.
Interest accrues at the rate of 3% per annum. While no assurances can be
provided, we believe that the terms of these notes are more favorable to us than
would have been provided by a commercial lending institution at the time the
notes were incurred, if we could have identified such a lender, which we could
not.
While we have sufficient funds to conduct our business and operations as
they are currently undertaken, we want to build an additional manufacturing line
in order to expand our paper product production. Based upon our preliminary
estimates this will require capital and other expenditures of approximately USD
$2 million to $3 million. We do not presently have sufficient working capital to
fund this project and we will need to raise additional working capital to
complete this project. We do not presently have any external sources of capital
and will in all likelihood raise the capital in a debt or equity offering. There
can be no assurance that acceptable financing to fund this project can be
obtained on suitable terms, if at all. Our ability to continue to implement our
growth strategy could suffer if we are unable to raise the additional funds on
acceptable terms which will have the effect of adversely affecting our ongoing
operations and limiting our ability to increase our revenues in the future.
Inflation
Although management expects that our operations will be influenced by
general economic conditions, we do not believe that inflation had a material
effect on our results of operations during the three month period ended
September 30, 2004.
6
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing of this quarterly report on Form
10-QSB, we carried out an evaluation, under supervision and with the
participation of our management, including our CEO, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, our CEO concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to us required to be included in our periodic SEC
filings. Subsequent to the date of that evaluation, there have been no changes
in internal controls or in other factors that could significantly affect
internal controls, nor were any corrective actions required with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There were no legal proceedings which we commenced, or which were filed or
threatened against our Company during the three month period ended September 30,
2004.
ITEM 2. CHANGES IN SECURITIES.
We did not issue any of our securities during the three month period ended
September 30, 2004.
Subsequent Events
Effective October 4, 2004, pursuant to an Agreement and Plan of
Reorganization dated on or about August 13, 2004, as amended on September 30,
2004, we issued 24,625,000 "restricted" shares of our Common Stock, including
(i) 22,750,000 "restricted" Common Shares to the Dragon shareholders on a pro
rata basis, and (ii) 1,875,000 "restricted" Common Shares to those entities
designated by Dragon pursuant to contractual obligations of Dragon in exchange
for all of the outstanding capital stock of Dragon, with our former shareholders
retaining 1,280,234 shares, or approximately 5% of our outstanding stock. In
connection with the merger, we effected a reverse stock split of our common
stock, whereby one (1) share of common stock was issued in exchange for every
eight (8) shares of common stock outstanding immediately prior to October 4,
2004, the effective date. The record date of this reverse stock split was
October 1, 2004.
On or about October 4, 2004, holders of convertible promissory notes
aggregating $26,574 elected to convert this balance into an aggregate of
3,543,211common shares, which were issued to an aggregate of eight persons
and/or entities. We relied upon the exemption from registration afforded by
Regulation D and Section 4/2, as applicable, promulgated under the Securities
Act of 1933, as amended, to issue these securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
During the three month period ended September 30, 2004, pursuant to the
laws of the State of Nevada, a majority of the holders of our outstanding common
stock approved the merger with Dragon, as well as the reverse stock split of our
common stock described above herein and the amendment to our Articles of
Incorporation, wherein we amended the name of our company to Dragon
International Group Corp. and reestablished our authorized capital to 25,000,000
shares of
7
Preferred Stock, par value $0.001 per share, and 50,000,000 Common Shares, par
value $.001 per share.
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31. Certification of Financial Statements in accordance
with Section 302 of the Sarbanes-Oxley Act of 2002
32. Certification of Financial Statements in accordance
with Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the three month period ended
September 30, 2004.
Subsequent Events
On or about October 4, 2004, we filed a report on Form 8-K, advising of the
merger with Dragon described hereinabove, as well as the change in control of
our company which resulted therefrom.
On or about November 8, 2004, we filed a report on Form 8-K, advising of
the termination of our relationship with our former accountants and the
retention of Sherb & Co, LLP as our independent certified accountants, as well
as the issuance of shares of our common stock pursuant to the conversion of
certain outstanding convertible promissory notes.
8
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
September 30, 2004
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 124
-----------
Total current assets 124
-----------
FURNITURE AND FIXTURES, net of accumulated
depreciation of $2,346 1,618
-----------
Total assets $ 1,742
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 8,637
Due to related party 17,345
Convertible notes payable 26,575
Convertible note payable - related party 42,214
-----------
Total current liabilities 94,771
-----------
STOCKHOLDERS' DEFICIT:
Preferred stock, $0.001 par value, 25,000,000 shares
authorized, no shares issued and outstanding --
Common stock, $0.001 par value, 50,000,000 shares
authorized, 1,280,234 shares issued and outstanding 1,280
Additional paid in capital 1,483,587
Deficit accumulated during development stage (1,577,896)
-----------
Total stockholders' deficit (93,029)
-----------
Total liabilities and stockholders' deficit $ 1,742
===========
The accompanying notes are an integral part of these financial statements.
9
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months ended February 17, 1993
September 30, (inception)
-------------------------- through
2004 2003 September 30, 2004
----------- ----------- ------------------
REVENUE $ -- $ -- $ --
GENERAL AND ADMINISTRATIVE EXPENSES 8,673 3,406 1,728,242
----------- ----------- ------------------
LOSS FROM OPERATIONS (8,673) (3,406) (1,728,242)
----------- ----------- ------------------
OTHER INCOME (EXPENSE):
Gain on relief of payables obligation 3,665 -- 129,683
Interest income -- -- 36,304
Interest expense (314) -- (847)
Loss on sale of property and equipment -- -- (14,794)
----------- ----------- ------------------
TOTAL OTHER INCOME (EXPENSE) 3,351 -- 150,346
----------- ----------- ------------------
NET LOSS $ (5,322) $ (3,406) $ (1,577,896)
=========== =========== ==================
PER SHARE INFORMATION:
NET (LOSS) PER COMMON SHARE
(BASIC AND DILUTED) $ (0.00) $ (0.00) ($ 1.90)
=========== =========== =================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 1,280,234 1,280,234 828,481
=========== =========== =================
The accompanying notes are an integral part of these financial statements.
10
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended February 17, 1993
September 30, (inception)
-------------------------- through
2004 2003 September 30, 2004
----------- ----------- ------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss $ (5,322) $ (3,406) $ (1,577,896)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 149 198 35,237
Write off development costs -- -- 887,325
Stock issued for services -- -- 15,510
Loss on sale of property and equipment -- -- 14,794
Cancellation of indebtedness -- -- (126,018)
Expenses of company paid by officer -- -- 10,000
Obligations assumed by stockholders -- -- 68,040
Changes in assets and liabilities:
Accounts payable and accrued expenses (5,401) 872 50,213
Convertible loan 314 -- 40,711
----------- ----------- ------------------
Net cash (used in) operating activities (10,260) (2,336) (582,084)
----------- ----------- ------------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of applied for patent -- -- (10,130)
Proceeds from sale of property and equipment -- -- 5,123
Acquisition of property and equipment -- -- (725,969)
----------- ----------- ------------------
Net cash (used in) investing activities -- -- (730,976)
----------- ----------- ------------------
CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from stock issuance -- -- 1,294,335
Increase in due to related party 8,074 2,496 18,849
Proceeds from note payable - related party -- -- 25,000
Payments on note payable - related party -- -- (25,000)
----------- ----------- ------------------
Net cash provided by financing activities 8,074 2,496 1,313,184
----------- ----------- ------------------
Net increase (decrease) in cash (2,186) 160 124
CASH AT BEGINNING OF PERIOD 2,310 9,862 --
----------- ----------- ------------------
CASH AT END OF PERIOD $ 124 $ 10,022 $ 124
=========== =========== ==================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ -- $ -- $ --
=========== =========== ==================
Income taxes $ -- $ -- $ --
=========== =========== ==================
Non-cash investing and financing activities:
Conversion of shareholder advances to convertible note $ -- $ -- $ 31,124
=========== =========== ==================
Conversion of payable to convertible note $ 11,404 $ -- $ 26,575
=========== =========== ==================
The accompanying notes are an integral part of these financial statements.
11
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The Company
Dragon International Group Corp. (formerly Retail Highway.com, Inc. ("Retail"))
was incorporated in the State of Nevada on February 17, 1993, under the name
"LBF Corporation" and has been in the development stage since its inception.
Effective April 17, 1999, the Company acquired certain assets to facilitate the
Company's entry into electronic commerce and changed its name to Retail
Highway.com, Inc.
On or about August 13, 2004, as amended on September 30, 2004 and effective
October 4, 2004, pursuant to an Agreement and Plan of Reorganization, the
Company issued 24,625,000 shares of its common stock in exchange for all of the
outstanding capital stock of Dragon International Group Corp., ("Dragon") a
Florida corporation. For financial accounting purposes, the exchange of stock
will be treated as a recapitalization of Retail with the former shareholders of
the Company retaining 1,280,234 or approximately 5% of the outstanding stock.
In connection with the merger, the Company affected a reverse stock split of its
common stock, whereby one (1) share of common stock was issued in exchange for
every eight (8) shares of common stock outstanding immediately prior to October
4, 2004, the effective date. All share and per-shares information has been
restated to reflect this reverse stock split.
Additionally, as part of the Merger and pursuant to the affirmative consent of
the holders of a majority of the Company's issued and outstanding common stock,
the Company amended its Articles of Incorporation, whereby it changed its name
to "Dragon International Group Corp." and reestablishing its capitalization to
the authorized capital immediately prior to the Merger, which consists of
25,000,000 shares of Preferred Stock, par value $0.001 per share, and 50,000,000
Common Shares, par value $.001 per share. Further, the Company's prior
management resigned their respective positions with the Company and was replaced
by management of Dragon.
Dragon International Group, Inc. ("Dragon"), a Florida corporation, was founded
in June 2004. On June 30, 2004, Dragon acquired 70% ownership interest of Ningbo
Anxin International Co. Ltd. ("Anxin"). Anxin is located in Ningbo, Zhejiang
Province, China, 200 miles south of Shanghai, and was established in 1997. It is
a company operating in international trade as well as a manufacturer in the
integrated packaging paper industry. It holds an ISO9000 certificate and
national license to import and export. In addition to its own operations, Anxin
operates three subsidiaries, including: (i) Shanghai Anhong Paper Co. Ltd.,
("Anhong"), a trading company located in Shanghai, with another manufacturing
facility in Ningbo; Anhong's main products are "Federal" SBS and "Hang Kong"
CCB; (ii) Ningbo Long'an Industry and Trade Co. Ltd ("Long'an"), which has been
set up to begin the business of Indonesia `Hang Kong" CCB. It holds
12
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
The Company (Continued)
the national license to import and export; and (iii) Jiangdong Yonglongxin
Special Paper Co., Ltd. ("Yonglongxin"). Yonglongxin holds an ISO9000
certificate and has five series of products, including golden and silver
paperboards, aluminum foil paperboards, pearl paperboards, laser paperboards and
mirror-like paperboards Anxin has a distribution network covering east and
central China. The Stock Purchase Agreement between Dragon and Anxin has been
accounted for as a reverse acquisition under the purchase method for business
combinations. Accordingly, the combination of the two companies is recorded as a
recapitalization of Dragon, pursuant to which Anxin is treated as the continuing
entity.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The accompanying financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
periods presented. These financial statements should be read in conjunction with
the financial statements for the year ended June 30, 2004 and notes thereto
contained on Form 10-KSB of the Company as filed with the Securities and
Exchange Commission. The results of operations for the three months ended
September 30, 2004 are not necessarily indicative of the results for the full
fiscal year ending June 30, 2005.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Net income (loss) per share
Basic income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period.
Diluted income per share is computed by dividing net income by the weighted
average number of shares of common stock, common stock equivalents and
potentially dilutive securities outstanding during each period. As of September
30, 2004 and 2003, the Company did not have any common stock equivalents or
potentially dilutive securities outstanding.
13
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Stock-based compensation
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
Revenue recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured. For the
three months ended September 30, 2004 and 2003, the Company did not have
revenue.
NOTE 2 - RELATED PARTY TRANSACTIONS
Due to related party
The former President of the Company, from time to time, provided advances to the
Company for operating expenses. These advances are short-term in nature and
non-interest bearing. The amount due to the former President at September 30,
2004 was $17,345.
14
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
Convertible note payable - related party
In September 2002, the former President of the Company lent the Company $10,000
to pay operating expenses pursuant to a note. This note is convertible into
1,333,333 shares of the Company's common stock at a conversion price of $0.0075
per share and is due on or before September 6, 2005. Interest accrues at the
rate of 3% per annum and aggregated $532 through September 30, 2004.
In April 2004, the former President of the Company entered into a convertible
note agreement with the Company to convert $31,124 of advances to pay operating
expenses into a convertible note. This note is convertible into 4,149,867 shares
of the Company's common stock at a conversion price of $0.0075 per share and is
due on or before April 1, 2005. Interest accrues at the rate of 3% per annum and
aggregated $558 through September 30, 2004.
NOTE 3 - CONVERTIBLE NOTES PAYABLE
In May 2004, the Company's attorney entered into an agreement with the Company
to convert $15,170 of accounts payable for legal services to a note. This note
is convertible into shares of the Company's common stock at a conversion price
of $0.0075 per share and is due on the earlier of (i) the Company successfully
consummating a merger or acquisition; or (ii) upon demand. Interest accrues at
the rate of 18% per annum. On October 4, 2004, a portion of this note was
converted into 1,489,735 shares of common stock. The holder released the Company
from the remaining balance due after conversion of the aforesaid shares.
In August 2004, a vendor entered into an agreement with the Company to convert
$11,404 of accounts payable to a convertible note. This note is convertible into
1,520,544 shares of the Company's common stock at a conversion price of $0.0075
per share and is due on the earlier of (i) the Company successfully consummating
a merger or acquisition; or (ii) upon demand. Interest accrues at the rate of
18% per annum. On October 4, 2004, this note was converted into 1,520,544 shares
of common stock.
NOTE 4 - STOCKHOLDERS EQUITY
Common Stock
In August 2004, holders of a majority of the Company's issued and outstanding
common stock and the Company's board of directors approved a 1 for 8 reverse
stock split. All per share data included in the accompanying consolidated
financial statement have been adjusted retroactively to reflect the reverse
split.
NOTE 5 - OPERATING RISK
(a) Country risk
15
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
Effective October 4, 2004, the Company's revenues will be mainly derived from
the sale of paper products in the Peoples Republic of China (PRC). The Company
hopes to expand its operations to countries outside the PRC, however, such
expansion has not been commenced and there are no assurances that the Company
will be able to achieve such an expansion successfully. Therefore, a downturn or
stagnation in the economic environment of the PRC could have a material adverse
effect on the Company's financial condition.
(b) Products risk
In addition to competing with other companies, the Company could have to compete
with larger US companies who have greater funds available for expansion,
marketing, research and development and the ability to attract more qualified
personnel if access is allowed into the PRC market. If US companies do gain
access to the PRC markets, they may be able to offer products at a lower price.
There can be no assurance that the Company will remain competitive should this
occur.
(c) Exchange risk
The Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of Chinese
Remnibi converted to US dollars on that date. The exchange rate could fluctuate
depending on changes in the political and economic environments without notice.
(d) Political risk
Currently, PRC is in a period of growth and is openly promoting business
development in order to bring more business into PRC. Additionally PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company's ability to operate
the PRC subsidiaries could be affected.
(e) Key personnel risk
The Company's future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.
16
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 5 - OPERATING RISK (continued)
(f) Performance of subsidiaries risk
Effective October 4, 2004, a majority of the Company's revenues will be derived
via the operations of the Company's Chinese subsidiaries. Economic,
governmental, political, industry and internal company factors outside of the
Company's control affect each of the subsidiaries. If the subsidiaries do not
succeed, the value of the assets and the price of our common stock could
decline. Some of the material risks relating to the partner companies include
the fact that the subsidiaries are located in China and have specific risks
associated with that and the intensifying competition for the Company's products
and services and those of the subsidiaries.
NOTE 6 - SUBSEQUENT EVENTS
On October 4, 2004, holders of convertible promissory notes aggregating $26,575
exercised their conversion rights applicable thereto and we issued an aggregate
of 3,543,211 common shares to eight persons and/or entities. The Company relied
upon the exemption from registration afforded by Regulation D and Regulation S,
as applicable, promulgated under the Securities Act of 1933, as amended, to
issue these securities.
On October 4, 2004, under an Agreement and Plan of Reorganization, the Company
issued 24,625,000 shares of the Company's common stock for the acquisition of
all of the outstanding capital stock of Dragon International Group Corp.,
("Dragon") a Florida corporation.
17
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DRAGON INTERNATIONAL GROUP CORP.
(Registrant)
Dated: November 16, 2004
By s/ David Wu
-----------------------------------------------
David Wu, Chief Executive Officer and President
18