U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
October 4, 2004
DRAGON INTERNATIONAL GROUP CORP.
--------------------------------
(Exact name of small business issuer as specified in its charter)
RETAIL HIGHWAY.COM, INC.
(Former Name)
Nevada 0-23485 98-0177646
------ ------- ----------
State or other jurisdiction Commission (IRS Employer ID No.)
jurisdiction of incorporation) File Number
Bldg 14
Suite A09, International Trading Center,
29 Dongdu Road
Ningbo, China 315000
(Address of principal executive offices)
225 Macpherson Ave.
Unit B
Toronto, Ontario, Canada M4V 1A1
(Former Address)
86-574-56169308
(Issuer's Telephone Number)
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of business acquired.
Attached hereto are the audited financial statements for Dragon
International Group Corp., as well as the unaudited pro forma financial
statements.
(c) Exhibits.
Number Exhibit
3.5 Articles of Merger
-2-
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this amendment to its
report to be signed on its behalf by the undersigned, thereunto duly authorized.
DRAGON INTERNATIONAL GROUP CORP.
(Registrant)
Dated: December 6, 2004
By:_s/ David Wu
David Wu, Chief Executive Officer
and President
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<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Registered Public Accounting Firm........................6
Consolidated Financial Statements:
Consolidated Balance Sheet-June 30, 2004.......................................7
Consolidated Statements of Operations-June 30, 2004............................8
Consolidated Statements of Stockholders' Equity-June 30, 2004..................9
Consolidated Statements of Cash Flows- June 30, 2004..........................10
Notes to Consolidated Financial Statements- June 30, 2004..................11-19
Consolidated Balance Sheet - September 30, 2004 (Unaudited)...................21
Consolidated Statement of Operations
For the three months ended September 30, 2004 (Unaudited)...............22
Consolidated Statement of Cash Flows
For the three months ended September 30, 2004 (Unaudited)...............23
Notes to Consolidated Financial Statements-September 30, 2004 (Unaudited)..24-27
Pro Forma Consolidated Balance Sheet (Unaudited)- September 30, 2004..........29
Notes to Consolidated Pro Forma Balance Sheet-September 30, 2004 (Unaudited)..30
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Dragon International Group Corp. and Subsidiaries
Ningbo, Zhejiang, China
We have audited the accompanying consolidated balance sheet of Dragon
International Group Corp. and Subsidiaries as of June 30, 2004, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended June 30, 2004 and 2003. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amount and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dragon International
Group Corp. and Subsidiaries as of June 30, 2004, and the results of their
operations and their cash flows for the years ended June 30, 2004 and 2003, in
conformity with accounting principles generally accepted in the United States of
America.
/s/Sherb & Co., LLP
Certified Public Accountants
New York, New York
November 10, 2004
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<page>
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 285,856
Short-term investments 386,473
Accounts receivable (net of allowance for
doubtful accounts of $54,244) 2,098,845
Inventories 2,827,214
Advances to employees 571,394
Due from related parties 2,559,040
Prepaid expenses and other 632,182
---------
Total Current Assets 9,361,004
PROPERTY AND EQUIPMENT - Net 298,445
---------
Total Assets $ 9,659,449
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,015,700
Accounts payable 4,286,220
Accrued expenses 963,848
Advances from customers 388,939
---------
Total Current Liabilities 6,654,707
LONG-TERM DEBT, net of current portion 120,773
---------
Total Liabilities 6,775,480
---------
STOCKHOLDERS' EQUITY:
Common stock ($.001 Par Value; 200,000,000 Shares Authorized;
8,000,000 shares issued and outstanding) 8,000
Additional paid-in capital 414,705
Retained earnings 2,461,264
---------
Total Stockholders' Equity 2,883,969
---------
Total Liabilities and Stockholders' Equity $ 9,659,449
===========
See notes to consolidated financial statements
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<page>
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
-----------------------------------------
2004 2003
------------------- -------------------
NET REVENUES $ 19,114,755 $ 15,040,725
COST OF SALES 17,203,284 13,211,116
------------------ -------------------
GROSS PROFIT 1,911,471 1,829,609
------------------ -------------------
OPERATING EXPENSES:
Selling expenses 652,266 1,127,653
General and administrative 232,273 184,497
------------------ -------------------
Total Operating Expenses 884,539 1,312,150
------------------ -------------------
INCOME FROM OPERATIONS 1,026,932 517,459
OTHER INCOME (EXPENSE):
Other income 285,472 315,624
Interest expense, net (53,623) (41,222)
------------------- -------------------
Total Other Income 231,849 274,402
------------------- -------------------
INCOME BEFORE INCOME TAXES 1,258,781 791,861
INCOME TAXES (73,778) (38,100)
------------------- -------------------
NET INCOME $ 1,185,003 $ 753,761
=================== ===================
See notes to consolidated financial statements
-8-
<page>
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 2004 and 2003
<table>
<caption>
Common Stock, $.001 Par Value
---------------------------------- Additional Total
Number of Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
---------------- ----------------- ----------------- ------------------ ----------------
<s> <c> <c> <c> <c> <c>
Balance, June 30, 2002 8,000,000 $ 8,000 $ 233,546 $ 697,026 $ 938,572
Shareholder contributions - - 181,159 - 181,159
Distributions to shareholders - - - (71,869) (71,869)
Net income for the year - - - 753,761 753,761
---------------- ----------------- ----------------- ------------------ ----------------
Balance, June 30, 2003 8,000,000 8,000 414,705 1,378,918 1,801,623
Distributions to shareholders - - - (102,657) (102,657)
Net income for the year - - - 1,185,003 1,185,003
---------------- ----------------- ----------------- ------------------ ----------------
Balance, June 30, 2004 8,000,000 $ 8,000 $ 414,705 $ 2,461,264 $ 2,883,969
================ ================= ================= ================== ================
</table>
See notes to consolidated financial statements
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<page>
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<table>
<caption>
Years Ended June 30,
----------------------------------------
2004 2003
------------------ ------------------
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,185,003 $ 753,761
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 47,191 22,678
Changes in assets and liabilities:
Accounts receivable (903,800) 1,193,961
Inventories (1,096,282) (1,457,929)
Prepaid and other current assets 462,416 (419,793)
Advances to employees (55,995) (492,399)
Other assets 69,087 (67,347)
Accounts payable 2,666,027 792,171
Accrued expenses (718,394) 1,179,131
Advances to customers 165,755 222,979
------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,821,008 1,727,213
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Due from related parties (1,441,890) (942,029)
Increase in short-term investments (386,473) -
Capital expenditures (52,126) (205,407)
------------------ ------------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (1,880,489) (1,147,436)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (102,657) (71,869)
Capital contributions - 181,159
Payments on loans payable (53,141) (402,140)
------------------ ------------------
NET CASH FLOWS USED IN FINANCING ACTIVITIES (155,798) (292,850)
------------------ ------------------
NET INCREASE (DECREASE) IN CASH (215,279) 286,927
CASH - beginning of year 501,135 214,208
------------------ ------------------
CASH - end of year $ 285,856 $ 501,135
================== ==================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for :
Interest $ 53,623 $ 41,222
================== ==================
Income taxes $ 73,778 $ 38,100
================== ==================
</table>
See notes to consolidated financial statements.
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<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Dragon International Group Corp. ("Dragon"), a Florida corporation, was
founded in June 2004. On June 30, 2004, Dragon acquired 70% ownership interest
of Ningbo Anxin International Co. Ltd. ("Anxin") under a Stock Purchase
Agreement ("Stock Purchase Agreement"). Anxin is located in Ningbo, Zhejiang
Province, China, 200 miles south of Shanghai, and was established in 1997. It is
a company operating in international trade as well as a manufacturer in the
integrated packaging paper industry. It holds an ISO9000 certificate and
national license to import and export. In addition to its own operations, Anxin
operates three subsidiaries, including: (i) Shanghai Anhong Paper Co. Ltd.,
("Anhong"), a trading company located in Shanghai, with another manufacturing
facility in Ningbo; (ii) Ningbo Long'an Industry and Trade Co. Ltd ("Long'an"),
and (iii) Jiangdong Yonglongxin Special Paper Co., Ltd. ("Yonglongxin"). The
Stock Purchase Agreement between Dragon and Anxin has been accounted for as a
reverse acquisition under the purchase method for business combinations.
Accordingly, the combination of the two companies is recorded as a
recapitalization of Dragon, pursuant to which Anxin is treated as the continuing
entity.
On or around August 13, 2004, as amended on September 30, 2004 and effective
October 4, 2004, under an Agreement and Plan of Reorganization, the Company was
acquired by Retail Highway.com, Inc. ("Retail"), a U.S. corporation, whereby
Retail issued 24,625,000 shares of its common stock for the acquisition of all
of the outstanding capital stock of Dragon. For financial accounting purposes,
the exchange of stock was treated as a recapitalization of Retail with the
former shareholders of the Retail retaining 1,280,234 or approximately 5% of the
outstanding stock.
Basis of presentation
The consolidated statements include the accounts of Dragon International Group
Corp. and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
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<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Cash and cash equivalents
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid instruments purchased with a maturity of three months or less
and money market accounts to be cash equivalents.
Short-Term Investments
Short-term investments include certificates of deposit ("CD") with a maturity of
greater than three months. The CD's mature in December 2004.
Inventories
Inventories, consisting of raw materials and finished goods related to the
Company's products are stated at the lower of cost or market utilizing the
first-in, first-out method.
Fair value of financial instruments
The carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, accounts receivable, due from related parties, accounts
payable and accrued expenses, and loans approximate their fair market value
based on the short-term maturity of these instruments.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated economic lives of the
assets, which are from five to ten years. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred.
Income taxes
The Company files federal and state income tax returns in the United States for
its domestic operations, and files separate foreign tax returns for the
Company's Chinese subsidiaries. Income taxes are accounted for under Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
is an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
-12-
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Foreign currency translation
Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Transactions and balances in other currencies
are converted into U.S. dollars in accordance with Statement of Financial
Accounting Standards(SFAS) No. 52, "Foreign Currency Translation," and are
included in determining net income or loss.
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues and
expenses are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive loss.
The reporting currency is the U.S. dollar. The functional currency of the
Company's Chinese subsidiary, Anxin, is the local currency. The financial
statements of the subsidiaries are translated into United States dollars using
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the period for revenues, costs, and expenses. Net gains and losses
resulting from foreign exchange transactions are included in the consolidated
statements of operations and were not material during the periods presented
because the Chinese dollar (RMB) fluctuates with the United States dollar. The
cumulative translation adjustment and effect of exchange rate changes on cash at
June 30, 2004 and 2003 was not material
Comprehensive loss
The Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130)
"Reporting Comprehensive Income". Comprehensive income is comprised of net
income and all changes to the statements of stockholders' equity, except those
due to investments by stockholders', changes in paid-in capital and
distributions to stockholders.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade accounts receivable. The
Company places its cash with high credit quality financial institutions. Almost
all of the Company's sales are credit sales which are primarily to customers
whose ability to pay is dependent upon the industry economics prevailing in
these areas; however, concentrations of credit risk with respect to trade
accounts receivables is limited due to generally short payment terms. The
Company also performs ongoing credit evaluations of its customers to help
further reduce credit risk.
-13-
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Revenue recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured. The
following policies reflect specific criteria for the various revenues streams of
the Company:
The Company's revenues from the sale of products are recorded when the goods are
shipped, title passes, and collectibility is reasonably assured.
Advertising
Advertising is expensed as incurred. Advertising expenses for the years ended
June 30, 2004 and 2003 was not material.
Shipping Costs
Shipping costs are included in selling and marketing expenses and totaled
$146,713 and $145,992 for the years ended June 30, 2004 and 2003, respectively.
Recent accounting pronouncements
In March 2004, the Financial Accounting Standards Board (FASB) approved the
consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." The objective of this Issue is to provide guidance for identifying
impaired investments. EITF 03-1 also provides new disclosure requirements for
investments that are deemed to be temporarily impaired. The accounting
provisions of EITF 03-1 are effective for all reporting periods beginning after
June 15, 2004. The Company has evaluated the impact of the adoption of EITF 03-1
and does not believe the impact will be significant to the Company's overall
results of operations, cash flows or financial position.
-14-
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 2 - INVENTORIES
At June 30, 2004, inventories consisted of the following:
Raw materials $ 588,310
Finished goods 2,238,904
--------------
$ 2,827,214
==============
NOTE 3 - PROPERTY AND EQUIPMENT
At June 30, 2004, property and equipment consisted of the following:
Estimated Life
Furniture and Fixtures 5 Years $ 4,172
Auto and Truck 10 Years 134,671
Manufacturing Equipment 5 Years 159,995
Building 20 Years 68,273
Office Equipment 5 Years 30,926
-------------
398,037
Less: Accumulated Depreciation (99,592)
-------------
$ 298,445
For the years ended June 30, 2004 and 2003, depreciation expense amounted to
$47,191 and $22,678, respectively.
-15-
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 4 - LONG-TERM DEBT
Long-term debt consisted of the following at June 30, 2004:
Note payable to bank, due on March 25, 2005. Interest only
payable monthly at a rate of 6.87%. Secured by equipment
and personal guarantee of officer. $ 265,700
Note payable to bank, due on February 21, 2007. Interest only
payable monthly at a rate of 6.37%. Secured by equipment
and personal guarantee of officer. 120,773
Note payable to bank, due on July 11, 2004 Interest only
payable monthly at a rate of 6.37%. Secured by equipment
and personal guarantee of officer. 120,773
Note payable to bank, due on November 2, 2004. Interest
only payable monthly at a rate of 5.31%. Secured by equipment
and personal guarantee of officer. 60,386
Note payable to Guangdong Development Bank, due in December 2004.
Interest only payable monthly at rates ranging from
4.54% to 6.05%. Secured by equipment and personal
guarantee of officer. 442,029
Note payable to Guangdong Development Bank, due on
September 14, 2004. Interest only payable monthly at a
rate of 6.05%.Secured by equipment and personal guarantee of officer. 66,425
Note payable to Guangdong Development Bank, due on
August 20, 2004. Interest only payable monthly at a rate of 5.84%.
Secured by equipment and personal guarantee of officer. 60,387
-----------
1,136,473
Less current portion (1,015,700)
------------
$ 120,773
============
Loans that have matured subsequent to the period have been settled.
-16-
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 5 - RELATED PARTY TRANSACTIONS
Due from related parties
The consolidated financial statements include balances and transactions with
related parties. At June 30, 2004, the Company had a net receivable from several
affiliated entities owned by an officer of the Company amounting to $2,559,040.
These advanced are payable on demand and are personally guaranteed by the
officer.
NOTE 6 - INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" "SFAS 109". SFAS 109 requires
the recognition of deferred tax assets and liabilities for both the expected
impact of differences between the financial statements and the tax basis of
assets and liabilities, and for the expected future tax benefit to be derived
from tax losses and tax credit carryforwards. SFAS 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets. The Company's subsidiaries in China are governed by the
Income Tax Law of the People's Republic of China concerning Foreign Investment
Enterprises and Foreign Enterprises and local income tax laws (the "PRC Income
Tax Law").
Internal Revenue Code Section 382 places a limitation on the amount of taxable
income that can be offset by carryforwards after a change in control (generally
greater than a 50% change in ownership).
The table below summarizes the differences between the Company's effective tax
rate and the statutory federal rate as follows for years ended June 30, 2004 and
2003:
2004 2003
----------------- ------------------
Computed "expected" tax expense 34.0 % 34.0 %
Foreign income taxes (28.1)% (29.2)%
----------------- ------------------
Effective tax rate 5.9% 4.8%
================= ================
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<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Letter of credits
The Company entered into a $235,507 Letter of Credit with a financial lending
institution. This agreement requires the Company to pay a fee upon issuance and
pay $235,507 on December 31, 2004 to the bank when it is due. Such instruments
are commonly used in China to support performance assurance needs in the
ordinary course of business.
Leases
The Company leases offices under leases that expire through December 2008.
Future minimum rental payments required under this operating lease is as
follows:
Year Ended June 30, 2005 $38,986
Year Ended June 30, 2006 $33,857
Year Ended June 30, 2007 $33,857
Year Ended June 30, 2008 $33,857
Thereafter $16,929
Rent expense for the twelve-month periods ended June 30, 2004 and 2003 was
$57,913 and $40,897. respectively.
NOTE 8 - OPERATING RISK
(a) Country risk
The Company's revenues will be mainly derived from the sale of paper products in
the Peoples Republic of China (PRC). The Company hopes to expand its operations
to countries outside the PRC, however, such expansion has not been commenced and
there are no assurances that the Company will be able to achieve such an
expansion successfully. Therefore, a downturn or stagnation in the economic
environment of the PRC could have a material adverse effect on the Company's
financial condition.
(b) Products risk
In addition to competing with other companies, the Company could have to compete
with larger US companies who have greater funds available for expansion,
marketing, research and development and the ability to attract more qualified
personnel if access is allowed into the PRC market. If US companies do gain
access to the PRC markets, they may be able to offer products at a lower price.
There can be no assurance that the Company will remain competitive should this
occur.
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<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 8 - OPERATING RISK (continued)
(c) Exchange risk
The Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of Chinese
Remnibi converted to US dollars on that date. The exchange rate could fluctuate
depending on changes in the political and economic environments without notice.
(d) Political risk
Currently, PRC is in a period of growth and is openly promoting business
development in order to bring more business into PRC. Additionally PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company's ability to operate
the PRC subsidiaries could be affected.
(e) Key personnel risk
The Company's future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.
(f) Performance of subsidiaries risk
All of the Company's revenues will be derived via the operations of the
Company's Chinese subsidiaries. Economic, governmental, political, industry and
internal company factors outside of the Company's control affect each of the
subsidiaries. If the subsidiaries do not succeed, the value of the assets and
the price of our common stock could decline. Some of the material risks relating
to the partner companies include the fact that the subsidiaries are located in
China and have specific risks associated with that and the intensifying
competition for the Company's products and services and those of the
subsidiaries.
-19-
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
-20-
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2004
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 95,997
Short-term investments 507,246
Accounts receivable (net of
allowance for doubtful accounts of $55,835) 1,809,443
Inventories 1,703,437
Advances to employees 140,247
Due from related parties 2,518,116
Prepaid expenses and other 323,555
-------
Total Current Assets 7,098,041
PROPERTY AND EQUIPMENT - Net 404,315
OHER ASSETS 2,298
-----
Total Assets $ 7,504,654
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,027,778
Accounts payable 2,455,277
Accrued expenses 948,558
Advances from customers 24,462
------
Total Current Liabilities 4,456,075
LONG-TERM DEBT, net of current portion 120,773
-------
Total Liabilities 4,576,848
---------
STOCKHOLDERS' EQUITY:
Common stock ($.001 Par Value; 200,000,000
Shares Authorized; 8,000,000 shares issued
and outstanding) 8,000
Additional paid-in capital 414,705
Retained earnings 2,505,101
---------
Total Stockholders' Equity 2,927,806
---------
Total Liabilities and Stockholders' Equity $ 7,504,654
==========
See notes to consolidated financial statements
-21-
<page>
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2004
(Unaudited)
NET REVENUES $ 3,542,850
COST OF SALES 3,236,882
-------------
GROSS PROFIT 305,968
-------------
OPERATING EXPENSES:
Selling expenses 150,241
General and administrative 69,580
------------
Total Operating Expenses 219,821
------------
INCOME FROM OPERATIONS 86,147
OTHER INCOME (EXPENSE):
Other income 19,218
Interest expense, net (21,937)
-------------
Total Other Expenses (2,719)
-------------
INCOME BEFORE INCOME TAXES 83,428
INCOME TAXES (39,591)
-------------
NET INCOME $ 43,837
=============
See notes to consolidated financial statements
-22-
<page>
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended September 30, 2004
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 43,837
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 16,787
Changes in assets and liabilities:
Accounts receivable 289,402
Inventories 1,123,777
Prepaid and other current assets 308,627
Advances to employees 431,147
Other assets (2,298)
Accounts payable (1,830,943)
Accrued expenses (15,290)
Advances to customers (364,477)
-----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 569
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Due from related parties 40,924
Increase in short-term investments (120,773)
Capital expenditures (122,657)
----------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (202,506)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable 12,078
----------------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 12,078
----------------
NET DECREASE IN CASH (189,859)
CASH - beginning of year 285,856
----------------
CASH - end of period $ 95,997
================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for :
Interest $ 21,937
================
Income taxes $ 39,591
================
See notes to consolidated financial statements.
-23-
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Dragon International Group Corp. ("Dragon"), a Florida corporation, was founded
in June 2004. On June 30, 2004, Dragon acquired 70% ownership interest of Ningbo
Anxin International Co. Ltd. ("Anxin") under a Stock Purchase Agreement ("Stock
Purchase Agreements"). Anxin is located in Ningbo, Zhejiang Province, China, 200
miles south of Shanghai, and was established in 1997. It is a company operating
in international trade as well as a manufacturer in the integrated packaging
paper industry. It holds an ISO9000 certificate and national license to import
and export. In addition to its own operations, Anxin operates three
subsidiaries, including: (i) Shanghai Anhong Paper Co. Ltd., ("Anhong"), a
trading company located in Shanghai, with another manufacturing facility in
Ningbo; (ii) Ningbo Long'an Industry and Trade Co. Ltd ("Long'an"), and (iii)
Jiangdong Yonglongxin Special Paper Co., Ltd. ("Yonglongxin"). The Stock
Purchase Agreement between Dragon and Anxin has been accounted for as a reverse
acquisition under the purchase method for business combinations. Accordingly,
the combination of the two companies is recorded as a recapitalization of
Dragon, pursuant to which Anxin is treated as the continuing entity.
On or around August 13, 2004, as amended on September 30, 2004 and effective
October 4, 2004, under an Agreement and Plan of Reorganization, the Company was
acquired by Retail Highway.com, Inc. ("Retail"), whereby Retail issued
24,625,000 shares of its common stock for the acquisition of all of the
outstanding capital stock of Dragon. For financial accounting purposes, the
exchange of stock was treated as a recapitalization of Retail with the former
shareholders of the Retail retaining 1,280,234 or approximately 5% of the
outstanding stock.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). The accompanying financial
statements for the interim periods are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the periods presented. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements for the year ended June 30, 2004 and notes thereto contained herein.
The results of operations for the three months ended September 30, 2004 are not
necessarily indicative of the results for the full fiscal year ending June 30,
2005.
Basis of presentation
The consolidated statements include the accounts of Dragon International Group
Corp. and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
-24-
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and cash equivalents
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid instruments purchased with a maturity of three months or less
and money market accounts to be cash equivalents.
Short-Term Investments
Short-term investments include certificates of deposit ("CD") with a maturity of
greater than three months. The CD's mature in December 2004.
Inventories
Inventories, consisting of raw materials and finished goods related to the
Company's products are stated at the lower of cost or market utilizing the
first-in, first-out method.
Fair value of financial instruments
The carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, accounts receivable, due from related parties, accounts
payable and accrued expenses, and loans approximate their fair market value
based on the short-term maturity of these instruments.
-25-
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Foreign currency translation
Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Transactions and balances in other currencies are
converted into U.S. dollars in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in
determining net income or loss.
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues and
expenses are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive loss.
The reporting currency is the U.S. dollar. The functional currency of the
Company's Chinese subsidiary, Anxin, is the local currency. The financial
statements of the subsidiaries are translated into United States dollars using
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the period for revenues, costs, and expenses. Net gains and losses
resulting from foreign exchange transactions are included in the consolidated
statements of operations and were not material during the periods presented
because the Chinese dollar (RMB) fluctuates with the United States dollar. The
cumulative translation adjustment and effect of exchange rate changes on cash at
June 30, 2004 and 2003 was not material
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade accounts receivable. The
Company places its cash with high credit quality financial institutions. Almost
all of the Company's sales are credit sales which are primarily to customers
whose ability to pay is dependent upon the industry economics prevailing in
these areas; however, concentrations of credit risk with respect to trade
accounts receivables is limited due to generally short payment terms. The
Company also performs ongoing credit evaluations of its customers to help
further reduce credit risk.
-26-
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Revenue recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured. The
following policies reflect specific criteria for the various revenues streams of
the Company:
The Company's revenues from the sale of products are recorded when the goods are
shipped, title passes, and collectibility is reasonably assured.
NOTE 2 - INVENTORIES
At September 30, 2004, inventories consisted of the following:
Raw materials $ 823,429
Finished goods 880,008
--------------
$ 1,703,437
==============
NOTE 3 - RELATED PARTY TRANSACTIONS
Due from related parties
The consolidated financial statements include balances and transactions with
related parties. At September 30, 2004, the Company had a net receivable from
several affiliated entities owned by an officer of the Company amounting to
$2,518,116. These advanced are payable on demand and are personally guaranteed
by the officer.
-27-
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
(UNAUDITED)
The accompanying unaudited pro forma consolidated balance sheet of
Dragon International Group Corp. and Subsidiaries (the "Company") give effect to
the recapitalization of the Company and the conversion of certain debt for
common stock. These pro forma statements are presented for illustrative purposes
only. The pro forma adjustments are based upon available information and
assumptions that management believes are reasonable. The Unaudited Pro Forma
balance sheet as of September 30, 2004 does not purport to represent what the
financial position of the Company would actually have been if the transaction
discussed above had in fact occurred on September 30, 2004, nor do they purport
to project the results of operations or financial position of Dragon
International Group Corp and subsidiaries for any future period or as of any
date.
-28-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 2004
(Unaudited)
<table>
<caption>
Dragon
Dragon International
International Group, Inc.and Pro forma Adjustments Pro Forma
Group Corp. Subsidiaries AJE Dr. AJE Cr. Balances
------------------------------------------------------------------- -----------
<s> <c> <c> <c> <c> <c> <c> <c>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 124 $ 95,997 $ - $ - $ 96,121
Short-term investments - 507,246 - - 507,246
Accounts receivable (net of allowance for
doubtful accounts of $55,835) - 1,809,443 - - 1,809,443
Inventories - 1,703,437 - - 1,703,437
Advances to employees - 140,247 - - 140,247
Due from related parties - 2,518,116 - - 2,518,116
Prepaid expenses and other - 323,555 - - 323,555
-- -------- -- -- -------
Total Current Assets 124 7,098,041 - - 7,098,165
PROPERTY AND EQUIPMENT - Net 1,618 404,315 - - 405,933
OHER ASSETS - 2,298 - - 2,298
-- ------ -- -- -----
Total Assets $ 1,742 $ 7,504,654 $ - $ - $ 7,506,396
======== ============ ==== ==== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 26,575 $ 1,027,778 (2) $ 26,575 $ - $ 1,027,778
Convertible note payable - related party 42,214 - - - 42,214
Accounts payable 8,637 2,455,277 - - 2,463,914
Accrued expenses - 948,558 - - 948,558
Due to related party 17,345 - - - 17,345
Advances from customers - 24,462 - - 24,462
-- ------- -- -- ------
Total Current Liabilities 94,771 4,456,075 26,575 - 4,524,271
LONG-TERM DEBT, net of current portion - 120,773 - - 120,773
-- -------- -- -- -------
Total Liabilities 94,771 4,576,848 26,575 - 4,645,044
------- ---------- ------- -- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value,
25,000,000 shares authorized, no shares
issued and outstanding - - - - -
Common stock ($.001 Par Value; 50,000,000
Shares Authorized; 29,079,265 shares issued
and outstanding) 10,242 8,000 (1)(3) 16,962 (2)(3) 7,799 29,079
Additional paid-in capital 1,474,625 414,705 (3) 1,602,521 (1)(2)(3) 40,363 327,172
Retained earnings (1,577,896) 2,505,101 - 1,577,896 2,505,101
----------- ---------- -- ---------- ---------
Total Stockholders' Equity (93,029) 2,927,806 1,619,483 1,646,058 2,861,352
-------- ---------- ---------- ---------- ---------
Total Liabilities and Stockholders'
Equity $ 1,742 $ 7,504,654 $ 1,646,058 $ 1,646,058 $ 7,506,396
======== ============ ============ ============ ===========
</table>
See notes to pro forma consolidated balance sheet
-29-
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
The adjustments to the unaudited pro forma balance sheet as of
September 30, 2004 relects a one for eight reverse stock split, reflect the
settlement of a loan payable for 3,174,031 shares of common stock, and reflects
the issuance of 24,625,000 shares of the Company's common stock for the
acquisition of all of the outstanding capital stock of Dragon International
Group, Inc. and that the transaction occurred as of September 30, 2004 and are
as follows:
(1) To reflect a 1 for 8 reverse stock split.
(2) To reflect the settlement of loans payable for 3,174,031 shares of common
stock.
(3) To reflect the issuance of 24,625,000 shares of the Company's common stock
for the acquisition of all of the outstanding capital stock of Dragon
International Group, Inc., ("Dragon") a Florida corporation. For financial
accounting purposes, the exchange of stock will be treated as a recapitalization
of Retail with the former shareholders of the Company retaining 1,280,234 or
approximately 5% of the outstanding stock.
Unaudited pro Forma adjustments reflect the following transaction:
Dr. Cr.
1)
Common stock 8,962
Paid-in capital 8,962
To reflect a 0ne for eight reverse
stock split
2)
Loans payable 26,575
Common stock 3,174
Paid-in capital 23,401
To reflect the issuance of 3,174,031
shares of common stock for debt
3)
Paid-in capital 1,602,521
Retained earnings 1,577,896
Common stock 24,825
Common stock 8,000
Paid-in capital 8,000
To reflect the issuance of 24,625,000
shares of common stock in connection
with reverse merger and the
recapitalization of the Company.
-30-
<page>