UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): September 30, 2008
RODOBO INTERNATIONAL, INC.
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(Exact Name of Registrant as Specified in Charter)
NEVADA 000-50340 75-2980786
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(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
380 Changjiang Road, Nangang District, Harbin, PRC 150001
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(Address of principal executive offices)
Registrant's telephone number, including area code: 86 0451 82260522
Navstar Media Holdings, Inc.
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(Former Name or Former 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 425 under the Securities Act (17
CFR 230.425)
[_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[_] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[_] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Forward Looking Statements
Some of the statements contained in this Form 8-K that are not historical facts
are "forward-looking statements" which can be identified by the use of
terminology such as "estimates," "projects," "plans," "believes," "expects,"
"anticipates," "intends," or the negative or other variations, or by discussions
of strategy that involve risks and uncertainties. We urge you to be cautious of
the forward-looking statements, that such statements, which are contained in
this Form 8-K, reflect our current beliefs with respect to future events and
involve known and unknown risks, uncertainties and other factors affecting our
operations, market growth, services, products and licenses. No assurances can be
given regarding the achievement of future results, as actual results may differ
materially as a result of the risks we face, and actual events may differ from
the assumptions underlying the statements that have been made regarding
anticipated events. Factors that may cause actual results, our performance or
achievements, or industry results, to differ materially from those contemplated
by such forward-looking statements include without limitation: our ability to
attract and retain management, and to integrate and maintain technical
information and management information systems; our ability to raise capital
when needed and on acceptable terms and conditions; o The intensity of
competition; and General economic conditions. Please see Risk Factors for
discussion in detail. All written and oral forward-looking statements made in
connection with this Form 8-K that are attributable to us or persons acting on
our behalf are expressly qualified in their entirety by these cautionary
statements. Given the uncertainties that surround such statements, you are
cautioned not to place undue reliance on such forward-looking statements.
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
The disclosure set forth below under Item 2.01 (Completion of Acquisition or
Disposition of Assets) is hereby incorporated by reference to this Item 1.01.
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
On September 30, 2008, Navstar Media Holdings, Inc. ("Navstar") entered into an
Agreement and Plan of Merger (the "Agreement") by and among the Company, its
wholly owned acquisition subsidiary Rodobo International, Inc., a Nevada
corporation, Mega Profit Limited ("Mega"), a corporation formed under the laws
of the Cayman Islands ("Cayman"), and its sole shareholder and . Pursuant to the
Agreement, Navstar completed its acquisition of 100% ownership interest in Mega,
which owns a 100% ownership interest in Harbin Rodobo Dairy Co., Ltd.
("Harbin"), a milk formula producer in China. At the closing, Navstar acquired
all of the issued and outstanding capital stock of Mega from the Mega
shareholder in exchange for 93% of the issued and outstanding shares of common
stock of Navstar ("Merger"), whose name has been be changed into Rodobo
International, Inc. pursuant to Chapter 92A the Revised Nevada Statutes in
connection with the merger ("Rodobo" or the "Company"). In connection with this
Merger, 10,293,359 shares of common stock issued to former employees of Navstar
and shareholders of prior subsidiaries were cancelled. Per agreement with
certain convertible note holders holding collectively $1,000,000 original face
value of the convertible notes, all such notes shall be converted into
approximately 458,490 shares of common stock of the new company post Merger
assuming a total issued and outstanding shares of 15,000,000 shares of common
stock after a reverse stock split of 37.4 to 1 eventually.
In connection with the acquisition of Mega on September 30, 2008, John Chen, and
Les Schector resigned as Directors, Ranny Liang resigned as the Chairman and
Acting Executive Officer of the Company and the following executive officers of
Mega were appointed as directors and executive officers of Rodobo: QIAO Xiuzhen,
Director and Chief Financial Officer; WANG Yanbin, Director, Chairman and Chief
Executive Officer.
2
For all the terms of the Agreement, reference is hereby made to such agreement
annexed hereto as Exhibit 10.1. All statements made herein concerning such
agreement are qualified by references to said exhibit.
Explanatory Note
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We refer to the transactions through which we acquired control of the operating
company as the "Reverse Acquisition." This report describes those transactions,
the agreements through which they were executed, the nature of the business we
now conduct through our newly-acquired operating company, and other important
features of the Company.
Through the Reverse Acquisition, we ceased to be a shell company as that term is
defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the "Exchange
Act") and are now in the business of manufacturing dairy based nutritional
products in northeastern China.
Unless otherwise noted, all currency figures in this filing are in U.S. dollars.
References to "yuan" or "RMB" are to the Chinese yuan, which is also known as
the renminbi. According to the currency exchange website www.xe.com, on Sep
16th, 2008, $1.00 was equivalent to 6.84 yuan.
Unless otherwise specified or required by context, references to "we," "our" and
"us" refer collectively to (i) Navstar Media Holdings, Inc., (ii) the
subsidiaries of Navstar Media Holdings, Mega Profit Limited and Harbin Mega
Profit Enterprise Management & Consultation Co., Ltd., (iii) Harbin Rodobo Dairy
Co., Ltd.("Harbin Rodobo") and Rodobo International, Inc. ("Rodobo"), which is
the new name of the survived entity post merger.
References to the "closing date" or the "closing," unless otherwise specified or
required by context, are to September 30, 2008, the date on which the
transactions described in this report were consummated.
Business Description
Overview
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Harbin Rodobo's industry niche is the dairy based nutritional products market.
Its operations include production, marketing, research and development,
packaging and the management of raw milk resources. Harbin Rodobo's target
market is comprised of infants, children, pregnant women and nursing mothers,
and other adults. Harbin Rodobo produces its products under the brand name
Rodobo(R) and is currently one of the largest non-state-owned dairy companies in
China, ranking in the top 10% of the industry. Harbin Rodobo's products are not
implicated in the recent wide-spread melamine contamination scandal in China and
expects to leverage its superior quality control in market competition when many
of its large competitors are found violating food safety regulations.
3
Business History
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Founded in 2002, Harbin Rodobo has been dedicated to developing, manufacturing,
and marketing formula for infants, middle-aged, and elderly consumers.
In 2003, Harbin Rodobo started to manufacture series of dairy products and
developed new markets in Sichuan, Shanxi, Zhejiang, Fujiang, Henan, and Shandong
provinces.
In 2004, Harbin Rodobo reconstructed its production facilities to meet the GMP
standard. Harbin Rodobo also received the ISO 9001-2001 Management Certificate
and HACPP Quality System Certificate.
In 2005, Harbin Rodobo was awarded as a "Heilongjiang Famous Brand" in
agricultural industry. .
In 2006, Harbin Rodobo and Chinese Nutrition Society (CNSOC) started to jointly
develop formula for the middle-aged and elderly.
In 2008, Harbin Rodobo and Chinese Nutrition Society (CNSOC) successfully
developed the formula under the name of "Healthy Mid&Elderly". Also Harbin
Rodobo invested RMB40 million to found its wholly-owned subsidiary Mega Profit
Agricultural Company to build its own cow farm and improve its raw milk
resources and gross profit will be improved.
Principal Products
Milk Formula Powder
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This is our primary product, which is divided into several sub-categories.
Baby/Infant Segment
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We produce milk powder for babies and young children formulated for 0 to 6
months, 6 months to 1 year and 131 to 3 years.
Adult Segment
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We also produce milk powder for pregnant and breast-feeding women, high calcium
milk powder for the middle-aged and elderly, multidimensional formula for
students of age 8 to 16 years and iron enriched formula for adults specifically
designed to decrease the rate of calcium loss through the aging process.
4
Whole Milk Powder Segment
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We offer fresh, sterilized, spray-dried raw whole milk, and whole milk with
supplemental ingredients to its commercial clients. Raw milk powder is typically
used to produce fluid milk, cheese, ice-cream and candies. It is also used as a
raw material to produce baked food, instant beverages, nutritional food and fast
food.
Brand Development and Marketing
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Our marketing will emphasize local production and national distribution of our
products, which begins with local dairy herds and results in premium quality
products for a national market. We did careful product positioning and targeted
marketing. Our products have received benefits from a considerable volume of
favorable press and other publications of mass circulation which have highly
rated our products highly.
Our marketing and promotional efforts will continue to include:
o Redesigning packaging of products to promote a premium quality image.
o Refining and targeting our message, which to date has largely been the
product of word-of-mouth and product reviews.
o Improving trade material, including multi-color trade sell sheets and
brochures.
o Further distinguishing our products from other dairy products.
Expanding retail advertising, including print advertising, televised advertising
and focused public relations.
We incurred advertising costs of $5,714 during fiscal 2007, $8,256 during fiscal
2006, and incurred advertising costs of $10,812 during fiscal 2005.
Raw Milk Processing
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We believe that through purchasing raw milk locally and employing fast
processing techniques, we are able to preserve the fresh taste of milk. It takes
us less than 48 hours from milking to finished milk powder. Most large dairies,
we believe, the process may typically take three to four days or more .
Milk processed by conventional farms for sale to regional dairies is typically
stored at the farm for a minimum of two days, plus a full day in transit to the
dairy facility, and then is processed the following day. However, our standard
is to process the raw milk within 12-24 hours after milking, depending upon the
time of day the raw milk is delivered to us. Within this time, the milk is
chilled, transported, separated, sterilized and spray-dried. The raw milk is
first received from milk collection centers. Fully enclosed, stainless-steel
vacuum milking machines are used to receive the raw milk. Once received, the raw
milk will no longer have any contact with air and is immediately processed with
refrigeration equipment that cools the raw milk to about 4(degree) Celsius
within three seconds. The raw milk is then stored in air-tight tanks in
preparation for advanced processes, which include milk fat separation,
sterilization and spray-drying.
5
Our milk is not homogenized. During homogenization, pressurized milk is forced
through openings smaller than the size of the fat globules present in milk,
breaking them into smaller particles. Thus treated, the milk fat remains
suspended and does not separate out in the form of cream. We believes that this
process adversely affects the taste and feel of milk. In addition, our milk is
pasteurized at the lowest temperatures allowed by law to avoid imparting a
cooked flavor to the milk. When the milk is clarified and the butterfat removed
to yield cream and skim milk, a process of cold separation is used, rather than
the more commonly employed hot separation which we believe adversely affects the
flavor of milk.
Dairy Product Processing
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Our products are made in small batches using low temperature processing
techniques to maintain freshness and allow maximum flavor and nutrition
retention. They are made with wholesome ingredients. No chemicals or additives
are employed. Because they are produced locally, our dairy products arrive to
consumers in Rodobo's marketing area sooner after production than most other
producers. To assure product quality, the beginning of each production run is
sampled for flavor, aroma, texture and appearance. In addition, inspectors
conduct spot-checks for bacteria and butterfat content in products, as well as
sanitary conditions in our facilities.
Milk Processing Facilities
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We have the following principal operating milk powder production and packaging
facilities:
The factory is located in Zhonghe Town, Qinggang County of Heilongjiang Province
with area of 30,000 square meters. Among 220 employees, 10 are management, 15
technicians, and 195 are employed in manufacturing. The factory operates
continuously through out the year.
The surrounding area of where the factory is located is pollution free. The
factory is surrounded by farm land, approximately 1 kilometer away from
downtown. To ensure high quality of the products from its two dairy production
lines, we utilize raw milk collection, pretreatment, sterilization, ingredients,
three-way evaporation devices, drying tower, fluidized bed, and CIP cleaning
technologies. We can process raw milk up to 200 tons and produce 70 tons of
dairy products daily. We combine advanced milk collection, concentration
process, and dry powder recovery technologies with secondary pelletized
fluidized bed devices to guarantee products' quality. Our processing procedure
increases energy and economic efficiency during production, improve products
quality, and enhance market competitiveness.
6
Product Distribution
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We utilize a dealer distribution model to deliver our products to end-users.
Currently, Rodobo's products are sold mostly through distributors. We have a
distribution team working out of our headquarters and coordinating a network of
over 126 distributors covering 4,463 retail stores across China. The
distributors, in turn, each hires one or two secondary agents who assist in the
distribution process, including inventory management, product sales and service
and payments.
Generally, our products are delivered only after receipt of payment from the
distributor. Distributors have new agreements each year which specify sales
targets and territories among other provisions. We seek to expand the number of
key provinces served by our distribution network as part of our growth strategy.
Customers
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Two major customers accounted for approximately 19% of the net revenue for the
fiscal year ended September 30, 2007, with each customer individually accounting
for 11% and 8%, respectively. Two major customers accounted for 54% of the net
revenue for the fiscal year ended September 30, 2006. We are continuing to
expand our sale networks and diversify our customer base.
Employees
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As of June 30, 2008, we have approximately 2,610 employees on our payroll. Of
these, eight are in management, 1,110 are in full-time sales and marketing, and
1,220 are in part-time sales and marketing. We have an employee manual setting
forth relevant policies.
Employee benefits include three state-mandated insurance plans:
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Old-age insurance: We withhold a portion of each employee's monthly salary
determined by the provincial government, generally 8%, and contribute an
additional amount determined by law, up to approximately 22% of the employee's
monthly salary.
Medical insurance: We withhold approximately 2% of each employee's salary, and
contribute an additional amount totaling approximately 7.5% of total payroll
expense.
Unemployment Insurance: We withhold approximately 1% of each employee's salary,
and contribute an additional amount totaling approximately 2% of total payroll
expense.
Our average compensation per employee per month was RMB 1100 or approximately
$157. We also pay benefits in the form of social security insurance fees for
every employee who signs a long-term contract with us.
7
We have a system of human resource performance review and incentive policies
that allows personnel reviews to be carried out monthly, quarterly or annually.
Intellectual Property
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We have registered the name "Rodobo" as a trademark in the PRC. Details of the
trademark are set forth below:
Trademark Certificate No. Category Owner
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No.4103017 No. 29: "cow milk,cow milk Harbin Rodobo Company
RuDuoBao No.4103018 drinks, edible oil, food Gum,
No.4103019 nuts, edible protein, fried
potato chips, canned fruit"
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No. 13:"cacao drinks, Harbin Rodobo Company
RuDuoBao No.3429755 biscuits, instant noodles,
bean powder, sugar, wheat
products"
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No. 29: "cow milk,cow
milk drinks, edible oil,
food
Rodobo No.4575865 gum,jelly, nuts, edible Harbin Rodobo Company
protein,fried potato chips,
canned fruit"
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No. 29: "cow milk,cow
milkdrinks ,cow milk
based products, edible
oil, food gum,jelly, nuts, Harbin Rodobo Company
No.4575866 edible protein,fried
potato chips, canned fruit"
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Insurance
Workers Compensation Insurance
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Our employees register workers compensation insurance at our Human Resource
Department on their start day, the effective date is corresponding to the start
day, and the cancellation of workers compensation insurance is corresponding to
the withdrawal day. The Human Resource Department fills out the "Workers
Compensation Insurance Adjustment Form" when the Workers Compensation Insurance
adjusts due to other factors. The Human Resources Department files employee's
personal workers compensation insurance information on record for reference. The
Human Resource Department calculates the workers compensation insurance fees and
transfers the data to the Finance Department annually. The Finance Department
withholds the insurance fees from each employee's salary.
8
Research and Development Activities
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We have 15 technicians engaged in research and development activities. These
technicians monitor quality control at our milk processing plants to ensure that
the processing, packaging and distribution of the milk products result in high
quality premium milk products that are safe and healthy for its customers. These
technicians also pursue methods and techniques to improve the taste and quality
of its milk products and to evaluate new milk products for further production
based upon changes in consumer tastes, trends and the introduction of
competitive products by other milk producers.
We are currently developing a new product specially formulated for the
middle-aged and elderly. We spent RMB400, 000 (approximately $57, 2000) in 2005,
RMB480, 000 (approximately $68,600) in 2006 and RMB500, 000 (approximately
$71,400) during the fiscal year ended September 30, 2007 on research and
development.
Government Regulations
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Harbin Rodobo is regulated under national and county laws in China. The
following information summarizes certain aspects of those regulations applicable
to us and is qualified in its entirety by reference to all particular statutory
or regulatory provisions.
Regulations at the national, province and county levels are subject to change.
To date, compliance with governmental regulations has not had a material impact
on our level of capital expenditures, earnings or competitive position, but,
because of the evolving nature of such regulations, management is unable to
predict the impact such regulation may have in the foreseeable future.
As a manufacturer and distributor of food products, we are subject to
regulations of China's Ministry of Agricultural. This regulatory scheme governs
the manufacture (including composition and ingredients), labeling, packaging and
safety of food. It also regulates manufacturing practices, including quality
assurance programs, for foods through its current good manufacturing practices
regulations, and specifies the standards of identity for certain foods,
including the products sold by Harbin Rodobo, and prescribes the format and
content of many of the products sold by Harbin Rodobo, prescribes the format and
content of certain nutritional information required to appear on food products
labels and approves and regulates claims of health benefits of food products.
In addition, China's Ministry of Agricultural authorizes regulatory activity
necessary to prevent the introduction, transmission or spread of communicable
diseases. These regulations require, for example, pasteurization of milk and
milk products. Harbin Rodobo and its products are also subject to province and
county regulations through such measures as the licensing of dairy manufacturing
facilities, enforcement of standards for products, inspection of facilities and
regulation of trade practices in connection with the sale of dairy products.
9
Approvals, Licenses and Certificates
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We require a number of approvals, licenses and certificates in order to operate
our business. Our principal approvals, licenses and certificates are set forth
below:
Enterprise Corporation Business License (No. 230199100023749) issued on
September 12, 2008, by the Heilongjiang Province Harbin City Administration for
Industry and Commerce.
Taxation Registration Certificate (Guo Shui Zhi No. 230198734593984) issued by
Heilongjiang Province Harbin Branch of State Taxation Administration Bureau,
which is valid until April 13, 2009
Taxation Registration Certificate (Da Di Shui Zhi No. 230198734593984) issued by
Harbin Development Zone Branch of Local Taxation Bureau, which is valid until
April 13, 2009.
Organization Code Certificate issued by Heilongjiang Province Harbin Bureau of
Quality Supervision, Inspection and Quarantine (code No. 73459398-4, and
registration No. Zu Dai Guan 230100-153886), the validity term of which is from
November 27, 2007 to November 27, 2008. The Company has passed the 2008 annual
inspection.
Food Health License ((Hei) Wei Shi Zheng Zi (2007) No. 230101-000007) issued by
Harbin Health Bureau. The license scope is pre-packaged food and the validity
term is from April 14, 2006 to April 13, 2009.
The Dairy Industry in China
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China's Economy
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China, the world's most populous country, has one of the world's largest
economies. Its 2007 gross domestic product ("GDP") is estimated at RMB 18.3
trillion (US$2.55 trillion) (see The US-China Business Council, Forecast 2008,
page 2, available at www.uschina.org). GDP, income, and retail spending have all
increased rapidly as the economy has grown over the last ten years, and
inflation has also risen significantly. The tables below set forth China's per
capita income, retail sales, and rates of inflation for the periods indicated.
10
Per capita income, 1995 - 2007
1995 2000 2005 2007
---- ---- ---- ----
RMB $ RMB $ RMB $ RMB $
Urban per capita 4,283 609 6,280 893 10,493 1,492 13,786 1,961
disposable income
Rural per capita net 1,578 224 2,253 320 3,255 463 4,140 589
income
__________________
Source: For 1995 - 2005, National Bureau of Statistics of China, China
Statistical Yearbook 2006, Chapter 2, Section 3, and China Statistical Yearbook
2002, Chapter 2, Section 3. For 2007, The US-China Business Council, Forecast
2008, page 2, published at
http://uschina.org/public/documents/2008/02/2008-china-economy.pdf. Figures for
2007 are estimates. Figures are rounded to the nearest hundred million. Dollar
amounts are translated from RMB using an exchange rate current as of the date of
this prospectus.
http://uschina.org/public/documents/2008/02/2008-china-economy.pdf.2007
Domestic retail sales, 1985 - 2005
figures in billions 1985 1990 1995 2000 2005 2007
---- ---- ---- ---- ---- ----
RMB $ RMB $ RMB $ RMB $ RMB $ RMB $
Total retail sales 380.1 54.1 725.0 103.1 2,062.0 293.2 3,415.3 485.7 6,717.7 955.3 8,921.0 1,268.7
of consumer goods
__________________
Source: China Statistical Yearbook 2006 and 2002, The US-China Business Council,
Forecast 2008, page 2.
Inflation, 1985 - 2005
figures in
billions 1985 1990 1995 2000 2005 2007
---- ---- ---- ---- ---- ----
Overall inflation 9.3% 3.1% 17.1% 0.4% 1.8% 4.8%
__________________
Source: China Statistical Yearbook 2006 and 2002, The US-China Business Council,
Forecast 2008.
Overview of the Dairy Industry in China
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The Chinese government views the dairy industry as an instrumental component in
reforming the China's agricultural system and concurrently increasing the income
of farmers. Additionally, the dairy industry plays a key role in improving the
diet and overall welfare of the Chinese people. Milk and dairy products have
gradually become a staple in the daily food intake of the Chinese. Consequently,
the dairy market is one of the fasted growing markets in China. In 2004, the
dairy industry had total revenues of $8.33 billion. In 2005, total sales grew by
28% to $10.66 billion. In 2006, the dairy industry recorded annual revenues of
$11.68 billion. China's dairy industry is currently experiencing rampant
expansion with annual growth rates of approximately 10%-20%.
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There are approximately 1,500 dairy producers in China. However, only about 97
producers have received licenses from the government to sell their products
directly on the market.
Additionally, only 5% of the 1,500 dairy producers produce over 1 million tons
of dairy products annually. Currently, six SOEs (State Owned Enterprises)
control more than half of China's dairy market. Because China's dairy market is
highly fragmented, Rodobo believes that current market dynamics provide a great
opportunity to acquire additional market share.
Recent melamine contamination scandal affected twenty-two large producers with
milk supply in Hebei and Inner Mongolia found to be problematic. So far the milk
supply from Heilongjiang Province has not been seriously affected and Rodobo's
products have not been tested positive in the contamination crackdown in China.
Baby/Infant Dairy Segment
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China's baby food industry, dominated by infant formula, is a multi-billion
dollar business and has experienced an annual double-digit growth rate during
the past five years. This growth resulted from increased demand which was the
cumulative byproduct of three factors: 1) increase in disposable income, 2)
penetration of milk formula into the rural market, and 3) female working
population growth. Along with rising income, Chinese parents are expected to
spend more on infant formula due to demanding higher quality and greater
variety. China's per capita dairy consumption is still relatively low, implying
ample room for continued industry growth. In 2005, China's per capita dairy
intake was only 21.7kg, about 20% of the global average. Milk consumption in
China is unbalanced, with the majority of consumption in large cities and
economically developed regions, whereas the consumption of the rural population
is 1/10 of that of the urban population. This disparity represents a substantial
opportunity for distribution to rural regions.
There are about 18 million new babies born each year in China according to the
National Statistics Bureau of the PRC. Rodobo's management initially estimated
that an average infant in China consumes approximately 30 kilograms of dairy
products per year and that infants generally consume dairy based formula
products for approximately 2.5 years. Therefore, Rodobo's management has
estimated the potential market demand for infant formula products per year in
China to be approximately 1.45 million tons. Based on Chinese industry
statistics, management has calculated that the actual production volume of
infant formula dairy products was more than 300,000 tons in 2006. Therefore,
management believes there is great potential for demand side growth for
infant formula dairy products in China. Rodobo's management estimates that the
total market size of dairy based nutritional products for infants and children,
in terms of sales in China, was about $2 billion USD during 2006, representing a
5% growth rate over the past year. Currently sales growth has been mainly
derived from increasing demand driven by medium size urban areas.
Breastfeeding is a substitute for infant formula. Rodobo's management believes
that Chinese woman generally only breastfeeding babies for the first six months
of an infant's life. After the first 6 months, management believes that mothers
may choose infant formula over breastfeeding for 2 primary reasons: 1) many
mothers must return to work after 6 months, making breastfeeding harder to
manage, and 2) infant formula products currently available in the Chinese market
provide adequate nutritional value. Accordingly, mothers are comfortable using
formula as an adequate breast milk substitute. Empirical evidence also reflects
the trend of Chinese mothers' increased acceptance and use of infant formula as
a breast milk substitute. The August 2006 WHO presentation stated that the
breastfeeding rate in China has been decreasing in recent years, with select
cities and regions dipping to around 61% of nursing mothers.
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China's consumer goods market has rapidly developed in recent years, leading to
increased demand for more modern food products. Rising income levels have
allowed consumers to buy better quality and more sophisticated food products,
particularly in the baby food sector. Because of the One Child Policy (state
policy allowing most Chinese families to have only one child), parents and
extended families tend to lavish a great deal of money, time and attention on
the child. The demand for better quality products is derived from parents being
able to spend more on baby formula and nutritional products. This market demand
has led to the development of new products containing additional nutrients,
including various essential fatty acids, vitamins and minerals.
Competition
- -----------
Competitive Environment
- -----------------------
The food and beverage business is highly competitive and, therefore, Rodobo
faces substantial competition in connection with the marketing and sale of our
milk powder products and soybean products. Our products are positioned as
premium products and, accordingly, are generally priced higher than certain
similar competitive products. We believe that the principal competitive factors
in marketing our products are quality, taste, freshness, price and product
recognition. While we believe that we compete favorably in terms of quality,
taste and freshness, our products may have higher price yet less brand
recognition than certain other established brands. Our premium products may also
be considered in competition with non-premium quality dairy products for
discretionary food dollars. The recent melamine contamination has severely
affected many of Rodobo's competitors and will produce major reshuffling in our
industry. Rodobo views this as a competitive opportunity to provide safe
products to our customers and develop further brand loyalty.
Our Competitors
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We believe that the following dairy companies are our most significant direct
competitors based in China: American Dairy, Inc., Synutra International, Inc.
and Yaolan Dairy, Inc. Those are much larger producers with dominating market
share. But they have lower profit margin. Synutra International, Inc. has been
implicated in the recent Melamine contamination scandal.
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Our Competitive Advantages
1) Resource advantage: We have our own independent raw milk processing
facilities. Therefore, its cost of purchasing raw milk is 0.2 yuan per
kilogram cheaper than other competitors.
2) Production advantage: We own infant formula production license issued by
the Chinese government. With its unique milk powder formula for the
elderly, we have exclusive access to the name of "China Nutrition Society
Development" for ten years under Chinese Nutrition Society's authorization.
3) Focused market: Our market strategy is to provide high-end products for
high-end elderly consumers to stand out from other competitors. To provide
professional services and products, Rodobo also owns an exclusive license
from the Chinese Nutrition Society (CNSOC) to produce formula for the
elderly. The implementation of company strategies can be concluded as to
provide high-end products and services to achieve high investment return
rate.
4) Established market coverage: Rodobo has a well established market network
with footholds in key three sales regions: Chengdu district (covering
Sichuan, Shanxi), Zhengzhou district (Covering Henan, Shandong), Fuzhou
district (covering Zhejiang, Fujian).
Legal Proceedings
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From time to time, the Company may become involved in various lawsuits and legal
proceedings, which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm business. The Company is
currently not aware of any such legal proceedings or claims that will have,
individually or in the aggregate, a material adverse effect on business,
financial condition or operating results.
Risk Factors
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An investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this prospectus before deciding to invest in our common stock.
Risks related to doing business in the People's Republic of China
Our business operations are conducted entirely in the PRC. Because China's
economy and its laws, regulations and policies are different from those
typically found in the west and are continually changing, we will face risks
including those summarized below.
14
The PRC is a developing nation governed by a one-party government and may be
more susceptible to political, economic, and social upheaval than other nations.
China is a developing country governed by a one-party government that
imposes restrictions on individual liberties that are significantly stricter
than those typically found in the West. China is also a country with an
extremely large population, widening income gaps between rich and poor and
between urban and rural residents, minority ethnic and religious populations,
and growing access to information about the different social, economic, and
political systems to be found in other countries. China has also experienced
extremely rapid economic growth over the last decade, and its legal and
regulatory systems have changed rapidly to accommodate this growth. These
conditions make China unique and may make it susceptible to major structural
changes. Such changes could include a reversal of China's movement to encourage
private economic activity, labor disruptions or other organized protests,
nationalization of private businesses, internal conflicts between the police or
military and the citizenry, and international political or military conflict. If
any of these events were to occur, it could shut down China's economy and cause
us to temporarily or permanently cease operations.
The PRC's laws, regulations and policies, and changes to them, may limit our
ability to operate profitably or prevent us from operating at all.
Our stores and distribution centers, as well as our suppliers and the
agricultural producers on whom they depend, are located in the PRC. The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the PRC economy, including the production,
distribution and sale of our merchandise. In particular, we are subject to
regulation by local and national branches of the Ministries of Agriculture,
Commerce, and Health, as well as the General Administration of Quality
Supervision, the State Administration of Foreign Exchange, and other regulatory
bodies. In order to operate under PRC law, we require valid licenses,
certificates and permits, which must be renewed from time to time. If we were to
fail to obtain the necessary renewals for any reason, including sudden or
unexplained changes in local regulatory practice, we could be required to shut
down all or part of our operations temporarily or permanently.
Our ability to operate in the PRC may be harmed by changes in its laws and
regulations, including those relating to agriculture, taxation, land use rights
and other matters. Such changes could be made at the national or local level and
in the form of: farm subsidies; corporate tax rates; employee benefits;
leaseholder or land-use rights; enforceability of contracts; intellectual
property; or retail pricing. The effects of such changes on our business cannot
be predicted but could be significant.
Anti-inflation measures may be ineffective or harm our ability to do business in
the PRC.
In recent years, the PRC government has instituted anti-inflationary
measures to curb the risk of an overheated economy characterized by debilitating
inflation. These measures have included devaluations of the renminbi,
restrictions on the availability of domestic credit, and limited
re-centralization of the approval process for some international transactions.
These austerity measures may not succeed in slowing down the economy's excessive
expansion or control inflation, or they may slow the economy below a healthy
growth rate and lead to economic stagnation or recession; in the worst-case
scenario, the measures could slow the economy without curbing inflation. The PRC
government could adopt additional measures to further combat inflation,
including the establishment of price freezes or moratoriums certain projects or
transactions. Such measures could harm the economy generally and hurt our
business by limiting the income of our customers available to purchase our
merchandise, by forcing us to lower our profit margins, and by limiting our
ability to obtain credit or other financing to pursue our expansion plans or
maintain our business.
15
Governmental control of currency conversions may affect the value of your
investment.
All of our revenue is earned in renminbi, and any future restrictions on
currency conversions may limit our ability to use revenue generated in renminbi
to make dividend or other payments in U.S. dollars. Although the PRC government
introduced regulations in 1996 to allow greater convertibility of the renminbi
for current account transactions, significant restrictions still remain,
including primarily the restriction that foreign-invested enterprises like us
may buy, sell or remit foreign currencies only after providing valid commercial
documents at a PRC banks specifically authorized to conduct foreign-exchange
business. In addition, conversion of renminbi for capital account items,
including direct investment and loans, is subject to governmental approval in
the PRC, and companies are required to open and maintain separate
foreign-exchange accounts for capital account items. There is no guarantee that
PRC regulatory authorities will not impose additional restrictions on the
convertibility of the renminbi. Such restrictions could prevent us from
distributing dividends and thereby reduce the value of our stock.
The fluctuation of the exchange rate of the renminbi against the dollar could
reduce the value of your investment.
The value of our common stock will be affected by the foreign exchange rate
between U.S. dollars and renminbi. For example, to the extent that we need to
convert U.S. dollars we receive from an offering of our securities into renminbi
for our operations, appreciation of the renminbi against the U.S. Dollar could
reduce the value in renminbi of our funds. Conversely, if we decide to convert
our renminbi into U.S. dollars for the purpose of declaring dividends on our
common stock or for other business purposes and the U.S. dollar appreciates
against the renminbi, the U.S. dollar equivalent of our earnings from Rodobo,
our subsidiary in the PRC, would be reduced. In addition, the depreciation of
significant U.S. Dollar-denominated assets could result in a charge to our
income statement and a reduction in the value of these assets.
On July 21, 2005, the PRC government changed its decade-old policy of
pegging the value of the renminbi to the U.S. Dollar. Under the new policy, the
renminbi is permitted to fluctuate within a narrow and managed band against a
basket of certain foreign currencies. This change in policy has resulted in an
appreciation of the renminbi against the U.S. dollar of approximately 12% as of
the date of this report. While the international reaction to the renminbi
revaluation has generally been positive, there remains significant international
pressure on the PRC government to adopt an even more flexible currency policy,
which could result in a further and more significant appreciation of the
renminbi against the U.S. Dollar.
16
We receive all of our revenues in renminbi. The PRC government imposes
controls on the convertibility of renminbi into foreign currencies and, in
certain cases, the remittance of currency out of the PRC. Shortages in the
availability of foreign currency may restrict our ability to remit sufficient
foreign currency to pay dividends, or otherwise satisfy foreign currency
denominated obligations. Under existing PRC foreign exchange regulations,
payments of current account items, including profit distributions, interest
payments and expenditures from the transaction, can be made in foreign
currencies without prior approval from the PRC State Administration of Foreign
Exchange ("SAFE") by complying with certain procedural requirements. However,
approval from appropriate governmental authorities is required where renminbi
are to be converted into foreign currency and remitted out of the PRC to pay
capital expenses, such as the repayment of bank loans denominated in foreign
currencies.
The PRC government could also restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay certain expenses as they come due.
Recently-modified SAFE regulations may restrict our ability to remit profits out
of the PRC as dividends.
SAFE Regulations regarding offshore financing activities by PRC residents
have recently undergone a number of changes which may increase the
administrative burdens we face. The failure of our stockholders who are PRC
residents to make any required applications and filings pursuant to these
regulations may prevent us from being able to distribute profits and could
expose us and our PRC-resident stockholders to liability under PRC law.
SAFE issued a public notice (the "October Notice"), effective as of
November 1, 2005, and implementation rules in May 2007, which require
registration with SAFE by the PRC-resident stockholders of any foreign holding
company of a PRC entity. These regulations apply to our stockholders who are PRC
residents. In the absence of such registration, the PRC entity (in our case both
Harbin Mega Profit and Rodobo) cannot remit any of its profits out of the PRC as
dividends or otherwise.
In the event that our PRC-resident stockholders have not followed the
procedures required under the October Notice and its implementation rules, we
could lose the ability to remit monies outside of the PRC and would therefore be
unable to pay dividends or make other distributions, and we could face liability
for evasion of foreign-exchange regulations. Such consequences could affect our
good standing under PRC regulations and our ability to operate in the PRC, and
could therefore diminish the value of your investment.
17
The PRC's legal and judicial system may not adequately protect our business and
operations and the rights of foreign investors.
The PRC legal and judicial system may negatively impact foreign investors.
In 1982, the National People's Congress amended the Constitution of China to
authorize foreign investment and guarantee the "lawful rights and interests" of
foreign investors in the PRC. However, the PRC's system of laws is not yet
comprehensive. The legal and judicial systems in the PRC are still rudimentary,
and enforcement of existing laws is inconsistent. Many judges in the PRC lack
the depth of legal training and experience that would be expected of a judge in
a more developed country. Because the PRC judiciary is relatively inexperienced
in enforcing the laws that do exist, anticipation of judicial decision-making is
more uncertain than would be expected in a more developed country. It may be
impossible to obtain swift and equitable enforcement of laws that do exist, or
to obtain enforcement of the judgment of one court by a court of another
jurisdiction. The PRC's legal system is based on civil law, or written statutes;
a decision by one judge does not set a legal precedent that must be followed by
judges in other cases. In addition, the interpretation of Chinese laws may vary
to reflect domestic political changes.
As a matter of substantive law, the foreign-invested enterprise laws
provide significant protection from government interference. In addition, these
laws guarantee the full enjoyment of the benefits of corporate articles and
contracts to foreign-invested enterprise participants. These laws, however, do
impose standards concerning corporate formation and governance, which are
qualitatively different from the general corporation laws of the United States.
Similarly, the PRC accounting laws mandate accounting practices that are not
consistent with U.S. generally accepted accounting principles. PRC accounting
laws require that an annual "statutory audit" be performed in accordance with
PRC accounting standards and that the books of account of foreign-invested
enterprises are maintained in accordance with Chinese accounting laws. Article
14 of the PRC Wholly Foreign-Owned Enterprise Law requires a wholly
foreign-owned enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities, at the risk of business
license revocation. Our subsidiary, Harbin Mega Profit, is a wholly
foreign-owned enterprise and is subject to these regulations.
As a matter of enforcement, although the enforcement of substantive rights
may appear less clear than in the U.S., foreign-invested enterprises and wholly
foreign-owned enterprises are PRC-registered companies, which enjoy the same
status as other PRC-registered companies in business-to-business dispute
resolution. Because the Articles of Association of Rodobo do not specify a
method for the resolution of business disputes, Rodobo and other parties
involved in any business dispute are free to proceed either in the Chinese
courts or, if they are in agreement, through arbitration. Under PRC law, any
award rendered by an arbitration tribunal is enforceable in accordance with the
United Nations Convention on the Recognition and Enforcement of Foreign Arbitral
Awards (1958). Therefore, PRC laws relating to business-to-business dispute
resolution should not work to the disadvantage of foreign-invested enterprises
such as Harbin Mega Profit and Rodobo.
However, the PRC laws and regulations governing our current business
operations are sometimes vague and uncertain. There are substantial
uncertainties regarding the interpretation and application of PRC laws and
regulations, including but not limited to the laws and regulations governing our
business and the enforcement and performance of our arrangements with suppliers
in the event of the imposition of statutory liens, death, bankruptcy and
criminal proceedings. We and any future subsidiaries are considered foreign
persons or foreign-invested enterprises under PRC laws, and as a result, we are
required to comply with PRC laws and regulations. These laws and regulations are
sometimes vague and may be subject to future changes, and their official
interpretation and enforcement may involve substantial uncertainty. The
effectiveness of newly enacted laws, regulations or amendments may be delayed,
resulting in detrimental reliance by foreign investors. New laws and regulations
that affect existing and proposed future businesses may also be applied
retroactively. We cannot predict what effect the interpretation of existing or
new PRC laws or regulations may have on our business.
18
In addition, some of our present and future executive officers and
directors, most notably Mr. Yanbin Wang, may be residents of the PRC and not of
the United States, and substantially all the assets of these persons are located
outside the United States. As a result, it could be difficult for investors to
effect service of process in the United States, or to enforce a judgment
obtained in the United States against us or any of these persons.
Risks related to our business
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Our limited operating history makes it difficult to evaluate our future
prospects and results of operations.
We have a limited operating history, having commenced operations in 2002.
We grew to our present size only in 2008. Accordingly, you should consider our
future prospects in light of the risks and uncertainties experienced by
early-stage companies in evolving markets such as that of supermarkets in the
PRC. Some of these risks and uncertainties relate to our ability to:
o offer new products to attract and retain a larger customer base;
o attract additional customers and increase spending per customer;
o increase awareness of our brand and continue to develop customer
loyalty;
o respond to competitive market conditions;
o respond to changes in our regulatory environment;
o manage risks associated with intellectual property rights;
o maintain effective control of our costs and expenses;
o raise sufficient capital to sustain and expand our business; and
o attract, retain and motivate qualified personnel
Because we are a relatively new company, we may not be experienced enough
to address all the risks in our business or in our expansion. If we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
We expect to incur costs related to our planned expansion and growth into new
plants and ventures which may not prove to be profitable. Moreover, any delays
in our expansion plans could cause our profits to decline and jeopardize our
business.
We anticipate that our proposed expansion of our milk processing plants may
include the construction of new or additional facilities. Rodobo's cost
estimates and projected completion dates for construction of new production
facilities may change significantly as the projects progress. In addition,
Rodobo's projects will entail significant construction risks, including
shortages of materials or skilled labor, unforeseen environmental or engineering
problems, weather interferences and unanticipated cost increases, any of which
could have a material adverse effect on the projects and could delay their
scheduled openings. A delay in scheduled openings will delay Rodobo's receipt of
increased sales revenues, which, when coupled with the increased costs and
expenses of our expansion, could cause a decline in our profits.
19
Our plans to finance, develop, and expand Rodobo's milk processing
facilities will be subject to the many risks inherent in the rapid expansion of
a high growth business enterprise, including unanticipated design, construction,
regulatory and operating problems, and the significant risks commonly associated
with implementing a marketing strategy in changing and expanding markets. These
projects may not become operational within their estimated time frames and
budgets as projected at the time Rodobo enters into a particular agreement, or
at all. In addition, Rodobo may develop projects as joint ventures in an effort
to reduce its financial commitment to individual projects. The significant
expenditures required to expand our milk processing plants may not ultimately
result in increased profits.
When our future expansion projects become operational, Rodobo will be
required to add and train personnel, expand our management information systems
and control expenses. If we do not successfully address Rodobo's increased
management needs or are otherwise unable to manage our growth effectively,
Rodobo's operating results could be materially and adversely affected.
Our products may not achieve market acceptance.
We are currently selling our products principally in northern China.
Achieving market acceptance for Rodobo's products, particularly in new markets,
will require substantial marketing efforts and the expenditure of significant
funds. There is substantial risk that any new markets may not accept or be
receptive to our products. Market acceptance of our current and proposed
products will depend, in large part, upon our ability to inform potential
customers that the distinctive characteristics of our products make them
superior to competitive products and justify their pricing. Our current and
proposed products may not be accepted by consumers or able to compete
effectively against other premium or non-premium dairy products. Lack of market
acceptance would limit our revenues and profitability.
Changing consumer preferences make demand for our products unpredictable.
Rodobo is subject to changing consumer preferences and nutritional and
health-related concerns. Our business could be affected by certain consumer
concerns about dairy products, such as the fat, cholesterol, calorie, sodium and
lactose content or contamination of such products. A significant percentage of
customers in China are lactose intolerant, and may therefore prefer other
beverages. Rodobo could become subject to increased competition from companies
whose products or marketing strategies address these consumer concerns more
effectively.
20
Adverse medical research relating to milk and demand for milk could
decrease the demand for our products. Periodically, medical and other studies
are released and announcements by medical and other groups are made which raise
concerns over the healthfulness of cow's milk in the human diet. A study may be
published or an announcement made concerning the healthfulness of cow's milk
which may result in a decrease in demand for dairy products in China.
Our planned growth may require more raw milk than is available and could
diminish the quality of our dairy products.
The supply of raw milk may be insufficient to meet demand which would limit
our growth. Moreover, as we attempt to implement our growth strategy, it may
become difficult to maintain current levels of quality control. Thus, concerns
over quality control could also limit our growth. The raw milk used in our
products is supplied to Rodobo by numerous local farms under output contracts.
We believe that our farmers can increase their production of raw milk. We
further believe, however, that this supply may not be sufficient to meet
increased demand for our products associated with our proposed marketing efforts
and that such increase may compromise quality. Though we believe that additional
raw milk is available locally, if needed, we may not be able to enter into
arrangements with the producers of such milk on terms acceptable to Rodobo, if
at all. An inadequate supply of raw milk, coupled with concern over quality
control, could limit our ability to grow, cause our earnings to decline and make
our business less profitable.
Possible volatility of raw milk costs makes our operating results difficult to
predict, and a steep cost increase could cause our profits to diminish
significantly.
The current policy of China since the mid-1990s has focused on moving the
industry in a more market-oriented direction. These reforms have resulted in the
potential for greater price volatility relative to past periods, as prices are
more responsive to the fundamental supply and demand aspects of the market.
These changes in China's dairy policy could increase the risk of price
volatility in the dairy industry, making our net income difficult to predict.
Also, if prices are allowed to escalate sharply, our costs will rise which will
lead to a decrease in profits.
We rely on Mr. Yanbin Wang, Our Chairman and Chief Executive Officer, for the
management of our business, and the loss of his services could significantly
harm our business and prospects.
We depend, to a large extent, on the abilities and participation of our
current management team, but have a particular reliance upon Mr. Yanbin Wang,
our Chairman and Chief Executive Officer and President, for the direction of our
business. The loss of the services of Mr. Wang for any reason could have a
material adverse effect on our business and prospects. We cannot assure you that
the services of Mr. Wang will continue to be available to us, or that we will be
able to find a suitable replacement for Mr. Wang. We have entered into an
employment contract with Mr. Wang, but that agreement does not guarantee Mr.
Wang's continuing to manage the Company. We do not have key man insurance on Mr.
Wang, and if he were to die and we were unable to replace him for a prolonged
period of time, we could be unable to carry out our long-term business plan, and
our future prospects for growth, and our business, could be harmed.
21
The milk business is highly competitive and, therefore, we face substantial
competition in connection with the marketing and sale of our products.
In general, milk products price is affected by many factors beyond our
control, including changes in consumer tastes, fluctuating commodity prices and
changes in supply due to weather, production, feed costs and natural disasters.
Our products compete with other premium quality dairy brands as well as less
expensive, non-premium brands. Rodobo's milk faces competition from non-premium
milk producers distributing milk in our marketing area and other milk producers
packaging their milk in glass bottles and other special packaging which serve
portions of our marketing area. Most of our competitors are well established,
have greater financial, marketing, personnel and other resources, have been in
business for longer periods of time than Rodobo, and have products that have
gained wide customer acceptance in the marketplace. The largest competitors of
Rodobo are state-owned dairies owned by the government of China. Large foreign
milk companies have also entered the milk industry in China. The greater
financial resources of such competitors will permit them to procure retail store
shelf space and to implement extensive marketing and promotional programs, both
generally and in direct response to advertising claims by Rodobo. The milk
industry is also characterized by the frequent introduction of new products,
accompanied by substantial promotional campaigns. We may be unable to compete
successfully or our competitors may develop products which have superior
qualities or gain wider market acceptance than ours.
Inadequate property and general liability insurance expose Rodobo to the risk of
loss of our property as well as liability risks in the event of litigation
against our company..
Except for some property, automobile insurance and personal injury
insurance, Rodobo and its subsidiaries do not carry enough property insurance,
general liability insurance, or product insurance that covers the full risks of
our business operations. We do not have other insurance such as business
liability or disruption insurance coverage for our operations in the PRC. As a
result, any material loss or damage to our properties or other assets could lead
to an increase in costs to replace or repair lost or damaged property and,
possibly, a decline in revenues from lost use of the lost or damaged property.
Also, we cannot assure that we would not face liability in the event of the
failure of any of our products. Any of the above would cause lost profits.
As we increase the scale of our operations, we may be unable to maintain the
level of quality we currently attain by producing our products in small batches.
22
Our products are manufactured in small batches with milk from the farms of
local farmers. We may be unable to maintain the quality of our dairy products at
increased levels of production. Increased production levels may cause Rodobo to
modify its current manufacturing methods and will necessitate the use of milk
from other additional sources. A decline in the quality of our products could
damage Rodobo's business, operations and finances.
We depend on suppliers for our raw material supply and may be exposed to the
risks associated with failure in their quality control.
We depend on milk farmers and/or milk powder and other component suppliers
for our raw material for further processing. This reliance exposes us to
potential risks associated with their deficiencies in quality control. Although
we choose our suppliers carefully, we cannot guarantee that there will not be
any lapses of quality control or deliberated sabotages on the part of our
suppliers which may result in severe damages to our brand name and business
performances and financial result. The recent milk melamine contamination
affected many milk powder of dairy related products producers. Even though, we
are not implicated in this scandal, we cannot guarantee that we will not be
implicated in similar situation in the future.
We face the potential risk of product liability associated with food products.
Rodobo faces the risk of liability in connection with the sale and
consumption of milk products, should the consumption of such products cause
injury, illness or death. Such risks may be particularly great in a company
undergoing rapid and significant growth. Rodobo currently maintains no product
liability insurance. Any insurance which we may obtain in the future may be
insufficient to cover potential claims or the level of insurance coverage needed
may be unavailable at a reasonable cost. A partially or completely uninsured
successful claim against Rodobo would drive up our costs to defend such claim or
pay damages and could cause reputational damage which would hurt our revenues.
Either of these results would in turn reduce our profitability.
Extensive regulation of the food processing and distribution industry in China
could increase our expenses resulting in reduced profits.
Rodobo is subject to extensive regulation by China's Agricultural Ministry,
and by other county and local authorities in jurisdictions in which its products
are processed or sold, regarding the processing, packaging, storage,
distribution and labeling of our products. Applicable laws and regulations
governing our products may include nutritional labeling and serving size
requirements. Our processing facilities and products are subject to periodic
inspection by national, county and local authorities. We believe that we are
currently in substantial compliance with all material governmental laws and
regulations and maintain all material permits and licenses relating to our
operations. Nevertheless, we may fall out of substantial compliance with current
laws and regulations or may be unable to comply with any future laws and
regulations. To the extent that new regulations are adopted, Rodobo will be
required to conform its activities in order to comply with such regulations. Our
failure to comply with applicable laws and regulations could subject Rodobo to
civil remedies, including fines, injunctions, recalls or seizures, as well as
potential criminal sanctions, which could have a material adverse effect on our
business, operations and finances.
23
Limited and uncertain trademark protection in China makes the ownership and use
of our trademark uncertain.
Rodobo has obtained trademark registrations for the use of our trade name
"Rodobo", which has been registered with the Trademark Bureau of the State
Administration for Industry and Commerce with respect to our milk products. We
believe our trademark is important to the establishment of consumer recognition
of our products. However, due to uncertainties in Chinese trademark law, the
protection afforded by our trademark may be less than we currently expect and
may, in fact, be insufficient. Moreover even if it is sufficient, in the event
it is challenged or infringed, we may not have the financial resources to defend
it against any challenge or infringement and such defense could in any event be
unsuccessful. Moreover, any events or conditions that negatively impact our
trademark could have a material adverse effect on our business, operations and
finances.
Our lack of patent protection could permit our competitors to copy our trade
secrets and formulae and thus gain a competitive advantage.
Rodobo has no patents covering our products or production processes, and we
expect to rely principally on know-how and the confidentiality of our formulae
and production processes for our products and our flavoring formulae in
producing competitive product lines. Any breach of confidentiality by our
executives or employees having access to our formulae could result in our
competitors gaining access to such formulae. The ensuing competitive
disadvantage could reduce our revenues and our profits.
A widespread health problem in the PRC could negatively affect our operations
A renewed outbreak of SARS or another widespread public health problem in
the PRC, such as bird flu, could have an adverse effect on our ability to
receive and distribute merchandise, the ability of our employees and customers
to reach our stores, and other aspects of our operations. Public-safety
measures, such as quarantines or closures of some stores could disrupt our
operations. Any of the foregoing events or other unforeseen consequences of
public health problems could adversely affect our business.
Difficulties with hiring, employee training and other labor issues could disrupt
our operations.
We may not be able to successfully hire and train new team members or
integrate those team members into the programs and policies of the Company. Any
such difficulties would reduce our operating efficiency and increase our costs
of operations.
24
Our company name and private-label merchandise may be subject to counterfeiting
or imitation, which could have an adverse impact upon our reputation and brand
image, as well as lead to higher administrative costs.
We regard brand positioning as an important element of our competitive
strategy, and intend to position our Rodobo brand to be associated with
affordable prices, high quality and convenience. There have been frequent
occurrences of counterfeiting and imitation of products in the PRC in the past.
Imitation of our company name or logo could occur in the future and there is no
guarantee that we will be able to detect it and deal with it effectively. Any
occurrence of counterfeiting or imitation could impact negatively upon our
corporate and brand image.
In addition, there is chance that another company brings a claim against us for
trademark infringement, which could be costly and time-consuming to defend.
We may have difficulty establishing adequate management, legal and financial
controls in the PRC.
The PRC historically has not adopted a western style of management and
financial reporting concepts and practices, as well as in modern banking,
computer and other control systems. We may have difficulty in hiring and
retaining a sufficient number of qualified employees to work in the PRC. As a
result of these factors, we may have difficulty or need use more efforts to
establish management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards.
Inadequate funding for our capital expenditure may affect our growth and
profitability
Our net sales revenue has increased from $8.8 million in 2006 to $12.7
million for 2007. Our continued growth will depend on our ability to raise
capital from outside sources. Our ability to obtain financing will depend upon a
number of factors, including:
o our financial condition and results of operations;
o the condition of the PRC economy;
o conditions in relevant financial markets;
o relevant PRC laws; and
o the success of our expansion plans
If we are unable to obtain financing, as needed, on a timely basis and on
acceptable terms, our financial position, competitive condition, growth and
profitability may be adversely affected.
25
We may not be able to effectively control and manage our growth.
If our business and markets grow and develop, it will be necessary for us
to finance and manage expansion in an orderly fashion. We may not have the
requisite experience to manage and operate a larger network of stores and
distribution centers. In addition, we may face challenges in integrating
acquired businesses with our own. These events would increase demands on our
existing management, workforce and facilities. Failure to satisfy these
increased demands could interrupt or adversely affect our operations and cause
production backlogs, longer product development time frames and administrative
inefficiencies.
Potential environmental liability could have a material adverse effect on our
operations and financial condition.
To the knowledge of management, neither the manufacturing nor the
distribution of our products constitutes an activity that requires us to comply
with PRC environmental laws. Although it has not been alleged by PRC government
officials that we have violated any current environmental regulations, we cannot
assure you that the PRC government will not amend the current PRC environmental
protection laws and regulations. Our business and operating results may be
materially and adversely affected if we were to be held liable for violating
existing environmental regulations or if we were to increase expenditures to
comply with environmental regulations affecting our operations.
Standards for compliance with Section 404 of the Sarbanes-Oxley Act Of 2002 are
uncertain, and if we fail to comply in a timely manner, our business could be
harmed and our stock price could decline.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act
of 2002 require annual assessment of our internal control over financial
reporting, and attestation of this assessment by our company's independent
registered public accountants. The SEC extended the compliance dates for
non-accelerated filers, as defined by the SEC. Accordingly, we believe that the
annual assessment of our internal controls requirement will first apply to our
annual report for the 2007 fiscal year and the attestation requirement of
management's assessment by our independent registered public accountants will
first apply to our annual report for the 2008 fiscal year. The standards that
must be met for management to assess the internal control over financial
reporting as effective are new and complex, and require significant
documentation, testing and possible remediation to meet the detailed standards.
We may encounter problems or delays in completing activities necessary to make
an assessment of our internal control over financial reporting. In addition, the
attestation process by our independent registered public accountants is new and
we may encounter problems or delays in completing the implementation of any
requested improvements and receiving an attestation of our assessment by our
independent registered public accountants. If we cannot assess our internal
control over financial reporting as effective, or our independent registered
public accountants are unable to provide an unqualified attestation report on
such assessment, investor confidence and share value may be negatively impacted.
26
Risks related to an investment in our common stock
- --------------------------------------------------
Our Chief Executive Officer controls us through his position and stock ownership
and his interests may differ from other stockholders
Our Chief Executive Officer, Mr. Yanbin Wang, owns approximately 20% of
Mega prior to the merger. As a result, Mr. Wang will be able to influence the
outcome of stockholder votes on various matters, including the election of
directors and extraordinary corporate transactions such as business
combinations. Mr. Wang's interests may differ from that of other stockholders.
We do not intend to pay cash dividends in the foreseeable future
We currently intend to retain all future earnings for use in the operation
and expansion of our business. We do not intend to pay any cash dividends in the
foreseeable future but will review this policy as circumstances dictate. Should
we decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiaries based in the PRC. Our operating
subsidiaries, from time to time, may be subject to restrictions on its ability
to make distributions to us, including restrictions on the conversion of local
currency into U.S. dollars or other hard currency and other regulatory
restrictions. See "Risks related to doing business in the People's Republic of
China" above.
There is currently a very limited trading market for our common stock
Because we were formerly a shell company, our bid and ask quotations have
not regularly appeared on the OTC Bulletin Board for any extended period of
time. There is a limited trading market for our common stock and our common
stock may never be included for trading on any stock exchange or through any
other quotation system, including the NASDAQ Stock Market. You may not be able
to sell your shares due to the absence of an established trading market.
Our common stock is subject to the Penny Stock Regulations
Our common stock is, and will continue to be subject to the SEC's "penny
stock" rules to the extent that the price remains less than $5.00. Those rules,
which require delivery of a schedule explaining the penny stock market and the
associated risks before any sale, may further limit your ability to sell your
shares.
The SEC has adopted regulations which generally define "penny stock" to be
an equity security that has a market price of less than $5.00 per share. Our
common stock, when and if a trading market develops, may fall within the
definition of penny stock and subject to rules that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally those with
assets in excess of $1,000,000, or annual incomes exceeding $200,000 or
$300,000, together with their spouse).
27
For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's prior written consent to the transaction. Additionally,
for any transaction, other than exempt transactions, involving a penny stock,
the rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our common stock and may affect
the ability of investors to sell their common stock in the secondary market.
Our common stock is illiquid and subject to price volatility unrelated to our
operations
The market price of our common stock could fluctuate substantially due to a
variety of factors, including market perception of our ability to achieve our
planned growth, quarterly operating results of other companies in the same
industry, trading volume in our common stock, changes in general conditions in
the economy and the financial markets or other developments affecting our
competitors or us. In addition, the stock market is subject to extreme price and
volume fluctuations. This volatility has had a significant effect on the market
price of securities issued by many companies for reasons unrelated to their
operating performance and could have the same effect on our common stock.
A large number of shares of common stock will be issuable for future sale
which will dilute the ownership percentage of our current holders of common
stock. Pursuant to the Share Purchase Agreement, we are obligated to register
for public resale 9.1 million shares of common stock underlying our Series A
Preferred Stock and an additional 1.5 million shares of common stock held by our
stockholders prior to the transactions described in this report. The
availability for public resale of those shares may depress our stock price.
Also as a result, there will be a significant number of new shares of
common stock on the market in addition to the current public float. Sales of
substantial amounts of common stock, or the perception that such sales could
occur, and the existence of warrants to purchase shares of common stock at
prices that may be below the then current market price of the common stock,
could adversely affect the market price of our common stock and could impair our
ability to raise capital through the sale of our equity securities.
28
Enforcement against us or our directors and officers may be difficult
Because our principal assets are located outside of the U.S. and some or
all our directors and officers, both present and future, reside outside of the
U.S., it may be difficult for you to enforce your rights based on U.S. federal
securities laws against us and our officers and some directors or to enforce a
U.S. court judgment against us or them in the PRC.
In addition, our operating company, Rodobo, is located in the PRC and
substantially all of its assets are located outside of the U.S. It may therefore
be difficult for investors in the U.S. to enforce their legal rights based on
the civil liability provisions of the U.S. Federal securities laws against us in
the courts of either the U.S. or the PRC and, even if civil judgments are
obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is
unclear if extradition treaties now in effect between the U.S. and the PRC would
permit effective enforcement against us or our officers and directors of
criminal penalties under the U.S. Federal securities laws or otherwise.
Management's Discussion and Analysis of Plan of Operations
Results of Operations
- ---------------------
Nine-Month Period Ended June 30, 2008 Compared to the Nine-Month Period Ended
June 30, 2007
The following table sets forth the period change for each category of the
statement of operations, as well as each category as a percentage of net sales.
Unaudited Unaudited % of change
2007.10-2008.6 % of 2006.10-2007.6 % of based on
US$ Sales US$ Sales 2006.10-2007.6
-------------- ----- -------------- ----- --------------
Net sales $16,107,220 100.0% $9,086,397 100.0% 77.3%
Cost of goods sold 9,544,205 59.3% 4,769,751 52.5% 100.1%
----------- ----------
Gross profit 6,563,015 40.7% 4,316,646 47.5% 52.0%
----------- ----------
Operating expenses:
Distribution expenses 3,054,130 19.0% 2,360,443 26.0% 29.4%
General & administrative expenses 674,126 4.2% 348,192 3.8% 93.6%
Depreciation expenses 31,743 0.2% 24,046 0.3% 32.0%
----------- ----------
Total operating expenses 3,759,999 23.3% 2,732,681 30.1% 37.6%
----------- ----------
Operating income 2,803,016 17.4% 1,583,965 17.4% 77.0%
Other income (expenses) 97,010 0.6% 83,071 0.9% 16.8%
----------- ----------
Income before income taxes 2,900,026 18.0% 1,667,036 18.3% 74.0%
Provision for income taxes -- 0.0% -- 0.0% n/a
----------- ----------
Net income $ 2,900,026 18.0% 1,667,036 18.3% 74.0%
Other comprehensive income:
Foreign currency translation
adjustment 615,300 3.8% 68,571 0.8% 797.7%
----------- ----------
Comprehensive income $ 3,515,325 21.8% 1,735,607 19.1% 102.8%
=========== ==========
29
Net Sales:
- ----------
Net sales for the nine months ended June 30, 2008 were about $16.1 million,
increased by approximately $7,0 million in absolute amount. It was 77.3% higher
than the net sales for the same period in fiscal year 2007. This increase was
primarily driven by the Company's continuous efforts on developing distribution
network and enhancing the ability to expand the customer base. Additionally, the
sales increase was contributed by an average of 23% pricing increase implemented
in May 2007, as a result of increased materials costs.
Gross Profit:
- -------------
The Company's gross profit increased approximately $2.2 million for the nine
months ended June 30, 2008, up 52.0% compared with the corresponding figure in
fiscal year 2007. Due to the increased material costs and labor costs, the cost
of goods sold increased by 100.1%, greater than the 77.3% increase in sales.
Therefore, the overall gross profit margin decreased from 47.5% in 2007 to 40.7%
in 2008.
Operating expenses:
- -------------------
Operating expenses for the nine months ended June 30, 2008 was about $3.8
million, increased by approximately $1.0 million in absolute amount. However,
operating expenses as a percentage of net sales dropped from 30.1% in 2007 to
23.3% in 2008.
Distribution expenses increased about $0.7 million, up 29.4% compared with the
amount in 2007. The increase was mainly due to an increase of $0.7 million in
distributor rebates, as a result of sales increase and market expansion.
General and administrative expenses increased by $0.33 million, or approximately
93.6%, from $0.35 million in the nine months ended June 30, 2007 to $0.67
million for the nine months ended June 30, 2008. The increase was resulted from
$0.09 million increase in salaries due to staff salary raise and headcount
addition, $0.15 million of sales consulting fees and $0.02 million of listing
related fee.
30
Depreciation expenses increased by $7,697, or approximately 32.0%, from $24,046
in the nine months ended June 30, 2007 to $31,743 for the nine months ended June
30, 2008. This increase was primarily related to the building improvement at the
Company's Qinggang production facilities and the purchase of equipment to
support the Company's sales growth.
Overall increase in operating expenses was less than the increase in net sales.
We realized 77.0% increase (approximately $1.2 million) in income from
operations in the nine months ended June 30, 2008 compared with the same period
in fiscal year 2007.
Net Income:
- -----------
The Company achieved about $2.9 million of net income for the nine months ended
June 30, 2008, increased by $1,2 million (approximately 74.0%) compared with
$1.7 million for the same period in fiscal year 2007. It was mainly attributable
to the increase in sales, partially offset by increase in cost of goods sold and
operating expenses.
Fiscal Year Ended September 30, 2007 Compared to Fiscal Year Ended September 30,
2006
The following table sets forth the period change for each category of the
statement of operations, as well as each category as a percentage of net sales.
Audited Audited % of change
FY 2007 % of FY 2006 % of based on
US$ Sales US$ Sales FY 2006
--- --- -------
Net sales $12,764,906 100.0% $8,829,946 100.0% 44.6%
Cost of goods sold 6,599,179 51.7% 5,117,997 58.0% 28.9%
----------- ----------
Gross profit 6,165,727 48.3% 3,711,949 42.0% 66.1%
----------- ----------
Operating expenses:
Distribution expenses 3,265,044 25.6% 3,151,353 35.7% 3.6%
General and administrative
expenses 337,006 2.6% 510,939 5.8% -34.0%
Depreciation expenses 28,901 0.2% 22,929 0.3% 26.0%
----------- ----------
Total operating expenses 3,630,951 28.4% 3,685,221 41.7% -1.5%
----------- ----------
Operating income 2,534,776 19.9% 26,728 0.3% 9383.6%
Other income (expenses) 84,206 0.7% 26,890 0.3% 213.2%
----------- ----------
Income before income taxes 2,618,982 20.5% 53,618 0.6% 4784.5%
Provision for income taxes -- 0.0% -- 0.0% n/a
----------- ----------
Net income $ 2,618,982 20.5% 53,618 0.6% 4784.5%
comprehensive income:
Foreign currency
translation adjustment 126,232 1.0% 20,509 0.2% 515.5%
----------- ----------
Comprehensive income $ 2,745,214 21.5% 74,126 0.8% 3603.4%
=========== ==========
31
Net Sales:
- ----------
Net sales for the fiscal year ended September 30, 2007 were about $12.8 million,
increased by approximately $3.9 million in absolute amount. It was 44.6 % higher
than the net sales for the fiscal year ended September 30, 2007. This increase
was primarily driven by the Company's continuous efforts on developing
distribution network and enhancing the ability to expand the customer base.
Additionally, the sales increase was partially contributed by an average of 23%
pricing increase implemented in May 2007, as a result of increased materials
costs towards the end of the fiscal year.
Gross Profit:
- -------------
In terms of the absolute amount, the Company's gross profit increased
approximately $2.5 million for the fiscal year ended September 30, 2007, up
66.1% compared with the corresponding figure in fiscal year 2007. The cost of
goods sold increased by 28.9%, lower than the 44.6% increase in net sales.
Therefore, the overall gross profit margin had been improved from 42.0% in
fiscal year 2006 to 48.3% in 2007.
Operating expenses:
- -------------------
Operating expenses for the fiscal year ended September 30, 2007 was maintained
at the same level as that in fiscal year ended September 30, 2006, which was
about $3.6 million. However, operating expenses as a percentage of net sales
dropped from 41.7% in fiscal year 2006 to 28.4% in fiscal year 2007.
Distribution expenses increased slightly by $0.1 million, or approximately 3.6%,
from $3,2 million in fiscal year ended September 30, 2006 to $3,3 million for
the fiscal year ended September 30, 2007. Distribution expenses remained
relatively stable between periods.
General and administrative expenses decreased by $0.17 million, or approximately
34.0%, from $0.51 million in the fiscal year ended September 30, 2006 to $0.34
million for the fiscal year ended September 30, 2007. The decrease was mainly
due to $0.04 million of reduction in traveling expenses, $0.01 million decrease
in freight expenses and decrease in other miscellaneous expenses.
32
Depreciation expenses increased by $5,972, or approximately 26.0%, from $22,929
in fiscal year ended September 30, 2006 to $28,901 for the fiscal year ended
September 30, 2007. This increase was related primarily to the purchase of
equipment and vehicles to support the Company's sales growth.
The relatively stable distribution expenses and depreciation expenses, along
with the decrease in general and administrative expenses contributed to the
stable level of operating expenses. Due to the overall increase in net sales
with no obvious increase in operating expenses, the Company achieved about $2.5
million income from operation for the fiscal year ended September 30, 2007. It
was approximately 9383.6% higher than the approximate $0.03 million of income
from operation for the fiscal year ended September 30, 2006.
Net Income:
- -----------
The Company achieved about $2.6 million of net income for the fiscal year ended
September 30, 2007, increased by $2.57 million (approximately 4784.5%) compared
with $0.053 million for the fiscal year ended September 30, 2006. It was mainly
attributable to the increase in sales, partially offset by increase in cost of
goods sold, with a relatively stable level of operating expenses.
Liquidity and Capital Resources
- -------------------------------
The following table summarizes the cash flows for the nine months ended June 30,
2008 and 2007.
2007.10 - 2008.6 2006.10 - 2007.6
US$ US$
---------------- ----------------
Net cash provided by operating activities $ 1,631,266 $ 1,491,529
---------------- ----------------
Net cash (used in) investing activities (3,246,188) (1,996,660)
---------------- ----------------
Net cash provided by financing activities 1,070,648 333,765
---------------- ----------------
Effect of exchange rate changes on
cash and cash equivalents 593,066 64,520
---------------- ----------------
Net increase (decrease) in cash and cash
equivalents 48,792 (106,846)
Cash and cash equivalents, beginning of period 33,302 156,448
---------------- ----------------
Cash and cash equivalents, end of period $ 82,094 $ 49,602
================ ================
Supplemental disclosures of cash flow information:
Interest paid $ 12,834 $ --
================ ================
Income taxes paid $ -- $ --
================ ================
33
Operating Activities:
- ---------------------
For the nine months ended June 30, 2008, the Company generated $1.63 million in
operating activities, compared with $1.49 million provided by operating
activities for the nine months ended June 30, 2007. The increase in net cash
flows provided from operating activities was attributable primarily to increase
in net income of $1.2 million, offset by an increase in accrued expenses of $1.5
million. As of June 30, 2008, the Company had working capital of approximately
$1.5 million.
Investing Activities:
- ---------------------
For the nine months ended June 30, 2008, the Company used $3.2 million in
investing activities, compared with $2.0 million used in investing activities
for the nine months ended June 30, 2007. This decrease was due primarily to
investment advances, deposit in intangible assets and purchase of fixed assets.
The Company entered into a "Technology Transfer Agreement" with China Nutrition
Society ("CNS") to obtain a powdered milk product formula specifically developed
for the middle aged and seniors with a total fee of RMB5.0 million
(approximately $0.7 million). The Company will exclusively have the right to use
the formula for 10 years starting July 1, 2008. Under the Agreement, the Company
agrees to pay a first installment payment of RMB2.0 million (approximately $0.3
million) upon the execution of the Agreement, a second installment payment of
RMB1.0 million (approximately $0.1 million) upon the technology transfer and the
remaining amount by December 25, 2008. As of June 30, 2008, the Company has made
the first installment payment of RMB2.0 million.
Financing Activities:
- ---------------------
For the nine months ended June 30, 2008, approximately $1.1 million was provided
by financing activities, compared with $0.3 million provided by financing
activities for the nine months ended June 30, 2007. This increase in net cash
from financing activities was due to the issuance of 14,500 shares of Common
Stock on January 11, 2008.
34
Critical Accounting Policies and Estimates
- ------------------------------------------
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America which
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of our financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. In the Company's opinion,
the condensed consolidated financial statements contain all the adjustments
necessary (consisting only of normal recurring accruals) to make the financial
position of the Company and the results of operations and cash flows not
misleading. Critical accounting policies are those that require the application
of management's most difficult, subjective, or complex judgments, often because
of the need to make estimates about the effect of matters that are inherently
uncertain and that may change in subsequent periods. In preparing the financial
statements, the Company utilized available information, including its past
history, industry standards and the current economic environment, among other
factors, in forming the Company's estimates and judgments, giving due
consideration to materiality. Actual results may differ from these estimates. In
addition, other companies may utilize different estimates, which may impact the
comparability of the Company's results of operations to those of companies in
similar businesses. We believe that of the Company's significant accounting
policies, the following may involve a higher degree of judgment and estimation.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Harbin Rodobo Dairy Co., Ltd. and Harbin Mega
Profit Management Consulting Co., Ltd. All inter-company transactions and
balances were eliminated.
Foreign Currency
- ----------------
The Company's principal country of operations is in The People's Republic of
China ("PRC"). The financial position and results of operations of the Company
are determined using the local currency ("RMB") as the functional currency. The
results of operations denominated in foreign currency are translated at the
average rate of exchange during the reporting period.
Assets and liabilities denominated in foreign currencies at the balance sheet
date are translated at the applicable rate of exchange in effect at that date.
The registered equity capital denominated in the functional currency is
translated at the historical rate of exchange at the time of capital
contribution. All translation adjustments arising from the translation of the
financial statements into the reporting currency ("US Dollars") are included as
a separate component within shareholders' equity as "Accumulated Other
Comprehensive Income". Translation adjustments for the nine months periods ended
June 30, 2008 and 2007 totaled $615,538 and $68,571, respectively.
As of June 30, 2008 and 2007 the exchange rate was 6.86 and 7.49 RMB per U.S.
Dollar.
35
Revenue recognition
- -------------------
The Company's revenue recognition policies are in compliance with Staff
Accounting Bulletin ("SAB") 104. Sales revenue is recognized at the date of
shipment to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectability is reasonably assured. Revenues consist of the
invoice value of the sale of goods net of sales returns and allowances.
Taxation
- --------
The Company utilizes Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes", which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financials statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to realized.
There are no deferred tax amounts at June 30, 2008 and September 30, 2007,
respectively.
In June 2006, the FASB issued Interpretation 48, "Accounting for Uncertainty in
Income Taxes" ("FIN 48"), an interpretation of FASB Statement No. 109,
"Accounting for Income Taxes." FIN 48 clarifies the accounting and reporting for
income taxes where interpretation of the law is uncertain. FIN 48 prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of income tax uncertainties with respect to
positions taken or expected to be taken in income tax returns. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company
adopted FIN 48 at October 1, 2007. The adoption of FIN 48 did not have a
material effect on the Company's financial position.
The Company's wholly owned subsidiary, Rodobo, is entitled to a tax holiday of
five years for full Enterprise Income Tax ("EIT") exemption. The preferential
tax treatment commenced in 2005 and will expire in 2009. The estimated tax
savings amounted to $0.8 million and $0.6 million for the nine months ended June
30, 2008 and 2007, respectively. The net effect on earnings per share had the
income tax been applied would decrease earnings per share from $206.42 to
$151.42 for the nine months ended June 30, 2008 and from $333.41 to $223.38 for
the nine months ended June 30, 2007.
36
Recently Issued Accounting Pronouncements
- -----------------------------------------
The following pronouncements have recently been issued by the Financial
Accounting Standards Board ("FASB"): In September 2006, the FASB issued SFAS No.
157, "Fair Value Measurements" ("FAS 157"). FAS 157 addresses how companies
should measure fair value when they are required to use a fair value measure for
recognition or disclosure purposes under GAAP. FAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. FAS 157 is effective for fiscal years beginning on or
after November 15, 2007, which is the Company's fiscal year 2009. The Company is
currently evaluating the impact of adopting FAS 157 on its financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("FAS 159"). This statement permits
companies to choose to measure many financial assets and liabilities at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings. FAS 159 is effective for fiscal years
beginning on or after November 15, 2007, which is the Company's fiscal year
2009. The Company is currently assessing the impact of FAS 159 on its financial
statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("FAS
141(R)"). FAS 141(R) requires the acquiring entity in a business combination to
recognize all assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and requires the acquirer to disclose
all information needed by investors to understand the nature and financial
effect of the business combination. FAS 141 (R) is effective for fiscal years
beginning on or after December 15, 2008, which is the Company's fiscal year
2010. The Company is currently assessing the impact of FAS 141 (R) on its
financial statements.
In December 2007, the FASB also issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements - an amendment of Accounting Research
Bulletin No. 51" ("FAS 160"). This statement requires an entity to classify
noncontrolling interests in subsidiaries as a separate component of equity.
Additionally, transactions between an entity and noncontrolling interests are
required to be treated as equity transactions. FAS 160 is effective for fiscal
years beginning on or after December 15, 2008, which is the Company's fiscal
year 2010. The Company is currently assessing the impact of FAS 160 on its
financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("FAS 161"). This statement requires
enhanced disclosures about (i) how and why companies use derivative instruments,
(ii) how companies account for derivative instruments and related hedged items
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", and (iii) how derivative instruments and related hedged items
affect their financial results. FAS 161 is effective for fiscal years beginning
on or after November 15, 2008, which is the Company's fiscal year 2010. The
Company is currently assessing the impact of FAS 161 on its financial
statements.
Off-Balance Sheet Arrangements
- ------------------------------
None.
37
Controls and Procedures
- -----------------------
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term
refers to the controls and procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified by the Securities and Exchange
Commission. The Company's management, including its chief executive officer and
chief financial officer, have evaluated the effectiveness of disclosure controls
and procedures as of the end of the period covered by this report. Based upon
that evaluation, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report.
There were no changes to the Company's internal control over financial reporting
during its last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Certain Relationship and Related Transaction
We have not been a party to any transaction, proposed transaction or series of
transactions in which the amount involved exceeded $120,000, and in which, to
our knowledge, any of our directors, officers, five percent beneficial security
holders or any member of the immediate family of the foregoing persons has had
or will have a direct or indirect material interest.
PROPERTIES
All land in the PRC is owned by the government and cannot be sold to any
individual or entity. Instead, the government grants or allocates landholders a
"land use right," which we sometimes refer to informally as land ownership.
There are four methods to acquire land use rights in the PRC:
o grant of the right to use land;
o assignment of the right to use land;
o lease of the right to use land; and
o allocated land use rights
In comparison with Western common law concepts, granted land use rights are
similar to life estates and allocated land use rights are in some ways similar
to leaseholds.
Granted land use rights are provided by the government in exchange for a grant
fee, and carry the rights to pledge, mortgage, lease, and transfer within the
term of the grant. Land is granted for a fixed term, generally 70 years for
residential use, 50 years for industrial use, and 40 years for commercial and
other use. The term is renewable in theory. Unlike the typical case in Western
nations, granted land must be used for the specific purpose for which it was
granted.
38
Allocated land use rights are generally provided by the government for an
indefinite period (usually to state-owned entities) and cannot be pledged,
mortgaged, leased, or transferred by the user. Allocated land can be reclaimed
by the government at any time. Allocated land use rights may be converted into
granted land use rights upon the payment of a grant fee to the government.
On July 1, 2004, Rodobo entered into a lease agreement with Heilongjiang Jinniu
Dairy Co., Ltd. ("Jinniu") to lease its manufacturing facilities in Qinggang,
Heilongjiang. Under the agreement, Harbin Rodobo is obligated to pay
RMB1,000,000 (approximately US$145,792) per year, payable in two installments
each year for six years from July 5, 2004 to July 5, 2010. On April 1, 2005 and
April 1, 2006, Harbin Rodobo and Jinniu amended the lease agreement whereby the
lease term was extended to July 6, 2030 and effective July, 2010, the annual
rent payment is reduced to RMB600,000 (approximately US$ 87,475), payable in two
installments each year. Under the amended agreement, Harbin Rodobo is also
required to make minimum RMB400,000 (approximately US$58,317) of annual
improvements or betterment to the leased facility when the new lease term takes
effect.
Our land use rights are set forth below:
Leased Premises
- ---------------
No. Lessees Description of the Lease Term Rent per Year
Yuan
1 Cangzong Wu Production Facilities, ~30,000 m(2) , 26 year 1,000,000
Zhonghe Town, Qinggang
2 Yanbin Wang Office building, ~300m2 , No.380 5 year 48,000
Changjing Road, Harbin
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our Directors and Executive Officers [Directors and officers of the U.S.
company] In connection with the change in control of the Company described in
Item 5.01 of this report, effective September 30, 2008, we appointed Mr. WANG
Yanbin as our Chairman and Chief Executive Officer, Ms. Qiao Xiuzhen as our
Chief Financial Officer, Ranny Liang, John Chen, Ross Warner, and Lester
Schecter resigned as our directors and executive officers at that same time.
All of or officers and directors are residents of the PRC. As a result, it may
be difficult for investors to effect service of process within the United States
upon any of them or to enforce court judgments obtained against them in the
United States courts.
39
The following table sets forth certain information as of the closing date
concerning our directors and executive officers:
Directors and Executive
Officers Position/Title Age
- -------------------------------------------------------------------------------
Yanbin Wang Chief Executive Officer, Director 36
Xiuzhen Qiao Chief Financial Officer, 35
Director
Our directors and executive officers have not, during the past five years:
o had any bankruptcy petition filed by or against any business of which was a
general partner or executive officer, either at the time of the bankruptcy
or within two years prior to that time,
o been convicted in a criminal proceeding and is not subject to a pending
criminal proceeding,
o been subject to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities, futures, commodities or
banking activities; or been found by a court of competent jurisdiction (in
a civil action), the Securities Exchange Commission or the Commodity
Futures Trading Commission to have violated a federal or state securities
or commodities law, and the judgment has not been reversed, suspended or
vacate
The following is a summary of the biographical information of those directors
and officers whose biographical information does not appear above:
Yanbin Wang, Chief Executive Officer, 36
Mr. Wang has been the Board Chairman and General Manager of Harbin Rodobo Dairy
Co.,Ltd since 2002. Prior to that, he was founder and General Manger of Harbin
Jinyu Maltose Syrup Co.,Ltd from 1997 to 2003. Jinyu has been one of the leading
maltose syrup suppliers in China since 1998. Mr. Wang obtained his EMBA in
Economy Management from Tsinghua University in 2007 and he obtained bachelor
degree from Harbin Light Industry College..
Qiao, Xiuzhen, Chief Finance Officer, 35
Ms. Qiao has more than 10 years of experience in accounting and corporate
finance areas. Prior to joining Rodobo in 2007, she was the Chief Financial
Officer of Harbin Runtong Group, a private company engaged in consumer
beverages. Ms. Qiao started her career as an accountant at the Runtong Group in
1996. She studied at Harbin Institute of Technology majoring in management and
prior to that she studied in Harbin Childcare Training School.
Ranny Liang,. Ms. Liang was the original founder of Navistar and is responsible
for overall strategy and Chinese investor relations. She formerly served as the
General Manager of The SinoAmerican Times and the Executive Director of Asian
Cultural Enterprises, Inc. where she was responsible for print and TV media
program production. Prior to this position, Ms. Liang was an Account Executive
at the New York Daily Times and a reporter for The World Journal, a major
newspaper and magazine in China. In addition, Ms. Liang was a teacher of
Guangzhou College and at the same time served as a free lance columnist for
several major newspapers and magazines in China. Ms. Liang holds a Bachelor of
Arts in Chinese Literature and Language from The South China Normal University.
Ross Warner, director. Mr. Warner has over 13 years' management, training and
consulting experience with international companies. He currently serves on the
board of General Steel Holdings, Inc. Previously he served as business manager
at TTI China and Infotechnology Group, Inc., and was the country manager for
China at Our Chinese Daughters Foundation, EF English First. Mr. Warner obtained
a Master of International Management from American Graduate School of
International Management at Thunderbird and a Bachelor of Business
Administration from Pacific Lutheran University & University of Copenhagen,
Denmark.
40
Liu, Songbin, Chief Production Officer, 51
Mr. Liu has served as the Chief Production Officer since 2004. Previously Mr.
Liu was the director of supply in Harbin Jinxin Dairy Company. Prior to 1993, he
was the director of supply in Harbin Hunan Textile Co. Ltd.
Qi, Junna, Chief Marketing Officer, 33
Ms. Qi has served as CMO since 2006. From 2004 to 2005, Ms. Qi was the Sales
Manager in Shandong Songfu Co., Ltd. From 2002 to 2003, Ms. Qi was the Sales
Manager in Shanghai Huaguan Dairy Co., Ltd. Ms. Qi graduated with a Finance
Degree from Fujian Institute of Media and Broadcast in 1997.
Audit Committee Financial Expert
- --------------------------------
Our board of directors currently acts as our audit committee. Because we only
recently executed the share exchange and the private placement, our Board of
Directors is still in the process of finding an "audit committee financial
expert" as defined in Regulation S-K and directors that are "independent" as
that term is used in Section 10A of the Securities Exchange Act.
Audit Committee
- ---------------
We have not yet appointed an audit committee. At the present time, we believe
that the members of Board of Directors are collectively capable of analyzing and
evaluating our financial statements and understanding internal controls and
procedures for financial reporting. We do, however, recognize the importance of
good corporate governance and intend to appoint an audit committee comprised
entirely of independent directors, including at least one financial expert, in
the near future.
Compensation Committee
- ----------------------
We do not presently have a compensation committee. Our board of directors
currently acts as our compensation committee.
Nominating Committee
- --------------------
We do not presently have a nominating committee. Our board of directors
currently acts as our nominating committee. We are in search for qualified
independent board members to staff this committee.
Section 16(a) beneficial reporting compliance
- ---------------------------------------------
Pursuant to Section 16(a) of the Securities Exchange Act of 1934 and the rules
issued thereunder, our directors and executive officers and any persons holding
more than 10% of our common stock are required to file with the SEC reports of
their initial ownership of our common stock and any changes in ownership of such
common stock. Copies of such reports are required to be furnished to us. We are
not aware of any instances in fiscal year ended December 31, 2007 when an
executive officer, director or any owner of more than 10% of the outstanding
shares of our common stock failed to comply with the reporting requirements of
Section 16(a) of the Securities Exchange Act of 1934.
41
Code of Ethics
- --------------
We do not currently have a Code of Ethics applicable to our principal executive,
financial or accounting officer and are in the process of adopting such a code.
42
EXECUTIVE COMPENSATION
The following is a summary of the compensation paid by Rodobo to Yanbin Wang,
its President and Chief Executive Officer, for the three years ended September
30, 2007, 2006 and 2005, respectively. No other executive officer of Rodobo
received compensation in excess of $100,000 for any of these three years.
Change in
Pension Value
and Nonqualified
Non-equity Deferred
Name and Stock Option Incentive Plan Compensation All Other
Principal Fiscal Salary Bonus Awards Awards Compensation Earnings Compensation Total
Position Year ($) ($) ($) ($) ($) ($) ($) ($)
- ----------------------------------------------------------------------------------------------------------------
WANG Yanbin 2007 9,452 -0- -0- -0- -0- -0- -0- -0-
2006 7,314 -0- -0- -0- -0- -0- -0- -0-
2005 7,314 -0- -0- -0- -0- -0- -0- -0-
- ----------------------------------------------------------------------------------------------------------------
2007 7,314 -0- -0- -0- -0- -0- -0- -0-
QIAO 2006 7,314 -0- -0- -0- -0- -0- -0- -0-
Xiuzhen 2005 7,314 -0- -0- -0- -0- -0- -0- -0-
- ----------------------------------------------------------------------------------------------------------------
(1) The relevant exchange rates for fiscal years 2007, 2006 and 2005 are $1 to
RMB 7.61720, RMB 7.98189, and RMB 8.20329, respectively.
Both these two officers receive such compensation on a monthly basis. With the
exception of the foregoing, no director or officer of the Company has received
any compensation during the last fiscal year. No options or rights were granted
to any employee, executive officer or director of the Company during the last
fiscal year.
As of the date of this report, we have no formal or informal arrangements or
agreements to compensate our directors for services they provide as directors.
We plan to implement a compensation program for our independent directors, as
and when they are appointed, which we anticipate will include such elements as
an annual retainer, meeting attendance fees and stock options. The details of
that compensation program will be negotiated with each independent director.
Currently, the directors for Rodobo are not compensated for their service as
directors.
Compensation Discussion and Analysis
- ------------------------------------
We strive to provide our named executive officers (as defined in Item 402 of
Regulation S-K) with a competitive base salary that is in line with their roles
and responsibilities when compared to peer companies of comparable size in
similar locations.
43
It is not uncommon for PRC private companies in northeastern China to have base
salaries as the sole form of compensation. The base salary level is established
and reviewed based on the level of responsibilities, the experience and tenure
of the individual and the current and potential contributions of the individual.
The base salary is compared to the list of similar positions within comparable
peer companies and consideration is given to the executive's relative experience
in his or her position. Base salaries are reviewed periodically and at the time
of promotion or other changes in responsibilities.
We plan to implement a more comprehensive compensation program, which takes into
account other elements of compensation, including, without limitation, short and
long term compensation, cash and non-cash, and other equity-based compensation
such as stock options. We expect that this compensation program will be
comparable to the programs of our peer companies and aimed to retain and attract
talented individuals.
We will also consider forming a compensation committee to oversee the
compensation of our named executive officers. The majority of the members of the
compensation committee would be independent directors.
ITEM 3.02 UNREGISTERED SALE OF EQUITY SECURITIES.
In January 2006, we completed a private placement offering with certain
accredited investors, raising a gross aggregate amount of US$1,000,000 from the
issuance of units, each of which consist of Convertible Debentures with a face
value of $25,000 (the "Debentures"), 5,000 shares of our Common Stock ("Unit
Shares") and 25,000 Stock Purchase Warrants ("Warrants"). The Debentures carried
an interest rate of 8% per annum and were convertible into shares of our common
stock at $1.00 per shares, and the warrants were of an exercise price of US$1.25
for a period of 4 years. These Debentures were extended on July 31, 2006 for a
four (4) month period with an increase of US$200,000 in principal as a bonus
payment to the Debenture holders as well as Warrants and conversion price of the
Debentures were reduced to US$0.40 and Warrant exercise price were reduced to
US$0.50. These Debentures were again extended for another four (4) months until
April 30, 2007 with the conversion price further reduced to US$0.20 and Warrant
exercise price reduced to US$0.30. The private placement was conducted pursuant
to Regulation D of the Securities Act. A settlement agreement has been reached
with these note holders to cancel their notes and warrants in exchange with
approximately 458,490 shares of the Company's common stock post the Merger and
post a reverse stock split of approximately 37.4.to 1 assuming a total issued
and outstanding of 15,000,000 shares of common stock.
44
ITEM 3.03 MATERIAL MODIFICATION TO RIGHTS OF SECURITY HOLDERS.
Pursuant to the Agreement with Mega (See Item 1.01) and pursuant to Nevada
Revised Statutes Section 78.209, the Company is effecting effective
approximately on Oct. 22, 2008 with October 3, 2008 as the record date, a
reverse split of 37.4 for 1 to reduce the total number of issued and outstanding
shares of common stock. The total authorized shares of common stock will be
reduced proportionately accordingly as well. As a result, the total numbers of
shares of common stock of the Company hold by its shareholders are all
proportionately reduced together with the total authorized share of the
Company's common stock, leaving your proportionate holdings substantially the
same. Such a reverse split is necessary to allow the merger with Mega to happen.
The merger with Mega is essential in salvaging the Company's existing
shareholders' value.
ITEM 4.01 CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On September 30, 2008, in connection with the acquisition of Mega, Navstar
terminated the services of Bernstein & Pinchuk LLP, as the Company's independent
auditor Bernstein & Pinchuk LLP performed the audits for the year ended December
31, 2007,which report did not contain any adverse opinion or a disclaimer of
opinion, nor was it qualified as to audit scope or accounting principles but did
carry a modification as to going concern. During Navstar's most recent fiscal
year and during any subsequent interim period prior to the February 5
termination as Navstar's independent auditors, there were no disagreements which
Bernstein & Pinchuk LLP, with respect to accounting or auditing issues of the
type discussed in Item 304(a)(iv) of Regulation S-B. On September 30, 2008,
Navstar provided Bernstein & Pinchuk LLP with a copy of this disclosure and
requested that it furnish a letter to Navstar, addressed to the SEC, stating
that it agreed with the statements made herein or the reasons why it disagreed.
A letter from Bernstein & Pinchuk LLP was provided on September 30, 2008
and is attached as an exhibit hereto.
On September 30, 2008, the Company's board of directors approved the
engagement of the firm of Bagell, Josephs, Levine & Company, LLC as the
Company's independent auditors. During Navstar's two most recent fiscal years or
any subsequent interim period prior to engaging Bagell, Josephs, Levine &
Company, LLC, Navstar had not consulted Bagell, Josephs, Levine & Company,
LLC.regarding any of the accounting or auditing concerns stated in Item
304(a)(2) of Regulation S-B.
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of Rodobo International, Inc. as of October 6, 2008 by: (i) each
person or entity known to be the beneficial owner of more than 5% of the
outstanding shares of common stock; (ii) each of its officers and directors; and
(iii) all of its officers and directors as a group.
Unless otherwise indicated, all persons named in the table have sole voting
and investment power with respect to all shares of common stock beneficially
owned by them.
45
Name and Address of
Percentage of Beneficial Approximate
Owner Common Stock Amount and Nature of Outstanding
Offering Title Beneficial Ownership* Before
- ------------------------ -------- -------------------- -----------
ZHAO Weihua 37,000,000 69%
Ranny Liang Director 596,025 **
WANG Yanbin Director and CEO 0 **
Ross Warner Director 0 0%
QIAO Xiuzhen Director and CFO 0 0%
All directors and N/A 626,025 3.8%
executive officers as a
group (7 individuals)
* All ownership prior to a reverse split of 37.4 to 1
** Less than 1%
ITEM 5.02 DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF PRINCIPAL OFFICERS..
See Item 1.01.
ITEM 5.03 AMENDMENTS TO THE ARTICLES OF INCORPORATION OR BYLAWS; CHANGE IN
FISCAL YEAR.
Effective immediately, the fiscal year of the Company shall be changed to
end on September 30 from December 31.
ITEM 5.06 CHANGE IN SHELL COMPANY STATUS.
Reference is made to the disclosure set forth under Item 2.01 of this
Current Report on Form 8-K, which disclosure is incorporated herein by reference
46
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of business acquired as of September 30, 2007.
(1) Report of Independent Registered Accounting Firm
(2) Balance Sheets dated as of September 30, 2007 and 2006
(3) Statements of Income for the fiscal years ended September 30, 2007
and 2006
(4) Statements of Shareholders' Equity for the fiscal years ended
September 30, 2007 and 2006
(5) Statements of Cash Flows for the fiscal years ended September 30, 2007
and 2006.
(6) Notes to the Financial Statements
(b) Financial statements of business acquired as of June 30, 2008.
(1) Balance Sheets dated as of June 30, 2008 (unaudited) and
September 30, 2007 (audited)
(2) Unaudited Statements of Income for the Nine Months and Three Months
Ended June 30, 2008 and 2007
(3) Unaudited Statements of Cash Flows for the Nine Months ended
June 30, 2008 and 2007.
(4) Notes to the Financial Statements
(c) Pro forma financial information.
(1) Pro Forma Balance Sheet
(2) Pro Form Statement of Operations
(d) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
10.1 Agreement and Plan of Merger dated September 30, 2008 by and among
Navstar Media Holding, Inc., a Nevada corporation, Rodobo
International, Inc. and Mega Profit Limited and Mr. Zhao Weihua
23.1 Auditors Letter per Item 4.01
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. Rodobo International, Inc.
Dated: October 6, 2008
By: /s/ WANG Yanbin
----------------
Name: WANG Yanbin
Title: Chairman and Chief Executive Officer
47
(a) Financial statements of business acquired.
HARBIN RODOBO DAIRY CO., LTD.
FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 & 2006
HARBIN RODOBO DAIRY CO., LTD.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm .......................1
Balance Sheets at September 30, 2007 and 2006..................................2
Statements of Income for the years ended September 30, 2007 and 2006...........3
Statements of Changes in Shareholders' Equity for the years ended
September 30, 2007 and 2006....................................................4
Statements of Cash Flows for the years ended September 30, 2007 and 2006.......5
Notes to Financial Statements.............................................6 - 12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Harbin Rodobo Dairy Co., Ltd.
We have audited the accompanying balance sheets of Harbin Rodobo Dairy Co., Ltd.
(the "Company) as of September 30, 2007 and 2006 and the related statements of
income, cash flows, and shareholders' equity for each of the two years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with standards established by the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. 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 Harbin Rodobo Dairy Co., Ltd.
as of September 30, 2007 and 2006 and the results of its operations and cash
flows for each of the two years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Bagell Josephs, Levine & Company, LLC
- -----------------------------------------
Bagell Josephs, Levine & Company, LLC
Marlton, New Jersey
December 18, 2007
1
HARBIN RODOBO DAIRY CO., LTD
BALANCE SHEETS
SEPTEMBER 30, 2007 AND 2006
2007 2006
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 33,302 $ 156,448
Accounts receivable - net of allowance for bad debts of
$60,643 and $60,668, respectively 887,403 642,039
Other receivables 267,930 204,595
Inventories 1,432,856 1,479,195
Prepaid expenses 142,611 --
Advances to suppliers 138,034 82,860
---------- ----------
Total current assets 2,902,136 2,565,137
---------- ----------
Property, plant and equipment:
Fixed assets, net of accumulated depreciation 115,204 100,141
Construction in progress 403,378 202,132
---------- ----------
518,582 302,273
---------- ----------
Other assets:
Investment advances 3,429,959 227,733
---------- ----------
Total assets $6,850,677 $3,095,143
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,035,101 $ 559,769
Other payable 229,576 193,716
Accrued expenses 1,458,537 1,024,960
Deferred revenue 96,484 33,138
Due to related party 384,826 382,621
---------- ----------
Total current liabilities 3,204,524 2,194,204
---------- ----------
Shareholders' equity
Capital 416,828 416,828
Retained earnings 3,065,667 446,685
Accumulated other comprehensive income 163,658 37,426
---------- ----------
Total shareholders' equity 3,646,153 900,939
---------- ----------
Total liabilities and shareholders' equity $6,850,677 $3,095,143
========== ==========
The accompanying notes are an integral part of these financial statements
2
HARBIN RODOBO DAIRY CO., LTD
STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006
2007 2006
----------- -----------
Net sales $12,764,906 $ 8,829,946
Cost of goods sold 6,599,179 5,117,997
----------- -----------
Gross profit 6,165,727 3,711,949
----------- -----------
Operating expenses:
Distribution expenses 3,265,044 3,151,353
General and administrative expenses 337,006 510,939
Depreciation expenses 28,901 22,929
----------- -----------
Total operating expenses 3,630,951 3,685,221
----------- -----------
Operating income 2,534,776 26,728
Other income (expenses) 84,206 26,890
Income before income taxes 2,618,982 53,618
----------- -----------
Provision for income taxes -- --
----------- -----------
Net income $ 2,618,982 $ 53,618
=========== ===========
Other comprehensive income:
Foreign currency translation adjustment 126,232 20,509
----------- -----------
Comprehensive income $ 2,745,214 $ 74,126
=========== ===========
Basic and diluted income per share $ 0.80 $ 0.02
=========== ===========
Basic and diluted weighted average shares outstanding 3,450,000 3,450,000
=========== ===========
The accompanying notes are an integral part of these financial statements
3
HARBIN RODOBO DAIRY CO., LTD
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006
Accumulated
Other
Retained Comprehensive
Capital Earnings Income Total
---------- ---------- ---------- ----------
Balance at September 30, 2005 $ 416,828 $ 393,067 $ 16,917 $ 826,812
Net income for the year -- 53,618 -- 53,618
Foreign currency translation adjustments -- -- 20,509 20,509
---------- ---------- ---------- ----------
Balance at September 30, 2006 416,828 446,685 37,426 900,939
Net income for the year -- 2,618,982 -- 2,618,982
Foreign currency translation adjustments -- -- 126,232 126,232
---------- ---------- ---------- ----------
Balance at September 30, 2007 $ 416,828 $3,065,667 $ 163,658 $3,646,153
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements
4
HARBIN RODOBO DAIRY CO., LTD
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006
2007 2006
----------- -----------
Cash flows from operating activities
Net income $ 2,618,982 $ 53,618
Adjustments to reconcile net income to operating activities
Depreciation 33,111 25,256
Changes in assets and liabilities:
(Increase) decrease in -
Accounts receivable and other receivables (308,699) 117,319
Inventories 46,339 (305,573)
Prepaid expenses (142,611) --
Advances to suppliers (55,174) (26,013)
Increase (decrease) in -
Accounts payable and other payable 511,192 (266,256)
Accrued expenses 433,577 423,988
Deferred revenue 63,345 (15,608)
----------- -----------
Net cash provided by operating activities 3,200,062 6,730
----------- -----------
Cash flows from investing activities
Purchase of fixed assets (42,405) (2,086)
Cash used for construction in progress (201,245) (82,111)
Investment advances (3,202,227) (227,733)
----------- -----------
Net cash used in investing activities (3,445,877) (311,930)
----------- -----------
Cash flows from financing activities
Due to related party 2,205 161,607
----------- -----------
Net cash provided by financing activities 2,205 161,607
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 120,464 17,999
----------- -----------
Net decrease in cash and cash equivalents (123,146) (125,594)
Cash and cash equivalents, beginning of year 156,448 282,042
----------- -----------
Cash and cash equivalents, end of year $ 33,302 $ 156,448
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ -- $ --
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
The accompanying notes are an integral part of these financial statements
5
HARBIN RODOBO DAIRY CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2007 and 2006
1. ORGANIZATION AND BASIS OF PRESENTATION
Harbin Rodobo Dairy Co., Ltd. ("Rodobo" or the "Company") was incorporated
in 2002 under the laws of the People's Republic of China ("PRC"). The
Company is engaged in the production, processing, distribution and
development of powdered milk products in the PRC for infants, children,
pregnant women and other adults under the brand name "Rodobo".
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in accordance
with generally accepted accounting principles require management to make
estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS - The Company considers cash and cash equivalents
to include cash on hand and deposits with banks with an original maturity
of three months or less.
ACCOUNTS RECEIVABLE - The Company's policy is to maintain reserves for
potential credit losses on accounts receivable. Provision is made against
accounts receivable to the extent which they are considered to be doubtful.
Accounts receivable in the balance sheet is stated net of such provision.
INVENTORIES - Inventories comprise raw materials, work in progress,
finished goods and packing materials and are stated at the lower of cost or
market value. Cost is calculated using the First In First Out method and
includes all costs to acquire and any overhead costs incurred in bringing
the inventories to their present location and condition. Overhead costs
included in finished goods inventory include direct labor cost and other
costs directly applicable to the manufacturing process, including
utilities, supplies, repairs and maintenances, and depreciation expense.
Market value represents the estimated selling price in the ordinary course
of business less the estimated costs necessary to complete the sale.
6
HARBIN RODOBO DAIRY CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED SEPTEMBER 30, 2007 and 2006
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are recorded
at cost. Expenditures for major additions and improvements are capitalized,
and minor replacements, maintenance, and repairs are charged to expense as
incurred. When property, plant and equipment are retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in the results of
operations for the respective period. Depreciation is provided over the
estimated useful lives of the related assets on a straight-line basis. The
estimated useful lives for significant property, plant and equipment
categories are as follows:
Leasehold improvement 5.5 years
Machinery, equipment and automobiles 5 years
Construction in progress represents the direct costs of construction or
acquisition incurred. Upon completion and readiness for use of the assets,
capitalization of these costs ceases and the cost of construction in
progress is transferred to fixed assets. No depreciation is provided until
the project is completed and the assets are ready for intended use. There
is no financing activity occurred during the course of construction. The
Company periodically reviews the carrying value of long-lived assets in
accordance with SFAS 144. When estimated future cash flows generated by
those assets are less than the carrying amounts of the assets, the Company
recognized an impairment loss equal to the an amount by which the carrying
value exceeds the fair value of assets. Based on its review, the Company
believes that there were no impairments of its long-lived assets as of
September 30, 2007.
REVENUE RECOGNITION - The Company's revenue recognition policies are in
compliance with Staff Accounting Bulletin ("SAB") 104. Sales revenue is
recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no
other significant obligations of the Company exist and collectability is
reasonably assured. Revenues consist of the invoice value of the sale of
goods net of sales returns and allowances.
DEFERRED REVENUE - Revenue from the sale of goods or services is recognized
when goods are delivered. Receipts in advance for goods to be delivered in
the subsequent year are carried forward as deferred revenue.
ADVERTISING COSTS - Advertising costs represent advertising expenses and
promotion incentives provided to distributors and are charged to operations
when incurred. Advertising expenses totaled $45,381 and $236,666 for the
years ended September 30, 2007 and 2006, respectively.
EMPLOYEES' BENEFIT COST - Mandatory contributions are made to the
Government's health, retirement benefit and unemployment schemes at the
statutory rates in force during the period, based on gross salary payments.
The cost of these payments is charged to the statement of income in the
same period as the related salary cost.
7
HARBIN RODOBO DAIRY CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED SEPTEMBER 30, 2007 and 2006
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FOREIGN CURRENCY TRANSLATION - The Company's principal country of
operations is in the PRC. The financial position and results of operations
of the Company are determined using the local currency ("RMB") as the
functional currency. The results of operations denominated in foreign
currency are translated at the average rate of exchange during the
reporting period. Assets and liabilities denominated in foreign currencies
at the balance sheet date are translated at the applicable rates of
exchange in effect at that date The equity denominated in the functional
currency is translated at the historical rate of exchange at the time of
capital contribution. Translation adjustments arising from the use of
different exchange rates from period to period are included as a component
of stockholders' equity as "Accumulated Other Comprehensive Income".
Historically the local currency's exchange rate had been tied to the US
Dollar at a rate of approximately 8.28 RMB per US Dollar. Effective July
21, 2005 the RMB was revalued to an effective exchange rate of
approximately 8.11 RMB per US Dollar. Subsequent to the revaluation the RMB
has been allowed to float within a specified range. As of September 30,
2007 and 2006, the exchange rate was 7.49 and 7.90 RMB per US Dollar,
respectively.
INCOME TAXES- The Company utilizes Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", which requires the
recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financials
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to
realized. There are no deferred tax amounts at September 30, 2007 and 2006,
respectively.
The Company is entitled to a tax holiday of five years for full Enterprise
Income Tax ("EIT") exemption. The preferential tax treatment commenced in
2005 and will expire in 2009. The estimated tax savings for the years ended
September 30, 2007 and 2006 amounted to $864,264 and $17,694, respectively.
The net effect on earnings per share had the income tax been applied would
decrease earnings per share from $0.80 to $0.51 in 2007 and $0.02 to $0.01
in 2006.
FAIR VALUE OF FINANCIAL STATEMENTS - The carrying amounts of certain
financial instruments, including cash, accounts receivable, other
receivables, accounts payable, accrued expenses, advances from customers,
and other payables approximate their fair values as of September 30, 2007
and 2006 due to the relatively short-term nature of these instruments.
8
HARBIN RODOBO DAIRY CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED SEPTEMBER 30, 2007 and 2006
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CONCENTRATIONS OF BUSINESS AND CRDIT RISK - The Company maintains certain
bank accounts in the People's Republic of China which are not protected by
FDIC insurance or other insurance. The Company's operations are carried out
in the PRC. Accordingly, the Company's business, financial condition and
results of operations may be influenced by the political, economic and
legal environments in the PRC and the general state of the PRC's economy.
The Company's operations in the PRC are subject to specific considerations
and significant risks not typically associated with companies in the North
America and Western Europe. The Company's operating results may be
adversely affected by changes in governmental policies with respect to laws
and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things.
NEW ACCOUNTING PRONOUNCEMENTS - In June 2006, the FASB issued
Interpretation 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"),
an interpretation of FASB Statement No. 109, "Accounting for Income Taxes."
FIN 48 clarifies the accounting and reporting for income taxes where
interpretation of the law is uncertain. FIN 48 prescribes a comprehensive
model for the financial statement recognition, measurement, presentation
and disclosure of income tax uncertainties with respect to positions taken
or expected to be taken in income tax returns. FIN 48 is effective for
fiscal years beginning after December 15, 2006, which is the Company's
fiscal year 2008. The Company is currently evaluating the impact of
adopting FIN 48 on its financial statements.
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" ("SFAS No. 157"). SFAS No. 157 addresses how companies should
measure fair value when they are required to use a fair value measure for
recognition or disclosure purposes under GAAP. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007, which is the Company's
fiscal year 2009. The Company is currently evaluating the impact of
adopting SFAS No. 157 on its financial statements.
In February 2007, the FASB issued Statement No. 159 "The Fair Value Option
for Financial Assets and Financial Liabilities" (SFAS 159). This statement
permits companies to choose to measure many financial assets and
liabilities at fair value. Unrealized gains and losses on items for which
the fair value option has been elected are reported in earnings. SFAS 159
is effective for fiscal years beginning after November 15, 2007, which is
the Company's fiscal year 2009. The Company is currently assessing the
impact of SFAS 159 on its financial statements.
9
HARBIN RODOBO DAIRY CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED SEPTEMBER 30, 2007 and 2006
3. ACCOUNTS RECEIVABLE
The Company's accounts receivable as of September 30, 2007 and 2006 are
summarized as follows:
2007 2006
-------- --------
Accounts receivable $948,046 $702,707
Less: Allowance for doubtful accounts 60,643 60,668
-------- --------
Total net accounts receivable $887,403 $642,039
======== ========
The activity in the allowance for doubtful accounts during the years ended
September 30, 2007 and 2006 is summarized as follows:
2007 2006
-------- --------
Balance at beginning of year $ 60,668 $ 25,429
Additions (deductions) during the year (25) 35,239
-------- --------
Balance at end of year $ 60,643 $ 60,668
======== ========
4. INVENTORIES
Inventories consist of the following as of September 30, 2007 and 2006:
2007 2006
---------- ----------
Raw materials $ 247,296 $ 247,770
Work-in-progress 741,850 846,832
Finished goods 276,246 241,860
Packing materials 167,464 142,733
---------- ----------
Total inventories $1,432,856 $1,479,195
========== ==========
10
HARBIN RODOBO DAIRY CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED SEPTEMBER 30, 2007 and 2006
5. FIXED ASSETS
Fixed assets consist of the following as of September 30, 2007 and 2006:
2007 2006
--------- ---------
Building improvement $ 130,459 $ 123,672
Plant and machinery 44,049 4,371
Motor vehicles 14,156 12,598
Computer equipment 4,244 854
--------- ---------
192,908 141,495
Less: accumulated depreciation (77,704) (41,354)
--------- ---------
Total fixed assets, net 115,204 100,141
Construction in progress 403,378 202,132
--------- ---------
$ 518,582 $ 302,273
========= =========
Depreciation expense totaled $33,111 and $25,256 for the years ended
September 30, 2007 and 2006, respectively.
6. INVESTMENT ADVANCES
Investment advances represent the payments the Company made to Wei Li Si
Dairy Co. ("WLS") in connection with its pending acquisition of the certain
assets owned by WLS. The total acquisition price of those assets by the
Company per Assets Acquisition Agreement ("Agreement) is estimated to be
around $4,000,000. As of September 30, 2007, the Company has made advances
to WLS in the total amount of $3,429,959 in an effort to secure the deal.
Pursuant to the agreement, the closing of this acquisition is subject to
the transfer of the ownership evidenced by the official recording of the
title change for those assets at the local authority. The management
anticipates the transfer of the ownership from WLS to the Company be
completed in the first quarter of 2008.
7. DUE TO RELATED PARTY
Due to related party represent temporary funding by its officer to finance
the working capital as needed. The amounts are unsecured, non-interest
bearing and due on demand. Due to related party also include rents payable
to its officer. The Company rents office space from its officer. The rent
amounted to RMB 98,700 (approximately $12,797) and RMB 95,600
(approximately $11,908) for the fiscal years ended September 30, 2007 and
2006, respectively. As of September 30, 2007 and 2006 the Company had the
following balances due to related party:
2007 2006
-------- --------
Due to Mr. Wang Yan-bin $384,826 $382,621
-------- --------
Total due to related party $384,826 $382,621
======== ========
11
HARBIN RODOBO DAIRY CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED SEPTEMBER 30, 2007 and 2006
8. CAPITAL
The Company's total registered capital is 3,450,000 RMB, of which, total
2,000,000 RMB was contributed on January 4, 2002 and the remaining
1,450,000 RMB was contributed on March 18, 2004. The total amount equals to
US$ 416,828. The industry practice in China does not require the issuance
of stock certificates to the shareholders, nor a third party transfer agent
to maintain the records. The Company elected to designate one (1) common
share for each RMB contributed for the purpose of financial reporting.
Accordingly, there were total 3,450,000 shares outstanding for the years
ended September 30, 2007 and 2006.
9. MAJOR CUSTOMERS
Two major customers accounted for approximately 19% of the net revenue for
the year ended September 30, 2007, with each customer individually
accounting for 11 % and 8%, respectively. At September 30, 2007, the total
receivable balance due from these customers was $161,669. Two major
customers accounted for 54% of the net revenue for the year ended September
30, 2006. At September 30, 2006, the total receivable balance due from
these two customers was $312,118.
10. COMMITTEMENTS AND CONTIGENCIES
On July 1, 2004, the Company entered into a lease agreement with
Heilongjiang Jinniu Dairy Co., Ltd. ("Jinniu") to lease its manufacturing
facilities in Qinggang, Heilongjiang. Under the agreement, the Company is
obligated to pay the rent of RMB1,000,000 (approximately US$130,000) per
year, payable in two installments each year for six years from July 5, 2004
to July 5, 2010.
On April 1, 2005 and April 1, 2006, the Company and Jinniu amended the
lease agreement whereby the lease term is extended to July 6, 2030, and
effective July 5, 2010, the annual rent payment is reduced to RMB 600,000
(approximately US$ 78,000), payable in two installments each year. Under
the amended agreement, the Company is also required to make minimum RMB
400,000 (approximately US$55,555) of annual improvements or betterment to
the leased facility when the new lease term takes effective.
12
MEGA PROFIT LIMITED
FINANCIAL STATEMENTS
JUNE 30, 2008 AND 2007
(UNAUDITED)
MEGA PROFIT LIMITED
INDEX TO FINANCIAL STATEMENTS
JUNE 30, 2008 AND 2007
(UNAUDITED)
TABLE OF CONTENTS
Page(s)
Balance Sheet as of June 30, 2008 (Unaudited) and
September 30, 2007 (Audited) 1
Statements of Income for the Nine Months and Three Months Ended
June 30, 2008 and 2007 (Unaudited) 2
Statements of Cash Flows for the Nine Months Ended
June 30, 2008 and 2007 (Unaudited) 3
Notes to Financial Statements (Unaudited) 4-12
MEGA PROFIT LIMITED
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2008 2007
----------- -----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 82,094 $ 33,302
Accounts receivable - net of allowance for
bad debts of $88,349 and $60,643,
respectively 1,830,618 887,403
Other receivables 48,513 267,930
Due from related parties 50,000 50,000
Inventories 1,258,694 1,432,856
Prepaid expenses 4,374 142,611
Advances to suppliers 32,017 138,034
----------- -----------
Total current assets 3,306,310 2,952,136
----------- -----------
Property, plant and equipment:
Fixed assets, net of accumulated depreciation 381,116 115,204
Construction in progress 520,482 403,378
----------- -----------
901,598 518,582
----------- -----------
Other assets:
Investment advances 5,992,040 3,429,959
Deposits on intangible assets 291,583 --
----------- -----------
Total assets $10,491,531 $ 6,900,677
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,305,044 $ 1,035,101
Other payable 108,763 229,576
Accrued expenses 407,647 1,458,537
Deferred revenue 3,125 96,484
Due to related party 5,474 384,826
----------- -----------
Total current liabilities 1,830,052 3,204,524
----------- -----------
Shareholders' equity
Common stock, $10 par value, 50,000 shares
authorized 19,500 and 5,000 shares
issued and outstanding as of June 30, 2008
and September 30, 2007, respectively 195,000 50,000
Additional paid in capital 1,721,828 416,828
Retained earnings 5,965,693 3,065,667
Accumulated other comprehensive income 778,957 163,658
----------- -----------
Total shareholders' equity 8,661,479 3,696,153
----------- -----------
Total liabilities and shareholders' equity $10,491,531 $ 6,900,677
=========== ===========
The accompanying notes are an integral part of these financial statements
1
MEGA PROFIT LIMITED
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
Three Months Ended June 30 Nine Months Ended June 30
-------------------------- -------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Net sales $ 6,788,262 $ 3,452,977 $16,107,220 $ 9,086,397
Cost of goods sold 3,824,131 1,700,267 9,544,205 4,769,751
----------- ----------- ----------- -----------
Gross profit 2,964,131 1,752,710 6,563,015 4,316,646
----------- ----------- ----------- -----------
Operating expenses:
Distribution expenses 1,443,809 900,083 3,054,130 2,360,443
General and administrative expenses 260,075 139,093 674,126 348,192
Depreciation expenses 12,524 8,740 31,743 24,046
----------- ----------- ----------- -----------
Total operating expenses 1,716,409 1,047,917 3,759,999 2,732,681
----------- ----------- ----------- -----------
Operating income 1,247,722 704,793 2,803,016 1,583,965
Other income (expenses) (8,473) 346 97,010 83,071
----------- ----------- ----------- -----------
Income before income taxes 1,239,250 705,139 2,900,026 1,667,036
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net income $ 1,239,250 $ 705,139 $ 2,900,026 $ 1,667,036
Other comprehensive income:
Foreign currency translation adjustment 189,919 36,287 615,300 68,571
----------- ----------- ----------- -----------
Comprehensive income $ 1,429,169 $ 741,426 $ 3,515,325 $ 1,735,607
=========== =========== =========== ===========
Basic and diluted net income per share $ 63.55 $ 141.03 $ 206.42 $ 333.41
=========== =========== =========== ===========
Basic and diluted weighted average shares outstanding 19,500 5,000 14,049 5,000
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
2
MEGA PROFIT LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
Nine Months Ended June 30
2008 2007
----------- -----------
Cash flows from operating activities
Net income $ 2,900,026 $ 1,667,036
Adjustments to reconcile net income to operating activities
Depreciation 31,743 24,046
Changes in assets and liabilities:
(Increase) decrease in -
Accounts receivable and other receivables (723,798) (1,377,426)
Inventories 174,162 175,517
Prepaid expenses 138,237 (6,963)
Advances to suppliers 106,017 (561,305)
Increase (decrease) in -
Accounts payable and other payable 149,130 1,141,913
Accrued expenses (1,050,891) 418,725
Deferred revenue (93,360) 9,985
----------- -----------
Net cash provided by operating activities 1,631,266 1,491,529
----------- -----------
Cash flows from investing activities
Purchase of fixed assets (275,421) (34,384)
Cash used for construction in progress (117,104) (149,809)
Investment advances (2,562,080) (1,812,467)
Deposits on intangible assets (291,583) --
----------- -----------
Net cash (used in) investing activities (3,246,188) (1,996,660)
----------- -----------
Cash flows from financing activities
Proceeds from common stock 1,450,000 --
(Repayment to) proceeds from related party loan (379,352) 333,765
----------- -----------
Net cash provided by financing activities 1,070,648 333,765
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 593,066 64,520
----------- -----------
Net increase (decrease) in cash and cash equivalents 48,792 (106,846)
Cash and cash equivalents, beginning of period 33,302 156,448
----------- -----------
Cash and cash equivalents, end of period $ 82,094 $ 49,602
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ 12,834 $ --
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
The accompanying notes are an integral part of these financial statements
3
MEGA PROFIT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
Mega Profit Limited (the "Company" or "Mega Profit") was incorporated under
the laws of the Cayman Islands on April 23, 2007. On October 26, 2007, the
Company invested $1,380,000 to form a wholly-owned subsidiary, Harbin Mega
Profit Management Consulting Co., Ltd. ("Harbin Mega Profit"), a wholly
foreign-owned entity ("WFOE") incorporated under the laws of the People's
Republic of China ("PRC" or "China").
The Company has not carried on any substantive operations of its own.
Instead, it had entered certain exclusive agreements with Harbin Rodobo
Dairy Co., Ltd. ("Rodobo"). Rodobo was incorporated on January 4, 2002
under the laws of the PRC.
The paid-in capital of Rodobo was funded by the stockholders of Harbin Mega
Profit. PRC law currently has limits on foreign ownership of companies. To
comply with these foreign ownership restrictions, on October 27, 2007,
Harbin Mega Profit entered into certain exclusive agreements with Rodobo
and its stockholders. Pursuant to these agreements, Harbin Mega Profit
provides exclusive consulting and other general business operation services
to Rodobo, in return for a consulting services fee which is equal to
Rodobo's revenue. In addition, Rodobo's shareholders have pledged their
equity interest in Rodobo to Harbin Mega Profit, irrevocably granted Harbin
Mega Profit an exclusive option to purchase, to the extent permitted under
PRC law, all or part of the equity interests in Rodobo and agreed to
entrust all the rights to exercise their voting power to the person(s)
appointed by Harbin Mega Profit. Through these contractual arrangements,
Harbin Mega Profit has the ability to substantially influence Rodobo's
daily operations and financial affairs, appoint its senior executives and
approve all matters requiring stockholders' approval.
As a result of these contractual arrangements, which obligates Harbin Mega
Profit to absorb a majority of the risk of loss from Rodobo's activities
and enable Harbin Mega Profit to receive a majority of its expected
residual returns, Harbin Mega Profit accounts for Rodobo as a variable
interest entity ("VIE") under FASB Interpretation No. 46R ("FIN 46R"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51". Accordingly, Harbin Mega Profit consolidates Rodobo's results, assets
and liabilities.
Harbin Mega Profit through its VIE, Rodobo, is engaged in the production,
processing, distribution and development of powdered milk products in the
PRC for infants, children, pregnant women and other adults under the brand
name "Rodobo".
Since Harbin Mega Profit and Rodobo are under common control, the
consolidation of Harbin Mega Profit and Rodobo has been accounted for at
historical cost and prepared on the basis as if the aforementioned
exclusive agreements between Harbin Mega Profit and Rodobo had become
effective as of the beginning of the first period presented in the
accompanying consolidated financial statements.
4
MEGA PROFIT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
FOR THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION - The accompanying consolidated
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. The consolidated
financial statements include the financial statements of the Company, its
wholly-owned subsidiary, Harbin Mega Profit, and its VIE, Rodobo. All
significant inter-company transactions and balances between the Company,
its subsidiaries and VIE are eliminated upon consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine months
ended June 30, 2008 and 2007 are not necessarily indicative of the results
that may be expected for the full years.
USE OF ESTIMATES - The preparation of financial statements in accordance
with generally accepted accounting principles require management to make
estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS - The Company considers cash and cash equivalents
to include cash on hand and deposits with banks with an original maturity
of three months or less.
ACCOUNTS RECEIVABLE - The Company's policy is to maintain reserves for
potential credit losses on accounts receivable. Provision is made against
accounts receivable to the extent which they are considered to be doubtful.
Accounts receivable in the balance sheet is stated net of such provision.
INVENTORIES - Inventories comprise raw materials, work in progress,
finished goods and packing materials and are stated at the lower of cost or
market value. Cost is calculated using the First In First Out method and
includes all costs to acquire and any overhead costs incurred in bringing
the inventories to their present location and condition. Overhead costs
included in finished goods inventory include direct labor cost and other
costs directly applicable to the manufacturing process, including
utilities, supplies, repairs and maintenances, and depreciation expense.
Market value represents the estimated selling price in the ordinary course
of business less the estimated costs necessary to complete the sale.
5
MEGA PROFIT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
FOR THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are recorded
at cost. Expenditures for major additions and improvements are capitalized
and minor replacements, maintenance, and repairs are charged to expense as
incurred. When property, plant and equipment are retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in the results of
operations for the respective period. Depreciation is provided over the
estimated useful lives of the related assets on a straight-line basis. The
estimated useful lives for significant property, plant and equipment
categories are as follows:
Leasehold improvement 5.5 years
Machinery, equipment and automobiles 5 years
Construction in progress represents the direct costs of construction or
acquisition incurred. Upon completion and readiness for use of the assets,
capitalization of these costs ceases and the cost of construction in
progress is transferred to fixed assets. No depreciation is provided until
the project is completed and the assets are ready for intended use. There
is no financing activity occurred during the course of construction.
The Company periodically reviews the carrying value of long-lived assets in
accordance with SFAS 144. When estimated future cash flows generated by
those assets are less than the carrying amounts of the assets, the Company
recognized an impairment loss equal to the an amount by which the carrying
value exceeds the fair value of assets. Based on its review, the Company
believes that there were no impairments of its long-lived assets as of June
30, 2008.
REVENUE RECOGNITION - The Company's revenue recognition policies are in
compliance with Staff Accounting Bulletin ("SAB") 104. Sales revenue is
recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no
other significant obligations of the Company exist and collectability is
reasonably assured. Revenues consist of the invoice value of the sale of
goods net of sales returns and allowances.
DEFERRED REVENUE - Revenue from the sale of goods or services is recognized
when goods are delivered. Receipts in advance for goods to be delivered in
the subsequent year are carried forward as deferred revenue.
ADVERTISING COSTS - Advertising costs represent advertising expenses and
promotion incentives provided to distributors and are charged to operations
when incurred. Advertising expenses totaled $139,588 and $58,115 for the
three months ended June 30, 2008 and 2007, respectively, and totaled
$151,698 and $88,862 for the nine months ended June 30, 2008 and 2007,
respectively.
EMPLOYEES' BENEFIT COST - Mandatory contributions are made to the
Government's health, retirement benefit and unemployment schemes at the
statutory rates in force during the period, based on gross salary payments.
The cost of these payments is charged to the statement of income in the
same period as the related salary cost.
6
MEGA PROFIT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
FOR THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FOREIGN CURRENCY TRANSLATION - The Company's principal country of
operations is in the PRC. The financial position and results of operations
of the Company are determined using the local currency ("RMB") as the
functional currency. The results of operations denominated in foreign
currency are translated at the average rate of exchange during the
reporting period. Assets and liabilities denominated in foreign currencies
at the balance sheet date are translated at the applicable rates of
exchange in effect at that date. The equity denominated in the functional
currency is translated at the historical rate of exchange at the time of
capital contribution. Translation adjustments arising from the use of
different exchange rates from period to period are included as a component
of stockholders' equity as "Accumulated Other Comprehensive Income".
Historically the local currency's exchange rate had been tied to the US
Dollar at a rate of approximately 8.28 RMB per US Dollar. Effective July
21, 2005 the RMB was revalued to an effective exchange rate of
approximately 8.11 RMB per US Dollar. Subsequent to the revaluation the RMB
has been allowed to float within a specified range. As of June 30, 2008 and
September 30, 2007, the exchange rate was 6.86 and 7.49 RMB per US Dollar,
respectively.
INCOME TAXES - The Company utilizes Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", which requires the
recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financials
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to
realized. There are no deferred tax amounts at June 30, 2008 and September
30, 2007, respectively.
In June 2006, the FASB issued Interpretation 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"), an interpretation of FASB
Statement No. 109, "Accounting for Income Taxes." FIN 48 clarifies the
accounting and reporting for income taxes where interpretation of the law
is uncertain. FIN 48 prescribes a comprehensive model for the financial
statement recognition, measurement, presentation and disclosure of income
tax uncertainties with respect to positions taken or expected to be taken
in income tax returns. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN 48 at October 1, 2007. The
adoption of FIN 48 did not have a material effect on the Company's
financial position.
Rodobo is entitled to a tax holiday of five years for full Enterprise
Income Tax ("EIT") exemption. The preferential tax treatment commenced in
2005 and will expire in 2009. The estimated tax savings amounted to
$311,065 and $232,696 for the three months ended June 30, 2008 and 2007,
respectively, and amounted to $772,715 and $550,121 for the nine months
ended June 30, 2008 and 2007, respectively. The net effect on earnings per
share had the income tax been applied would decrease earnings per share
from $63.55 to $47.66 for the three months ended June 30, 2008, from
$141.03 to $94.49 for the three months ended June 30, 2007, from $206.42 to
$151.42 for the nine months ended June 30, 2008 and from $333.41 to $223.38
for the nine months ended June 30, 2007.
7
MEGA PROFIT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
FOR THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUE OF FINANCIAL STATEMENTS - The carrying amounts of certain
financial instruments, including cash, accounts receivable, other
receivables, accounts payable, accrued expenses, advances from customers,
and other payables approximate their fair values as of June 30, 2008 and
September 30, 2007 due to the relatively short-term nature of these
instruments.
CONCENTRATIONS OF BUSINESS AND CRDIT RISK - The Company maintains certain
bank accounts in the People's Republic of China which are not protected by
FDIC insurance or other insurance.
The Company's operations are carried out in the PRC. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC and
the general state of the PRC's economy.
The Company's operations in the PRC are subject to specific considerations
and significant risks not typically associated with companies in the North
America and Western Europe. The Company's operating results may be
adversely affected by changes in governmental policies with respect to laws
and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things.
NEW ACCOUNTING PRONOUNCEMENTS - In September 2006, the FASB issued SFAS No.
157, "Fair Value Measurements" ("FAS 157"). FAS 157 addresses how companies
should measure fair value when they are required to use a fair value
measure for recognition or disclosure purposes under GAAP. FAS 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. FAS 157 is effective for fiscal
years beginning on or after November 15, 2007, which is the Company's
fiscal year 2009. The Company is currently evaluating the impact of
adopting FAS 157 on its financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("FAS 159"). This statement
permits companies to choose to measure many financial assets and
liabilities at fair value. Unrealized gains and losses on items for which
the fair value option has been elected are reported in earnings. FAS 159 is
effective for fiscal years beginning on or after November 15, 2007, which
is the Company's fiscal year 2009. The Company is currently assessing the
impact of FAS 159 on its financial statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("FAS 141(R)"). FAS 141(R) requires the acquiring entity in a business
combination to recognize all assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose all information needed by investors to understand the
nature and financial effect of the business combination. FAS 141 (R) is
effective for fiscal years beginning on or after December 15, 2008, which
is the Company's fiscal year 2010. The Company is currently assessing the
impact of FAS 141 (R) on its financial statements.
8
MEGA PROFIT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
FOR THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENTS (Continued)
In December 2007, the FASB also issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements - an amendment of Accounting
Research Bulletin No. 51" ("FAS 160"). This statement requires an entity to
classify noncontrolling interests in subsidiaries as a separate component
of equity. Additionally, transactions between an entity and noncontrolling
interests are required to be treated as equity transactions. FAS 160 is
effective for fiscal years beginning on or after December 15, 2008, which
is the Company's fiscal year 2010. The Company is currently assessing the
impact of FAS 160 on its financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("FAS 161"). This statement requires
enhanced disclosures about (i) how and why companies use derivative
instruments, (ii) how companies account for derivative instruments and
related hedged items under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", and (iii) how derivative instruments
and related hedged items affect their financial results. FAS 161 is
effective for fiscal years beginning on or after November 15, 2008, which
is the Company's fiscal year 2010. The Company is currently assessing the
impact of FAS 161 on its financial statements.
3. ACCOUNTS RECEIVABLE
The Company's accounts receivable as of June 30, 2008 and September 30,
2007 are summarized as follows:
June 30, September 30,
2008 2007
---------- ------------
Accounts receivable $1,918,968 $ 948,046
Less: Allowance for doubtful accounts 88,349 60,643
---------- ------------
Total net accounts receivable $1,830,618 $ 887,403
========== ============
The activity in the allowance for doubtful accounts as of June 30, 2008 and
September 30, 2007 is summarized as follows:
June 30, September 30,
2008 2007
---------- ----------
Nine months Yearly
Beginning balance $ 60,643 $ 60,668
Additions (deductions) during the period 27,706 (25)
---------- ----------
Ending balance $ 88,349 $ 60,643
========== ==========
9
MEGA PROFIT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
FOR THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
4. INVENTORIES
Inventories consist of the following as of June 30, 2008 and September 30,
2007:
June 30, September 30,
2008 2007
---------- ----------
Raw materials $ 240,206 $ 247,296
Work-in-progress 876,143 741,850
Finished goods 19,812 276,246
Packing materials 122,533 167,464
---------- ----------
Total inventories $1,258,694 $1,432,856
========== ==========
5. FIXED ASSETS
Fixed assets consist of the following as of June 30, 2008 and September 30,
2007:
June 30, September 30,
2008 2007
----------- ----------
Building improvement $ 216,120 $ 130,459
Plant and machinery 254,027 44,049
Motor vehicles 21,003 14,156
Computers and equipment 8,102 4,244
----------- -----------
429,271 192,908
Less: accumulated depreciation (118,136) (77,704)
----------- -----------
Total fixed assets, net 381,116 115,204
Construction in progress 520,482 403,378
----------- -----------
$ 901,598 $ 518,582
=========== ===========
Depreciation expense totaled $12,524 and $8,740 for the three months ended
June 30, 2008 and 2007, respectively, and totaled $31,743 and $24,046 for
the nine months ended June 30, 2008 and 2007, respectively.
6. INVESTMENT ADVANCES
Investment advances primarily represent the payments the Company made to
Wei Li Si Dairy Co. ("WLS") in connection with its pending acquisition of
the certain assets owned by WLS. The total acquisition price of those
assets by the Company per Assets Acquisition Agreement ("Agreement) dated
June 18, 2006 was estimated to be RMB 30,000,000 (approximately
US$4,373,752). The Company has decided to cease the effort to acquire the
certain assets owned by WLS aforementioned. As of June 30, 2008, WLS has
returned to the Company the majority of the investment advances made to
date with a remaining balance of $14,579 to be returned.
10
MEGA PROFIT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
FOR THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
6. INVESTMENT ADVANCES (continued)
On October 15, 2007, the Company entered into an "Agreement for Increase of
the Share Capital" with Inner Mongolia Hulunbeier Beixue Dairy Co., Ltd.
("Beixue") to obtain 51% interest of Beixue with a total investment of RMB
51,000,000 (approximately US$7,435,378). Under the Agreement, the Company
agrees to pay a first installment payment of RMB 1,000,000 (approximately
US$145,792) by February 20, 2008 and the remaining amount within 90 days of
the first installment payment. As of June 30, 2008, the Company has made
advances to Beixue in the total amount of $145,792. The Company has decided
to cease the effort to acquire the 51% interest of Beixue aforementioned.
Beixue will return the investment advances made to date to the Company.
On April 1, 2008, the Company entered into an "Investment Agreement" with
Harbin Mega Profit to incorporate a subsidiary company, Mega Profit
Agriculture Company. During the nine months ended June 30, 2008, the
Company made investment advances in the amount of RMB 40,000,000
(approximately US$5,831,669) to acquire land, buildings and equipments. The
Company is in process of obtaining the license and approval from Chinese
government. Once these documents are ready, the Company will reclassify the
full amount to appropriate accounts.
7. DEPOSITS ON INTANGIBLE ASSETS
The Company entered into a "Technology Transfer Agreement" with China
Nutrition Society ("CNS") to obtain a powdered milk product formula
specifically developed for the middle aged and seniors with a total fee of
RMB 5,000,000 (approximately $728,959). The Company will exclusively have
the right to use the formula for 10 years starting July 1, 2008. Under the
Agreement, the Company agrees to pay a first installment payment of RMB
2,000,000 (approximately $291,583) upon the execution of the Agreement, a
second installment payment of RMB 1,000,000 (approximately $145,792) upon
the technology transfer and the remaining amount by December 25, 2008. As
of June 30, 2008, the Company has made the first installment payment of RMB
2,000,000.
8. DUE TO RELATED PARTY
Due to related party represent temporary funding by its officer to finance
the working capital as needed. The amounts are unsecured, non-interest
bearing and due on demand. Due to related party also includes rents payable
to its officer. The Company rents office space from its officer. The rent
amounted to RMB 98,700 (approximately $12,797) and RMB 36,000
(approximately $5,010), respectively, for the fiscal year ended September
30, 2007 and for the nine months ended June 30, 2008. As of June 30, 2008
and September 30, 2007, the Company had the following balances due to
related party:
June 30, September 30,
2008 2007
----------- -----------
Due to Mr. Wang Yan-bin $ 5,473 $ 384,826
----------- -----------
Total due to related party $ 5,473 $ 384,826
=========== ===========
11
MEGA PROFIT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
FOR THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
9. STOCKHOLDER'S EQUITY
Upon its inception, the Company issued common stock of 50,000 shares with
$1 par value. On January 10, 2008, the Company effected a reverse split at
a rate of 10:1. On January 11, 008, the Company issued another 14,500
shares of common stock to an investor. As of June 30, 2008, there were
19,500 shares of common stock issued and outstanding.
10. MAJOR CUSTOMERS
The following table presents sales from major customers with individual
sales over 10% of total net revenue for the three months ended June 30,
2008 and for the nine months ended June 30, 2008:
Three Months Ended June 30, Nine Months Ended June 30,
-------------------------------------------------- --------------------------------------------------
2008 2007 2008 2007
----------------------- ----------------------- ----------------------- -----------------------
% of % of % of % of
Sales Sales Sales Sales Sales sales Sales sales
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Luoling $1,740,230 26% $ 832,576 24% $4,426,459 27% $2,664,881 29%
Huijiabei 1,531,643 23% n/a n/a 1,639,285 10% n/a n/a
Meilu 1,117,071 16% 861,584 25% 2,866,566 18% 2,487,869 27%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $4,388,944 65% $1,694,160 49% $8,932,309 55% $5,152,750 57%
========== ========== ========== ========== ========== ========== ========== ==========
At June 30, 2008, the total receivable balance due from the three major
customers was $1,245,918. At June 30, 2007, the total receivable balance
due from the two major customers was $645,677.
11. COMMITTEMENTS AND CONTINGENCIES
On July 1, 2004, the Company entered into a lease agreement with
Heilongjiang Jinniu Dairy Co., Ltd. ("Jinniu") to lease its manufacturing
facilities in Qinggang, Heilongjiang. Under the agreement, the Company is
obligated to pay RMB1,000,000 (approximately US$145,792) per year, payable
in two installments each year for six years from July 5, 2004 to July 5,
2010.
On April 1, 2005 and April 1, 2006, the Company and Jinniu amended the
lease agreement whereby the lease term is extended to July 6, 2030 and
effective July 5, 2010, the annual rent payment is reduced to RMB 600,000
(approximately US$87,475), payable in two installments each year. Under the
amended agreement, the Company is also required to make minimum RMB 400,000
(approximately US$58,317) of annual improvements or betterment to the
leased facility when the new lease term takes effective.
12
(b) Pro forma financial information.
NAVSTAR MEDIA HOLDINGS, INC.
INDEX TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
PAGE (S)
Introduction to Unaudited Pro Forma Condensed Consolidated
Financial statements 1
Pro Forma Balance Sheet- June 30, 2008 (Unaudited) 2
Pro Forma Statement of Operations for the year ended December 31,
2007 (Unaudited) 3
Pro Forma Statement of Operations for the six months ended June 30,
2008 (Unaudited) 4
Notes to Pro Forma Financial Statements (Unaudited) 5
NAVSTAR MEDIA HOLDINGS, INC.
INTRODUCTION TO UNAUDITIED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On September 30, 2008, Navstar Media Holdings, Inc., a Nevada corporation
("The Company"), Rodobo International, Inc., also a Nevada corporation
wholly-owned by the Company ("Merger Sub"), and Mega Profit Limited ("Mega
Profit"), a corporation formed under the laws of the Cayman Islands, and
shareholder of Mega Profit ("Sellers"), entered an Agreement and Plan of Merger
("Agreement").
Pursuant to the Agreement, Merger Sub acquired Mega Profit and then merged
with and into the Company (the "Merger"). In consideration of the acquisition of
Mega Profit by the Merger Sub and the Merger, Merger Sub issued to the Sellers
and their designees: 1) 10 shares of the common stock of the Merger Sub, which
are converted into approximately 37,000,000 shares of common stock of the
Company prior to and approximately 973,685 shares post a 38:1 reverse split,
which is done in conjunction of the Merger; 2) 12,976,316 shares of convertible
preferred stock which are converted into 12,976,316 shares of the common stock
of the Company. Upon completion of the Merger, the Sellers and their designees
own 93% of common stock of the Company outstanding.
In connection with the acquisition of Mega Profit on September 30, 2008,
officers and directors of the Company resigned and executive officers of Mega
Profit were appointed as the Company's officers and directors.
The acquisition will be accounted for as a reverse merger under the
purchase method of accounting since there was a change of control. Accordingly,
Mega Profit will be treated as the continuing entity for accounting purposes.
The accompanying unaudited pro forma condensed consolidated balance sheet
has been presented with consolidated subsidiaries at June 30, 2008. The
unaudited pro forma condensed consolidated statement of operations for the year
ended December 31, 2007 and for the six months ended June 30, 2008 has been
presented as if the acquisition had occurred January 1, 2007.
The unaudited pro forma condensed consolidated statements do not
necessarily represent the actual results that would have been achieved had the
companies been combined at the beginning of the year, nor may they be indicative
of future operations. These unaudited pro forma condensed financial statements
should be read in conjunction with the companies' respective historical
financial statements and notes included thereto.
1
NAVSTAR MEDIA HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2008
Navstar
Media Mega (1)
Holdings, Profit Pro
Inc. Limited Adjustments Notes Forma
----------- ----------- ----------- ----- -----------
ASSETS
Current Assets
Cash and cash equivalents $ -- $ 82,094 $ 82,094
Accounts receivable -- 1,830,618 1,830,618
Other receivables -- 48,513 48,513
Due from related parties -- 50,000 50,000
Inventories -- 1,258,694 1,258,694
Prepaid expenses -- 4,374 4,374
Advances to suppliers -- 32,017 32,017
----------- ----------- -----------
Total current assets -- 3,306,310 3,306,310
----------- ----------- -----------
Property and Equipment, Net
Fixed assets, net of accumulated depreciation -- 381,116 381,116
Construction in progress -- 520,482 520,482
----------- ----------- -----------
-- 901,598 901,598
----------- ----------- -----------
Other assets
Investment advances -- 5,992,040 5,992,040
Deposits on intangible assets -- 291,583 291,583
----------- ----------- -----------
TOTAL ASSETS $ -- $10,491,531 $10,491,531
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses $ 844,757 $ 1,712,691 $ (844,757) a $ 1,712,691
Other payable -- 108,763 108,763
Deferred revenue -- 3,125 3,125
Due to related party -- 5,474 5,474
Convertible debentures payable 718,921 -- (718,921) a --
----------- ----------- -----------
Total current liabilities 1,563,678 1,830,052 1,830,052
----------- ----------- -----------
SHAREHOLDERS' (DEFICIT) EQUITY
Common stock, $0.001 Par value, 60,000,000
shares authorized, 26,980,609 shares issued
and outstanding as of June 30, 2008 26,980 -- 26,980
Common stock, $10 par value, 50,000 shares
authorized 19,500 shares issued and
outstanding as of June 30, 2008 -- 195,000 (195,000) b --
Additional paid-in-capital 3,958,947 1,721,828 (3,790,926) a,b 1,889,849
Accumulated other comprehensive income (20,001) 778,957 20,001 a,b 778,957
(Accumulated deficit) retained earnings (4,224,404) 5,965,693 4,224,404 a,b 5,965,693
Treasury stock, at cost (1,305,200) -- 1,305,200 --
----------- ----------- -----------
Total shareholders' (deficit) equity (1,563,678) 8,661,479 8,661,479
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY $ -- $10,491,531 $10,491,531
=========== =========== ===========
(1) Represents reverse acquisition showing assets and liabilities of Mega
Profit Limited only.
See notes to unaudited condensed consolidate Pro Forma financial statements
2
NAVSTAR MEDIA HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2007
Navstar
Media Mega (1)
Holdings, Profit Pro
Inc. Limited Adjustments Notes Forma
------------ ------------ ----------- ----- ------------
REVENUES $ -- $ 14,241,980 $ 14,241,980
COST OF GOODS SOLD -- 7,944,054 7,944,054
------------ ------------ ------------
GROSS PROFIT -- 6,297,927 6,297,927
OPERATING EXPENSES
Selling, general and administrative expenses 402,244 3,623,274 (402,244) a 3,623,274
------------ ------------ ------------
NET (LOSS) INCOME (LOSS) (402,244) 2,674,653 2,674,653
------------ ------------ ------------
OTHER INCOME (EXPENSE) (210,000) 179,698 210,000 a 179,698
NET (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (612,244) 2,854,351 2,854,351
------------ ------------ ------------
PROVISION FOR INCOME TAX -- -- --
------------ ------------ ------------
NET (LOSS) INCOME FROM CONTINUING OPERATIONS (612,244) 2,854,351 2,854,351
NET (LOSS) INCOME FROM CONTINUING OPERATIONS (831,479) -- 831,479 a --
------------ ------------ ------------
NET (LOSS) INCOME FROM CONTINUING OPERATIONS $ (1,443,723) $ 2,854,351 $ 2,854,351
============ ============ ============
BASIC AND DILUTED (LOSS) INCOME PER SHARE $ (0.07) $ 570.87 $ (570.67) b $ 0.13
============ ============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES 21,780,609 5,000 21,780,609
============ ============ ============
See notes to unaudited condensed consolidate Pro Forma financial statements
3
NAVSTAR MEDIA HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
Navstar
Media Mega (1)
Holdings, Profit Pro
Inc. Limited Adjustments Notes Forma
------------ ------------ ----------- ----- ------------
REVENUES $ -- $ 12,073,967 $ 12,073,967
COST OF GOODS SOLD -- 6,730,002 6,730,002
------------ ------------ ------------
GROSS PROFIT -- 5,343,965 5,343,965
OPERATING EXPENSES
Selling, general and administrative expenses 19,000 3,039,226 (19,000) a 3,039,226
------------ ------------ ------------
NET (LOSS) INCOME (LOSS) (19,000) 2,304,738 2,304,738
------------ ------------ ------------
OTHER INCOME (EXPENSE) (49,269) (1,068) 49,269 a (1,068)
NET (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (68,269) 2,303,670 2,303,670
------------ ------------ ------------
PROVISION FOR INCOME TAX -- -- --
------------ ------------ ------------
NET (LOSS) INCOME $ (68,269) $ 2,303,670 $ 2,303,670
============ ============ ============
BASIC AND DILUTED (LOSS) INCOME PER SHARE $ (0.00) $ 123.20 $ (123.11) b $ 0.09
============ ============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES 26,980,609 18,699 26,980,609
============ ============ ============
See notes to unaudited condensed consolidate Pro Forma financial statements
4
NAVSTAR MEDIA HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL STATEMENTS
The following unaudited pro forma adjustments are included in the accompanying
unaudited pro forma condensed consolidated balance sheet as of June 30, 2008 and
the unaudited pro forma condensed consolidated statement of operations for the
year ended December 31, 2007 and for the six months ended June 30, 2008 to
reflect the acquisition of Mega Profit by the Company:
a. To record the spin-off of the Company's assets and liabilities prior
to the reverse merger.
b. These adjustments reflect the recapitalization of the Company as a
result of the transactions related to the Merger.
5