As filed with the Securities and Exchange Commission on August 15, 2005
Registration No. 333-____________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
under the
SECURITIES ACT OF 1933
DRAGON INTERNATIONAL GROUP CORPORATION
(Name of small business issuer in its charter)
Nevada 2671 98-0177646
------ ---- ----------
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification Number)
or organization)
Dragon International Group Corporation
Bldg 14
Suite A09, International Trading Center,
29 Dongdu Road
Ningbo, China 315000
86-574-56169308
(Address and telephone number of principal executive
offices and principal place of business)
David Wu, President
Dragon International Group Corporation
Bldg 14
Suite A09, International Trading Center,
29 Dongdu Road
Ningbo, China 315000
86-574-56169308
(Name, address and telephone number of agent for service)
Copies of all communications to:
Andrew I. Telsey, Esq.
Andrew I. Telsey, P.C.
12835 E. Arapahoe Road
Tower I Penthouse #803
Englewood, Colorado 80112
(303) 768-9221
(303) 768-9224 FAX
Approximate date of proposed sale to public:
As soon as practicable after this Registration Statement becomes effective.
1
<page>
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /x/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<table>
<caption>
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of
Securities to be Registered Registered Share (1) Price (1) Registration Fee
- --------------------------- ---------- --------- --------- ----------------
<s> <c> <c> <c> <c>
Common Stock, $.001 par
value per share . 9,637,000(2) $.29 $2,794,730 $328.94
Common Stock, $.001 par
value per share 6,142,300(3) $.29 $1,781,267 $209.65
TOTAL 15,779,300 $.29 $4,575,997 $538.59
</table>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of
1933, using the average of the high and low price as reported on the OTC
Bulletin Board on August 11, 2005.
(2) Represents the maximum number of shares of common stock to be issued to
certain of the selling stockholders upon conversion of their convertible
promissory notes pursuant to our July 2005 private placement.
(3) Represents shares of common stock underlying warrants issued to certain of
the selling stockholders, including Skyebanc, Inc., the placement agent of
our recently completed private placement offering.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
2
Subject to Completion, dated August __, 2005
PRELIMINARY
PROSPECTUS
Dragon International Group Corporation
Common Stock
15,779,300 Shares
This Prospectus relates to the resale by the selling stockholders (the
"Selling Stockholders") of 15,779,300 shares of our common stock (the "Common
Stock" or the "Securities"), including up to a maximum of 9,637,000 shares
issuable upon the conversion of convertible promissory notes (the "Notes") and
6,142,300 shares issuable upon exercise of warrants (the "Warrants"). The
Selling Stockholders may sell Common Stock from time to time in the principal
market on which the stock is traded at the prevailing market price or in
negotiated transactions.
We will pay the expenses of registering these shares. We will not
receive any proceeds from the sale of shares of Common Stock in this Offering.
All of the net proceeds from the sale of our Common Stock will go to the Selling
Stockholders.
Our Common Stock is listed on the OTC Bulletin Board (the "OTCBB")
under the symbol "DRGG." The last reported sales price per share of our Common
Stock as reported by the OTCBB on August 12, 2005 was $0.29.
Investing in these Securities involves significant risks. Investors
should not buy these Securities unless they can afford to lose their entire
investment.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the registration statement that was filed by Dragon
International Group Corporation with the Securities and Exchange Commission. The
Selling Stockholders may not sell these Securities until the registration
statement becomes effective. This Prospectus is not an offer to sell these
Securities and is not soliciting an offer to buy these Securities in any state
where the offer or sale is not permitted.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is [_____________], 2005
3
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................4
ABOUT THE OFFERING.............................................................6
SUMMARY FINANCIAL DATA.........................................................9
RISK FACTORS..................................................................10
USE OF PROCEEDS...............................................................17
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................18
DESCRIPTION OF BUSINESS.......................................................23
MANAGEMENT....................................................................31
EXECUTIVE COMPENSATION........................................................32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................35
DESCRIPTION OF SECURITIES.....................................................36
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES.......................................36
SELLING STOCKHOLDERS..........................................................37
PLAN OF DISTRIBUTION..........................................................39
LEGAL MATTERS.................................................................42
EXPERTS.......................................................................42
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS....................................42
AVAILABLE INFORMATION.........................................................43
FINANCIAL STATEMENT INDEX....................................................F-1
4
PROSPECTUS SUMMARY
This summary provides an overview of certain information contained elsewhere in
this Prospectus and does not contain all of the information that you should
consider or that may be important to you. Before making an investment decision,
you should read the entire Prospectus carefully, including the "RISK FACTORS"
section, the financial statements and the notes to the financial statements. In
this Prospectus, the terms "Dragon," "Company," "we," "us" and "our" refer to
Dragon International Group Corporation and its wholly owned operating
subsidiaries.
We were incorporated on February 17, 1993, under the laws of the State of Nevada
under the name "LBF Corporation" to engage in any lawful corporate purpose.
Effective April 17, 1999, we acquired certain assets owned by Michael Levine,
including a proposed electronic commerce web site and the right to certain
business names, including "Shopshopshopping.com," "Retailhighway.com" and
"Greatestmall on earth.com." As a result of this acquisition, our principal
business objective became establishing a primary portal and transaction point
for online extensions of "Bricks and Mortar" ("BAM") retail stores. In June
2000, management decided that without additional funding implementation of our
then existing business plan was impossible and we elected to cease retailer
acquisition activities and began to seek out other private entities seeking to
enter the public arena in order to either enter into a joint venture or merger.
Effective October 4, 2004, we entered into an Agreement and Plan of
Reorganization (the "Merger") with Dragon International Group Corp, Ningbo,
China ("Dragon"), whereby Dragon did agree to merge with us. We were the
surviving entity in the Merger. We also undertook a reverse stock split of our
Common Stock whereby one (1) share of Common Stock was issued in exchange for
every eight (8) shares of Common Stock outstanding immediately prior to the
effective date of the Merger. We issued an aggregate of 25,905,233 "restricted"
shares of our Common Stock to the Dragon shareholders, representing
approximately 95% of our issued and outstanding Common Stock following the
Merger. We also amended our Articles of Incorporation, whereby we changed our
name to "Dragon International Group Corporation," as well as reestablishing our
capitalization to the authorized capital immediately prior to the Merger, which
consisted of 25,000,000 shares of Preferred Stock, par value $0.001 per share,
and 50,000,000 Common Shares, par value $.001 per share. We subsequently amended
our Articles again to increase the amount of authorized Common Shares to
200,000,000. Further, our prior management resigned their respective positions
with our Company and was replaced by management of Dragon.
DRAGON INTERNATIONAL GROUP CORPORATION
Dragon International Group Corp. owns 100% interest in Ningbo Anxin
International Co. Ltd. ("Anxin"). Anxin is located in Ningbo, Zhejiang Province,
China, 200 miles south of Shanghai, and was established in 1997. Anxin is one of
China's leading manufacturers and distributors of specialty paper products and
packaging materials. Anxin operates one subsidiary, Jiagdong Yonglongxin Special
Paper Company, Limited ("Yonglongxin"). Anxin holds an ISO9000 certificate and
national license to import and export its product line globally. Anxin's main
products are "Federal" Solid Bleached Sulfate Paperboard (SBS), "Hang Kong" Cast
Coated Board Paperboard (CCB), golden and silver paperboards, aluminum foil
paperboards, pearl paperboards, laser paperboards and mirror-like paperboards.
Anxin currently has a distribution network covering east and central China.
5
<page>
We have cultivated strategic relationships with several of the world's largest
manufacturers of paper and specialty packaging products. "Federal" SBS is
manufactured by International Paper Company ("IP"), a leading paper
manufacturing company worldwide. "Hang Kong" CCB is manufactured by Asia Pulp &
Paper Co. Ltd. ("APP"), an Indonesian company that is one of the largest
manufacturers in Asia. Our management believes that these two companies provide
products that represent the highest quality choices for China's domestic
high-end packaging materials industry. Anxin is a primary distributor for IP and
APP in China. The products mainly aim at top-level packaging materials. They are
utilized for the packaging of cigarettes, alcohol, gifts, cosmetics,
pharmaceuticals and tea. Our primary markets are the printing and tobacco
manufacturing industries. Current clients of Anxin include Dare Technology Co.,
Ltd. (a Chinese Publicly Listed Company), Shanghai Tobacco Industry Printing
Factory and Xuzhou Tobacco Industry Company. Among all the products that we
manufacture and distribute, we believe that "Federal" SBS, which represents
approximately 15% of the total Chinese domestic market, and "Hang Kong" CCB,
which represents approximately 20% of the total domestic market in China, have
the greatest upside potential. The management of Anxin believes China represents
one of the world's fastest growing economies. Furthermore, due to low
manufacturing costs, they expect the enormous export potential of the Chinese
economy to continue its rapid growth rate. Inherent with this tremendous export
market of Chinese goods is a growing packaging market to deliver these products.
Anxin expects to capture a growing share of the packaging market. As we develop,
we are eager to cultivate opportunities to consolidate the specialty packaging
market and garner a growing share of the rapidly growing economy of the Peoples
Republic of China ("PRC")
Our principal executive offices are located at Bldg 14, Suite A09, International
Trading Center, 29 Dongdu Road, Ningbo, China 315000, telephone:
86-574-56169308. For more information on us, prospective investors are
encouraged to review the filings available with the Securities and Exchange
Commission at www.sec.gov. All prospective investors are invited to visit our
website at www.DRGG.net.
6
ABOUT THE OFFERING
Common Stock Offered 15,779,300 shares, including a maximum of
by Selling Shareholders... 9,637,000 shares issuable upon conversion of
outstanding convertible promissory notes (the
"Notes") and 6,142,300 shares issuable upon the
exercise of common stock purchase warrants (the
"Warrants"), assuming full conversion of the
Notes at the lowest conversion price and exercise
of the Warrants. This number represents
approximately 29% of the total number of shares
to be outstanding following this Offering,
assuming conversion of the Notes at the lowest
possible conversion price and exercise of all
Warrants into the Securities being registered.
Common Stock Outstanding
After the Offering....... 54,914,534 shares
Use of Proceeds.......... We will not receive any proceeds from the sale of
the Common Stock. However, we will receive the
exercise price of any Common Stock we issue to
the Selling Stockholders upon exercise of the
warrants. We intend to use the proceeds received
from the exercise of their Warrants, if any, for
general working capital purposes.
OTC Bulletin Board Symbol DRGG
The above information regarding Common Stock to be outstanding after the
Offering is based upon 39,135,234 shares of Common Stock outstanding as of the
date of this Prospectus and assumes the subsequent issuance of shares of Common
Stock to the Selling Stockholders resulting from the conversion of their
outstanding Notes at the lowest possible conversion price and exercise of
Warrants by our Selling Stockholders. The Notes are convertible into shares of
our Common Stock based upon a formula related to the then current market price
of our Common Stock on the OTCBB. In the event these Notes are converted at a
higher price than the minimum, the number of shares to be issued upon conversion
shall decrease. See "Recent Developments," below, for a detailed description of
the conversion features of the Notes.
7
RECENT DEVELOPMENTS
July 2005 Private Placement
On May 9, 2005, we commenced a private offering of units, each unit consisting
of a secured, convertible promissory note and warrants (the "Units"), totaling
up to a maximum of $2,500,000. We closed this offering in July 2005, after we
had sold an aggregate of $1,927,400 of these Units to 36 "accredited" investors,
as that term is defined under the Securities Act of 1933, as amended. The
minimum subscription was for $100,000 or one Unit; however, we reserved the
right to accept subscriptions for a fractional Unit, which we did. Each Unit
consisted of a secured convertible note with a face value of the principal
amount invested by each investor, carrying an annual coupon of 8%, payable on a
monthly basis in cash or common stock on the first of every month and two
hundred thousand (200,000) common stock purchase warrants, each to purchase a
share of our Common Stock for every dollar invested, exercisable at a purchase
price of $.30 per share for a period of five years following the final closing
date of the offering period, subject to adjustment upon the occurrence of
specific events, including stock dividends, stock splits, combinations or
reclassifications of our Common Stock. The Notes mature two years after
issuance. We have the option to satisfy principal and interest payments in cash
or Common Stock. The principal and interest is convertible into shares of our
"registered" Common Stock based on the following criteria: At the sole election
of the holder (the "Holder"), any portion of the unpaid principal balance of the
Note, together with any interest that may have accrued through the date of such
conversion, may be converted into shares of our Common Stock. The Holder shall
provide us with fifteen (15) days written notice prior to such payment ("Holder
Conversion Notice"). The Holder may elect to receive shares of Common Stock at a
conversion rate equal to a 20% discount to the average closing bid price for the
previous five days to the Holder Conversion Notice. The Holder will have a
maximum conversion price of $.55 per share and a minimum conversion price of
$.20 per share. The Holder may elect to convert a portion or all of any unpaid
interest and/or principal due to the Holder regardless as to whether the
criteria as detailed herein are satisfied.
Principal payments will begin on the first day of the fourth month following the
final closing date of the offering. The amount of principal to be paid each
month shall be 1/21 of the total amount offered plus any accrued interest. The
remaining balance of the principal value of the Notes will be due on the first
day of the twenty-fourth month following the final closing of the offering.
However, we, at our sole option, may elect to pay the current portion of
principal and/or interest in shares of our Common Stock. We are obligated to
provide the Holder with fifteen (15) days written notice prior to such payment
("Company Conversion Notice"). The Holder may receive shares of Common Stock at
a conversion rate equal to a 20% discount to the average closing bid price for
the previous five days to our Company Conversion Notice, subject to a $.55
ceiling. We can elect to convert the current portion of unpaid interest and/or
principal due to the Holder under the condition that certain criteria are met
which include: (a) the Common Stock received for payment is fully registered at
the time of receipt and is delivered without restriction of any kind; and (b)
the average daily trading volume as measured for the prior twenty days to
payment is as follows: (i) 100,000 shares per day for principal balance in
excess of $2,000,000; (ii) 75,000 shares per day for principal balance in excess
of $500,000 but less than $2,000,000; (iii) 50,000 shares per day for principal
balance less than $500,000; (iv) no less than 100,000 shares per day if the
remaining principal balance is in excess of $2,000,000.00; and (v) the average
daily price per share as measured from the five trading days prior to payment is
no less than $0.24 per share. The stock must be delivered within five business
days of the first of the then current month.
In addition, we also entered into a Registration Rights Agreement with these
investors pursuant to which we are obligated to file a registration statement
covering the above-referenced Common Stock and shares underlying the warrants
within 45 days of closing of this offering. If the registration statement is not
8
<page>
filed within the 45 day period, or declared effective within 120 days of the
closing, we are required to pay a penalty of 2% of each investor's investment
per month until such default is cured, on a pro-rated daily basis. Should the
registration statement not be effective within 140 days from the closing date of
the offering, and the closing bid price for any three of the previous twenty
trading days is greater than $.6875, we are obligated to issue collateral shares
on the monthly payment date to the investor, as liquidated damages and not as a
penalty, equivalent to 2% per month of the investor's position as calculated
under the following formula:
Principal Balance of Investor + Accrued
interest x 2% x (80% average of three
highest closing bids - $.55)
The average of the three highest closing bids would be measured from the 20 days
preceding the 1st of each month from which a payment is due. This penalty will
be in effect until such time as the registration statement is declared effective
and will be due each month, if applicable, along with the cash payment.
Skyebanc, Inc., an NASD broker dealer, acted as selling agent in connection with
the offering. We issued a total of eight percent (8%) of the total proceeds
resulting from the sale of the securities. We also reimbursed Skyebanc, Inc. for
its expenses in the amount of two percent (2%) of the selling price of the
securities sold on a non-accountable basis. We also granted warrants to purchase
500,000 shares of our Common Stock to Skyebanc, Inc. for its services with
regard to the offering at an exercise price of $.01 per share, which warrants
expire on July 1, 2010. We have agreed to indemnify Skyebanc, Inc. and other
persons against specific liabilities under the Securities Act of 1933, as
amended.
The issuance of the Units and the securities included therein was exempt from
registration requirements of the Securities Act of 1933 pursuant to Section 4(2)
of such Securities Act and Regulation D promulgated thereunder based upon the
representations of each of the investors that he, she or it was an "accredited
investor" (as defined under Rule 501 of Regulation D) and that he, she or it was
purchasing such securities without a present view toward a distribution of the
securities. In addition, there was no general advertisement conducted in
connection with the sale of the securities.
Recent Acquisitions
On July 1, 2005, we acquired a 60% interest in Hangzhou Yongxin Paper Company,
Limited. ("Hangzhou"). Hangzhou, established in 2003, is located in Hangzhou of
Zhejiang Province, China, and manufactures and sells high-end cigarette packing
material and was a direct competitor of ours. We issued an aggregate of
1,000,000 shares of our Common Stock in consideration for this acquisition. See
"DESCRIPTION OF BUSINESS - Acquisitions."
On June 1, 2005, we used an account receivable of $2,601,906 to acquire 100% of
the issued and outstanding capital stock of Ningbo Xinyi Paper Company, Limited
("Xinyi"), making it a subsidiary of Anxin. Xinyi is located in Ningbo, China
and owns land, building and equipment with a market value of $3,797,778
appraised by an independent third party. See "DESCRIPTION OF BUSINESS -
Acquisitions."
On August 1, 2005, we acquired the Xianyang Naite Research & Development Center,
located in Ningbo, China, which was created to improve production efficiencies
in the specialty packaging industry. We paid $25,000 in cash and issued 500,000
shares of our Common Stock in consideration for this acquisition. See
"DESCRIPTION OF BUSINESS - Acquisitions."
9
<page>
In May 2005, we signed a letter of intent to acquire a 51% ownership interest of
Shanghai Jinkui Packing Material Company, Limited ("Jinkui"). Jinkui, based in
Shanghai, China and was founded in 2002, is a manufacturer of packing materials
for pharmaceutical products. As of the date of this Prospectus, no definitive
terms have been reached on this transaction but negotiations are continuing. See
"DESCRIPTION OF BUSINESS - Acquisitions."
March 2005 Private Placement
On March 1, 2005, we closed a private offering of Units, each Unit consisting of
an 8% Secured Convertible Debenture and 250,000 Class "A" Warrants, each warrant
exercisable to purchase one (1) share of our Common Stock at an exercise price
of $.40 per share for a period of five (5) years following the closing of the
offering. The investors in this offering were also granted "piggyback"
registration rights for the shares underlying the warrants, as well as the
shares reserved for issuance in the event of conversion of the Debentures. We
received gross proceeds of $357,500 from the sale of these Units ($321,750 net).
The Units were sold to a total of 7 "accredited investors," as that term is
defined under the Securities Act of 1933, as amended. The Debentures were
scheduled to mature six months following the closing of the offering. Interest
only is payable monthly. The relevant offering documents contained a provision
which provided for each of the investors to convert into the subsequent offering
which took place beginning in May 2005 (described above). Pursuant to the terms
of this offering, each of the investors retained ownership of the warrants
issued to them in this offering as part of the consideration for extending the
maturity date of their Debenture.
On March 31, 2005, we had a net receivable from several affiliated entities
owned by David Wu, our Chief Executive Officer and President, amounting to
$2,559,040. These advances were payable on demand and personally guaranteed by
Mr. Wu. However, in May 2005, we reached an agreement to buy a manufacturing
facility from Ningbo Xinyi Paper Company, Limited. Ningbo Xinyi Paper Company,
Limited transferred ownership of 23,345 square meters of property, including a
recently completed 8,500 square meter manufacturing facility in exchange for
this outstanding receivable. The land is valued at approximately $2.5 million.
This new facility allows us to upgrade our manufacturing capabilities and
provides a significant amount of land to expand on in the future. Furthermore,
the transaction will reduce costs as we will eliminate the leasing costs on our
current facility. We intend on moving our current plant into the new facility,
and consolidating the new R&D Center and manufacturing facility under one roof
in the near future.
SUMMARY FINANCIAL DATA
Selected Financial Data
The following summary of our financial information for the years ended
June 30, 2004 and 2003 has been derived from, and should be read in conjunction
with, our audited financial statements included elsewhere in this prospectus.
Information for the nine months ended March 31, 2005 and 2004 has been derived
from, and should be read in conjunction with, our unaudited financial statements
included elsewhere in this prospectus.
10
<page>
<table>
<caption>
Nine Months Ended Year Ended
March 31, June 30,
---------------------------------- -------------------------------------
<s> <c> <c> <c> <c>
Statement of operations: 2005 2004 2004 2003
--------------- --------------- ----------------- ---------------
(unaudited) (unaudited)
--------------- --------------- ----------------- ---------------
Net revenues $14,564,067 $14,715,401 $19,114,755 $15,040,725
Gross profit 917,920 1,640,757 1,911,471 1,829,609
Total operating expenses 725,929 994,131 884,539 1,312,150
Income from operations 191,991 646,626 1,026,932 517,459
Other income (expense) (47,931) 197,915 231,849 274,402
Income taxes 49,213 89,627 73,778 38,100
--------------- --------------- ----------------- ---------------
Net income $ 94,847 $ 754,914 $1,185,003 $ 753,761
=============== =============== ================= ===============
Net income per share -
basic and diluted $ 0.00 $ 0.03 $ 0.05 $ 0.03
=============== =============== ================= ===============
Weighted common shares 29,774,932 24,625,000 24,625,000 24,625,000
outstanding
=============== =============== ================= ===============
Balance Sheet: March 31, 2005 June 30, 2004
--------------- -----------------
Cash $ 226,588 $ 285,856
Working capital $ 2,949,236 $2,706,297
Current assets $ 8,074,270 $9,361,004
Total assets $ 8,486,775 $9,659,449
Current liabilities $ 5,125,034 $6,654,707
Total liabilities $ 5,245,807 $6,775,480
Total stockholders' equity $ 3,240,968 $2,883,969
</table>
11
RISK FACTORS
An investment in our common stock is a risky investment. In addition to the
other information contained in this Prospectus, prospective investors should
carefully consider the following risk factors before purchasing shares of our
Common Stock offered hereby. We believe that we have included all material
risks.
RISKS RELATED TO OUR BUSINESS
The management of our Company is located in the Peoples Republic of China
("PRC") and we are materially dependent upon advisory services of a
U.S. company.
None of the current members of our management have any experience in U.S. public
companies and these individuals are not fluent in English, except our President.
We have engaged China Direct Investments, Inc. to provide us with various
advisory and consulting services, including U.S. business methods and compliance
with SEC disclosure requirements. We selected China Direct Investments, Inc. to
provide these services to us in part because its staff includes Chinese-speaking
individuals with experience in the operation and regulatory framework applicable
to U.S. public companies. Until such time as we are able to expand our board of
directors to include English-speaking individuals who have experience with the
operation and regulatory framework applicable to U.S. public companies, we are
materially dependent upon our relationship with China Direct Investments, Inc.
Our contract with that company expires in June 2005. If for any reason China
Direct Investments, Inc. should fail to provide the contracted services at the
anticipated levels or fails to extend its services and we have not added members
to our board of directors with the requisite experience, the abilities of our
board of directors to do business as a U.S. public company could be materially
and adversely affected. In such instances, we may be unable to prepare and file
reports as required by the Securities Exchange Act of 1934 on a timely basis
which could lead to our Common Stock being de-listed from trading on the OTCBB.
Certain agreements to which we are a party and which are material to our
operations lack various legal protections that are customarily contained in
similar contracts prepared in the United States.
Our operations are based in the People's Republic of China ("China" or "PRC"),
our operating subsidiaries are Chinese companies and all of our business and
operations are conducted in China. We are a party to certain material contracts,
including supply contracts, purchase contracts and the lease for our principal
offices and manufacturing facility. While these contracts contain the basic
business terms of the agreements between the parties, these contracts do not
contain certain provisions which are customarily contained in similar contracts
prepared in the U.S., such as representations and warranties of the parties,
confidentiality and non-compete clauses, provisions outlining events of
defaults, and termination and jurisdictional clauses. Because our material
contracts omit these types of clauses, notwithstanding the differences in
Chinese and U.S. laws, we may not have the same legal protections as we would if
the contracts contained these additional provisions. We anticipate that
contracts we enter into in the future will likewise omit these types of legal
protections. While we have not been subject to any adverse consequences as a
result of the omission of these types of clauses, and we consider the contracts
to which we are a party to contain all the material terms of our business
arrangements with the other party, we cannot provide assurances that future
events will not occur which could have been avoided if the contracts were
prepared in conformity with U.S. standards, or what the impact, if any, of these
hypothetical future events could have on our Company.
We are materially reliant on revenues from our operations in the PRC. There are
significant risks associated with doing business in the PRC that may cause you
to lose your entire investment in our Company.
12
<page>
While our goal is to both expand our operations to countries outside the PRC, in
the foreseeable future our growth and success will remain tied to our existing
operations in the PRC. Therefore, a downturn or stagnation in the economic
environment of the PRC could have a material adverse effect on our financial
condition that could result in a significant loss of revenues and liquidity in
future periods.
We cannot assure you that the current Chinese policies of economic reform will
continue. Because of this uncertainty, there are significant economic risks
associated with doing business in China.
Although the majority of productive assets in China are owned by the Chinese
government, in the past several years the government has implemented economic
reform measures that emphasize decentralization and encourage private economic
activity. In keeping with these economic reform policies, the PRC has been
openly promoting business development in order to bring more business into the
PRC. Because these economic reform measures may be inconsistent or ineffectual,
there are no assurances that:
o the Chinese government will continue its pursuit of economic reform
policies;
o the economic policies, even if pursued, will be successful;
o economic policies will not be significantly altered from time to time;
and
o business operations in China will not become subject to the risk of
nationalization.
Even if the Chinese government continues its policies of economic reform, we may
be unable to take advantage of these opportunities in a fashion that will
provide financial benefit to our Company. Our inability to sustain our
operations in China at current levels could result in a significant reduction in
our revenues that would result in escalating losses and liquidity concerns
China's economy has experienced significant growth in the past decade, but such
growth has been uneven across geographic and economic sectors and has recently
been slowing. There can be no assurance that such growth will not continue to
decrease or that any slow down will not have a negative effect on our business.
The Chinese economy is also experiencing deflation which may continue in the
future. We cannot assure you that we will be able to capitalize on these
economic reforms, assuming the reforms continue. Given our material reliance on
our operations in the PRC, any failure on our part to continue to take advance
of the growth in the Chinese economy will have a material adverse effect on our
results of operations and liquidity in future periods.
We are subject to risks associated with the conversion of Chinese RMB into
U.S. dollars.
We generate revenue and incur expenses and liabilities in both Chinese renminbi
(RMB) and U.S. dollars. Since 1994, the official exchange rate for the
conversion of Chinese RMB to U.S. dollars has generally been stable and the
Chinese RMB has appreciated slightly against the U.S. dollar. We have not
entered into agreements or purchased instruments to hedge our exchange rate
risks, although we may do so in the future. Our results of operations and
financial condition may be affected by changes in the value of Chinese RMB and
other currencies in which our earnings and obligations are denominated.
Recently, the Chinese government raised 2% of Chinese RBM against US dollar by
floating Chinese RMB with a basket of foreign currencies. 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.
13
<page>
We may not have sufficient protection of certain of our intellectual property.
We utilize certain technologies in the production of certain packaging paper
that are used in our products that are proprietary in nature. To protect our
proprietary rights, we rely generally on confidentiality agreements with
employees and third parties, and agreements with consultants, vendors and
customers, although we have not signed such agreements in every case. Despite
such protections, a third party could, without authorization, utilize our
propriety technologies without our consent. The unauthorized use of this
proprietary information by third parties could adversely affect our business and
operations as well as any competitive advantage we may have in our market
segment. We can give no assurance that our agreements with employees,
consultants and others who participate in the production of our products will
not be breached, or that we will have adequate remedies for any breach, or that
our proprietary technologies will not otherwise become known or independently
developed by competitors.
We have not voluntarily implemented various corporate governance measures,
in the absence of which, stockholders may have reduced protections against
interested director transactions, conflicts of interest and other matters.
We are not subject to any law, rule or regulation requiring that we adopt any of
the corporate governance measures that are required by the rules of national
securities exchanges or Nasdaq such as independent directors and audit
committees. It is possible that if we were to adopt some or all of the corporate
governance measures, stockholders would benefit from somewhat greater assurances
that internal corporate decisions were being made by disinterested directors and
that policies had been implemented to define responsible conduct. Prospective
investors should bear in mind our current lack of corporate governance measures
in formulating their investment decisions.
We may be exposed to potential risks relating to our internal controls
over financial reporting and our ability to have those controls attested to
by our independent auditors.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"), the
Securities and Exchange Commission adopted rules requiring public companies to
include a report of management on the company's internal controls over financial
reporting in their annual reports, including Form 10-KSB. In addition, the
independent registered public accounting firm auditing a company's financial
statements must also attest to and report on management's assessment of the
effectiveness of the company's internal controls over financial reporting as
well as the operating effectiveness of the company's internal controls. We were
not subject to these requirements for the fiscal year ended June 30, 2004. We
are evaluating our internal control systems in order to allow our management to
report on, and our independent auditors attest to, our internal controls, as a
required part of our annual report on Form 10-KSB beginning with our report for
the fiscal year ended June 30, 2005.
While we expect to expend significant resources in developing the necessary
documentation and testing procedures required by SOX 404, there is a risk that
we will not comply with all of the requirements imposed thereby. At present,
there is no precedent available with which to measure compliance adequacy.
Accordingly, there can be no positive assurance that we will receive a positive
attestation from our independent auditors.
In the event we identify significant deficiencies or material weaknesses in our
internal controls that we cannot remediate in a timely manner or we are unable
to receive a positive attestation from our independent auditors with respect to
our internal controls, investors and others may lose confidence in the
reliability of our financial statements and our ability to obtain equity or debt
financing could suffer.
We will need to raise additional capital to expand our operations in future
periods. If we cannot raise sufficient capital, our ability to implement our
business strategies and continue to expand will be at risk.
14
<page>
We want to build an additional manufacturing line and upgrade our manufacturing
facilities and technologies in order to expand our business. Based upon our
preliminary estimates this will require capital and other expenditures of
approximately USD $1 million to $2 million. We do not presently have sufficient
working capital to fund the additional acquisitions and upgrade our
manufacturing facilities and technologies, and we will need to raise additional
working capital to accomplish these objectives. We do not presently have any
external sources of capital and will in all likelihood raise the capital in a
debt or equity offering. If we raise the necessary capital through the issuance
of debt, this will result in increased interest expense. If we raise additional
funds through the issuance of equity or convertible debt securities, the
percentage ownership of our Company held by existing stockholders will be
reduced and those stockholders may experience significant dilution. In addition,
new securities may contain certain rights, preferences or privileges that are
senior to those of our Common Stock. There can be no assurance that acceptable
financing to fund this project can be obtained on suitable terms, if at all. Our
ability to continue to implement our growth strategy could suffer if we are
unable to raise the additional funds on acceptable terms that will have the
effect of adversely affecting our ongoing operations and limiting our ability to
increase our revenues in the future.
We do not have significant financial reporting experience, which may lead
to delays in filing required reports with the Securities and Exchange Commission
and suspension of quotation of our securities on the OTCBB, which will make it
more difficult for you to sell your securities.
The OTCBB limits quotations to securities of issuers that are current in their
reports filed with the Securities and Exchange Commission. These limitations may
be impediments to our quotation on the OTCBB. Because we do not have significant
financial reporting experience, we may experience delays in filing required
reports with the Securities and Exchange Commission following the effectiveness
of the registration statement to which this Prospectus is a part. Because
issuers whose securities are qualified for quotation on the OTCBB are required
to file these reports with the Securities and Exchange Commission in a timely
manner, the failure to do so may result in a suspension of trading or delisting
from the OTCBB.
There are no automated systems for negotiating trades on the OTCBB and it is
possible for the price of a stock to go up or down significantly during a lapse
of time between placing a market order and its execution, which may affect your
trades in our securities.
Because there are no automated systems for negotiating trades on the OTCBB, they
are conducted via telephone. In times of heavy market volume, the limitations of
this process may result in a significant increase in the time it takes to
execute investor orders. Therefore, when investors place market orders, an order
to buy or sell a specific number of shares at the current market price, it is
possible for the price of a stock to go up or down significantly during the
lapse of time between placing a market order and its execution.
Because our stock currently trades below $5.00 per share, and is quoted on
the OTCBB, our stock is considered a "penny stock" which can adversely affect
its liquidity.
As the trading price of our Common Stock is less than $5.00 per share, our
Common Stock is considered a "penny stock," and trading in our Common Stock is
subject to the requirements of Rule 15g-9 under the Securities Exchange Act of
1934. Under this rule, broker/dealers who recommend low-priced securities to
persons other than established customers and accredited investors must satisfy
special sales practice requirements. The broker/dealer must make an
individualized written suitability determination for the purchaser and receive
the purchaser's written consent prior to the transaction.
15
<page>
SEC regulations also require additional disclosure in connection with any trades
involving a "penny stock," including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and its
associated risks. These requirements severely limit the liquidity of securities
in the secondary market because few broker or dealers are likely to undertake
these compliance activities. In addition to the applicability of the penny stock
rules, other risks associated with trading in penny stocks could also be price
fluctuations and the lack of a liquid market.
"Penny Stock" rules may make buying or selling our Securities difficult.
Trading in our Securities will be subject to the "penny stock" rules for the
foreseeable future. The Securities and Exchange Commission has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
These rules require that any broker-dealer who recommends our securities to
persons other than prior customers and accredited investors must, prior to the
sale, make a special written suitability determination for the purchaser and
receive the purchaser's written agreement to execute the transaction. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated with trading in the penny stock
market. In addition, broker-dealers must disclose commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities they offer. The additional burdens imposed upon broker-dealers by
such requirements may discourage broker-dealers from recommending transactions
in our securities, which could severely limit the liquidity of our securities
and consequently adversely affect the market price for our securities.
We do not anticipate payment of dividends, and investors will be wholly
dependent upon the market for the Common Stock to realize economic benefit
from their investment.
As holders of our Securities, you will only be entitled to receive those
dividends that are declared by our board of directors out of surplus. We do not
expect to have surplus available for declaration of dividends in the foreseeable
future. Indeed, there is no assurance that such surplus will ever materialize to
permit payment of dividends to you as holders of the Securities. The board of
directors will determine future dividend policy based upon our results of
operations, financial condition, capital requirements, reserve needs and other
circumstances.
RISKS RELATED TO OUR INDUSTRY
Our business is strongly conjunct with the cigarette industry and in the
exposure of risks derived from the fluctuation of the cigarette industry.
Our majority clients are from the cigarette industry, which is facing
significant governmental actions aimed at reducing the consumption of
cigarettes. As one of the largest cigarette consumption markets in the world,
the Chinese government is following the world trends to enforce more regulations
on the cigarette industry. Management does not think the Chinese cigarette
industry will have a regression in the near future, but we cannot ignore the
risks deriving from the fluctuation of the cigarette industry.
16
<page>
Intense competition from existing and new entities may adversely affect our
revenues and profitability.
We face intense competition. The packaging products and paperboard industries
are highly competitive, and no single company dominates either industry. Our
competitors include large, vertically integrated packaging products and
paperboard companies and numerous smaller companies.
Because all of our businesses operate in highly competitive industry segments,
we regularly bid for sales opportunities to customers for new business or for
renewal of existing business. The loss of business or the award of new business
from our larger customers may have a significant impact on our results of
operations.
The primary competitive factors in the packaging products and paperboard
industries are price, design, product innovation, quality and service, with
varying emphasis on these factors depending on the product line and customer
preferences. We believe that we compete effectively with respect to each of
these factors. However, to the extent that any of our competitors becomes more
successful with respect to any key competitive factor, our business could be
materially adversely affected.
RISKS RELATED TO THE OFFERING
Provisions of our Articles of Incorporation and Bylaws may delay or prevent a
take-over that may not be in the best interests of our stockholders.
Provisions of our Articles of Incorporation and Bylaws may be deemed to have
anti-takeover effects, which include when and by whom special meetings of our
stockholders may be called, and may delay, defer or prevent a takeover attempt.
In addition, certain provisions of the Nevada Revised Statutes also may be
deemed to have certain anti-takeover effects which include that control of
shares acquired in excess of certain specified thresholds will not possess any
voting rights unless these voting rights are approved by a majority of a
corporation's disinterested stockholders.
In addition, our Articles of Incorporation authorize the issuance of up to
25,000,000 shares of Preferred Stock with such rights and preferences as may be
determined from time to time by our Board of Directors. No shares are currently
outstanding. Our Board of Directors may, without stockholder approval, issue
Preferred Stock with dividends, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of the holders of
our Common Stock.
After this Offering, our executive officers, directors and 5% or greater
shareholders will have the ability to significantly influence matters
requiring a shareholder vote and shareholders acquiring shares in this
Offering may not have the ability to influence corporate transactions.
Currently, our existing officers, directors and 5% or greater shareholders in
the aggregate beneficially own approximately 68.4% of our outstanding stock.
Upon completion of this Offering, this group will continue to own approximately
68.4% of our outstanding stock, until and unless the Selling Stockholders herein
exercise their Warrants and convert their Notes into shares of our Common Stock.
In the event all of the Warrants are exercised and Notes are converted, our
existing officers, directors and 5% or greater shareholders in the aggregate
will beneficially own approximately 50% of our outstanding stock. As a result,
such persons, acting together, will have the ability to significantly influence
the vote on all matters requiring approval of our shareholders, including the
election of directors and approval of significant corporate transactions.
17
<page>
This Prospectus permits Selling Stockholders to resell their shares. If they do
so, the market price for our shares may fall and purchasers of our shares may be
unable to resell them.
This Prospectus includes up to 15,779,300 shares being offered by existing
stockholders, including an aggregate of 6,142,300 shares issuable upon the
exercise of outstanding common stock purchase warrants, 3,854,800 of which are
exercisable at $.30 per warrant, 1,787,500 of which are exercisable at $.40 per
warrant and 500,000 of which are exercisable at $.01 per warrant and 9,637,000
shares issuable upon conversion of outstanding convertible promissory notes that
are convertible pursuant to a formula which includes a discount to the current
market price of our Common Stock. To the extent that these shares are sold into
the market for our shares, there may be an oversupply of shares and an
undersupply of purchasers. If this occurs the market price for our shares may
decline significantly and investors may be unable to sell their shares at a
profit, or at all.
We cannot predict whether we will successfully effectuate our current business
plan. Each prospective purchaser is encouraged to carefully analyze the risks
and merits of an investment in our Common Stock and should take into
consideration when making such analysis, among others, the Risk Factors
discussed above.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
We have made some statements in this Prospectus, including some under
"RISK FACTORS," "MANAGEMENT'S PLAN OF OPERATIONS," "DESCRIPTION OF BUSINESS" and
elsewhere, which constitute forward-looking statements. These statements may
discuss our future expectations or contain projections of our results of
operations or financial condition or expected benefits to us resulting from
acquisitions or transactions and involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of activity,
performance or achievements to be materially different from any results, levels
of activity, performance or achievements expressed or implied by any
forward-looking statements. These factors include, among other things, those
listed under: "RISK FACTORS" and elsewhere in this Prospectus. In some cases,
forward-looking statements can be identified by terminology such as "may,"
"should," "could," "expects," "intends," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of these
terms or other comparable terminology. Although we believe that the expectations
reflected in forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
USE OF PROCEEDS
We will not receive any proceeds from the sale of Common Stock by the Selling
Stockholders. All of the net proceeds from the sale of our Common Stock will go
to the Selling Stockholders. If all Warrants held by the Selling Stockholders
are exercised, we will receive $1,876,440 in proceeds.
We anticipate that any proceeds from the exercise of Warrants by the Selling
Stockholders will be used for acquisition of additional, state-of-the-art
manufacturing equipment and general corporate purposes, which may include but
are not limited to working capital, capital expenditures, acquisitions and the
repayment or refinancing of our indebtedness. Pending the application of any
proceeds from the exercise of Warrants, if any, by the Selling Stockholders, we
expect to invest the proceeds in short-term, interest-bearing instruments or
other investment-grade securities.
18
<page>
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our Common Stock began trading on the OTCBB operated by the NASD in August 2000
under the symbol "RHWY." In October 2004, as a result of the reverse merger with
Dragon International Group Corp. discussed above, our trading symbol changed to
its current symbol, "DRGG." The table below sets forth the reported high and low
bid prices for the periods indicated. The bid prices shown reflect quotations
between dealers, without adjustment for markups, markdowns or commissions, and
may not represent actual transactions in our Securities. The prices are adjusted
to reflect all stock splits.
Bid Price
Quarter Ended High Low
September 2003 $.16 $.08
December 2003 $.40 $.16
March 2004 $.40 $.16
June 2004 $.40 $.24
September 2004 $.32 $.24
December 2004 $.65 $.46
March 2005 $.59 $.35
June 2005 $.47 $.32
As of August 12, 2005, there were 39,135,234 shares of our Common Stock
outstanding.
As of August 12, 2005, there were approximately 59 stockholders of record of our
Common Stock. This does not reflect those shares held beneficially or those
shares held in "street" name.
We have not paid cash dividends in the past, nor do we expect to pay cash
dividends for the foreseeable future. We anticipate that earnings, if any, will
be retained for the development of our business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of
our financial condition; and
o state other "forward-looking" information.
19
<page>
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "Risk Factors" and
"Description of Business" and elsewhere in this prospectus. See "RISK FACTORS."
Overview
We were incorporated on February 17, 1993, under the name "LBF Corporation"
pursuant to the laws of the State of Nevada to engage in any lawful corporate
purpose. In December 1997, we filed a registration statement with the United
States Securities and Exchange Commission on Form 10-SB, registering our Common
Stock under the Securities Exchange Act of 1934, as amended (the "34 Act"). Our
intention at that time was to seek to acquire assets or shares of an entity
actively engaged in business which generated revenues or provided a business
opportunity in exchange for our securities. In effect, this filing caused us to
be a full "reporting company" under the 34 Act.
Effective April 17, 1999, we acquired certain assets owned by Michael Levine,
including a proposed electronic commerce web site and the right to certain
business names, including "Shopshopshopping.com," "Retailhighway.com" and
"Greatestmall on earth.com" (the "Assets"). We issued 2,500,000 shares of our
Common Stock equal to ownership of approximately 33% of our then outstanding
shares, in exchange for all of the Assets. In addition, our shareholders
approved an amendment to our Articles of Incorporation changing our name to
"Retail Highway.com, Inc." As a result of this acquisition, our principal
business objective was changed to becoming a primary portal and transaction
point for online extensions of "Bricks and Mortar" ("BAM") retail stores.
Because of negative business conditions, we ceased these operations in June 2000
and began seeking a merger or acquisition candidate. Relevant thereto, effective
October 4, 2004, pursuant to an Agreement and Plan of Reorganization, we issued
24,625,000 shares of our Common Stock for the acquisition of all of the
outstanding capital stock of Dragon International Group Corp. ("Dragon"), a
Florida corporation, representing approximately a 95% interest in our Company.
Dragon was founded in June 2004. On June 30, 2004, Dragon acquired 70% ownership
interest of Ningbo Anxin International Company, Limited ("Anxin"). Anxin is
located in Ningbo, Zhejiang Province, China, 200 miles south of Shanghai, and
was established in 1997. It is a company operating in international trade as
well as a manufacturer in the integrated packaging paper industry. It holds an
ISO9000 certificate and national license to import and export. In addition to
its own operations, Anxin operates three subsidiaries, including:
(i) Shanghai Anhong Paper Co. Ltd. ("Anhong"), a trading company
located in Shanghai, with another manufacturing facility in
Ningbo; whose main products are "Federal" SBS and "Hang Kong"
CCB;
(ii) Ningbo Long'an Industry and Trade Co. Ltd ("Long'an"), which
has been set up to begin the business of Indonesia "Hang Kong"
CCB, and holds the national license to import and export; and
(iii) Jiangdong Yonglongxin Special Paper Co., Ltd. ("Yonglongxin"),
which holds an ISO9000 certificate and has five series of
products, including golden and silver paperboards, aluminum
foil paperboards, pearl paperboards, laser paperboards and
mirror-like paperboards.
Anxin has a distribution network covering east and central China. On December
31, 2004, we issued 4,000,000 Common Shares for the remaining 30% interest in
Anxin.
20
<page>
In order to consolidate operations, we discontinued the operations of Anhong in
December 2004 and discontinued operations of Long'an in January 2005. We
consolidated operations and the businesses of Anhong and Long'an into Anxin's.
The following information is intended to highlight developments in our
operations, to present our results of operations, to identify key trends
affecting our businesses and to identify other factors affecting our results of
operations for the periods indicated.
Results of Operations
Comparison of Our Results of Operations for the Nine Month Periods Ended March
31, 2005 and 2004
For the nine months ended March 31, 2005, our revenues were $14,564,067, as
compared to $14,715,401 for the nine months ended March 31, 2004, a decrease of
$151,334 or approximately 1%. Additionally, during the period, we consolidated
the operations of certain of our subsidiaries in one company and delayed the
shipment of product to expedite the consolidation. Additionally, we announced
that we entered into an agreement to become the supplier of printing paper for
"Red Gold Dragon" cigarette mark paper to the Hubei Jinsanxia Printing Company
("Jinsanxia"). Jinsanxia specializes in the printing of cigarette packaging and
is ranked number one in the industry in Provinces of Hunan and Hubei. We expect
our revenues to grow it the third quarter. On April 5, 2005, we announced that
we received an order from Jiangsu Dare Technology Company Limited, a wholly
owned subsidiary of Jiangsu Dare Group. Dare Group, established in 1978, is a
shareholder of Dare PLC, a publicly listed company. The initial order is valued
in excess of $2 million.
For the nine months ended March 31, 2005, cost of sales amounted to $13,646.147,
or 94% of net revenues, as compared to cost of sales of $13,074,644 or 89% of
net revenues for the nine months ended March 31, 2004, an increase of $571,503
or 4.4%. This increase resulted from an increase in raw material costs and
overhead costs such as utilities during the nine months ended March 31, 2005 as
compared to the nine months ended March 31, 2004. We paid more for pulp, oil,
and metal materials due to increases in global prices. To deal with these
increased costs, we intend to market new products that will provide us higher
profit margins than those of our old products. There can be no assurance that we
will be successful in marketing new products, or that we will generate higher
profit margins from these products in the future.
Gross profit for the nine months ended March 31, 2005 was $917,920 or 6% of
revenues, as compared to $1,640,757 or 11% of revenues for the nine months ended
March 31, 2004.
For the nine months ended March 31, 2005, total operating expenses were
$725,929, as compared to $994,131 for the nine months ended March 31, 2004, a
decrease of $268,202, or approximately 27%. This decrease was attributable to a
decrease in selling expenses. During the nine month period ended March 31, 2005,
we incurred selling expenses of $338,595, as compared to $642,573 for the nine
months ended March 31, 2004, a decrease of $303,978 or approximately 47%. This
decrease is attributable to a material decrease in consulting expense of
approximately $321,000 incurred in the 2004 period, compared to $0 in the 2005
period. This decrease was offset by increased shipping costs. Additionally, for
the nine months ended March 31, 2005, we increased our advertising and
promotions spending compared to the same period in the prior year. We expect out
selling expenses to increase as we attempt to increase revenues and expect to
spend increased funds on adverting and promotion of our products.
For the nine months ended March 31, 2005, general and administrative expenses
were $387,334, as compared to $351,558 for the nine months ended March 31, 2004,
an increase of $35,776, or approximately 10%. For the nine months ended March
31, 2005, we incurred professional fees of approximately $70,000 related to our
acquisition of Anxin, as compared to $0 for the nine months ended March 31,
2004, an increase of $70,000 or 100%. Additional increases were due to increased
salary and wages and operating expenses.
21
<page>
For the nine months ended March 31, 2005, other income amounted to $57,856, as
compared to other income of expenses of $252,002 for the nine months ended March
31, 2004. Other income for the nine months ended March 31, 2005 and 2004 was
associated with income recognized from the collection of value-added taxes on
certain of our products which we receive a tax credit.
For the nine months ended March 31, 2005, interest expense was $105,787, as
compared to $54,087 for the nine months ended March 31, 2004 and was related to
increased borrowings.
As a result of these factors, we reported net income of $94,847 (less than $.01
per share) for the nine months ended March 31, 2005, as compared to net income
of $754,914 (approximately $.03 per share) for the nine months ended March 31,
2004.
Comparison of our Results of Operations for the Fiscal Years Ended June 30, 2004
and 2003
For the year ended June 30, 2004, our revenues were $19,114,755, as compared to
$15,040,725 for the year ended June 30, 2003, an increase of $4,074,030 or
approximately 27%. The increased was caused by both increased revenues of
distribution business of $3.54 million or 30.53% compared to fiscal year 2003
and manufacturing business of $0.54 million or 27.9% compared to the fiscal year
2003. We believe our business will continue grow as the demand for paper
packaging will continue to increase in China.
For the year ended June 30, 2004, cost of sales amounted to $17,203,284, or 90%
of net revenues, as compared to cost of sales of $13,211,116, or 88% of net
revenues for the year ended June 30, 2003, an increase of $3,992,168, or 30%.
This increase resulted from an increase in raw material costs and overhead costs
such as utilities during the year ended June 30, 2004, as compared to the year
ended June 30, 2003. We paid more for pulp, oil, and metal materials due to
increase in global prices. Gross profit for the year ended June 30, 2004 was
$1,911,471, or 10% of revenues, as compared to $1,829,609, or 12% of revenues
for the year ended June 30, 2003.
For the year ended June 30, 2004, total operating expenses were $884,539, as
compared to $1,312,150 for the year ended June 30, 2003, a decrease of $427,611,
or approximately 32.6%.
Included in this decrease was:
For the year ended June 30, 2004, selling expenses amounted to $652,266, as
compared to $1,127,653 for the year ended June 30, 2003, a decrease of $475,387
or approximately 45%. This decrease is attributable to a material decrease in
consulting expense of approximately $438,647 to $153,382 incurred in the 2004
period compared to $592,029 in the 2003 period, and a decrease in bad debt
expense of $106,563 due to the write-off of old accounts receivable balances in
2003. This decrease was offset by increased salaries of $8,979, and increased
warehouse costs of $13,562 due to our expanding operations. We expect out
selling expenses to increase as we attempt to increase revenues and expect to
spend increased funds on adverting and promotion of our products.
For the year ended June 30, 2004, general and administrative expenses were
$232,273, as compared to $184,497 for the year ended June 30, 2003, an increase
of $47,776, or approximately 26%. The increase was attributable to increases in
office expense of $8,378, postage of $7,500, and delivery expense of $9,465, and
telephone expense of $18,376.
For the year ended June 30, 2004, other income amounted to $285,472 as compared
to other income of $315,624 for the year ended June 30, 2003. Other income for
the year ended June 30, 2004 and 2003 was associated with income recognized from
the collection of value-added taxes on certain of our products which we receive
a tax credit.
22
<page>
Interest expense was $53,623 during our fiscal year ended June 30, 2004,
compared to $41,222 for the year ended June 30, 2003 and was related to
increases in our loans payable balances.
As a result of these factors, we reported net income of $1,185,003 for the year
ended June 30, 2004, as compared to net income of $753,761 for the year ended
June 30, 2003.
Liquidity and Capital Resources
On March 31, 2005, we had cash and cash equivalents of $226,588.
In March 2005, we raised $357,500 ($321,750 net) in capital from accredited
investors under a private offering of Units. Each Unit consisted of a $50,000 8%
Secured Convertible Debenture and a Class A Common Stock Purchase Warrant to
purchase 250,000 of our Common Stock at $.40 per share for a period of five (5)
years following the closing of the offering. The investors in this offering were
also granted "piggyback" registration rights for the shares underlying the
warrants, as well as the shares reserved for issuance in the event of conversion
of the Debentures. The Units were sold to a total of 7 "accredited investors,"
as that term is defined under the Securities Act of 1933, as amended. The
Debentures are secured by property with an audited value of $227,900 and
12,250,000 shares of Common Stock owned by David Wu, our President and Chief
Executive Officer. The Debentures mature six (6) months following the closing of
the offering. Interest only is payable monthly. The investors in this offering
converted to our second offering, described below, pursuant to the original
terms included in this offering.
In July 2005, we successfully closed a second private offering of Units. We sold
an aggregate of $1,927,400 from the sale of the Units ($1,772,410 net) to a
total of 36 "accredited investors," as that term is defined under the Securities
Act of 1933, as amended, including the seven (7) investors who purchased Units
in our prior offering undertaken in March 2005, discussed above. Each Unit
consisted of a $100,000 8% Secured Convertible Promissory Note and a Class A
Common Stock Purchase Warrant to purchase 200,000 of our Common Stock at $.30
per share for a period of five (5) years expiring July 1, 2010. The Notes are
convertible into shares of our Common Stock and mature two years after issuance.
We have the option to satisfy principal and interest payments in cash or Common
Stock. The principal and interest is convertible into shares of our "registered"
Common Stock. At the sole election of the Holder, any portion of the unpaid
principal balance of the Note, together with any interest which may have accrued
through the date of such conversion, may be converted into shares of our Common
Stock. The Holder shall provide us with fifteen (15) days written notice prior
to such payment ("Holder Conversion Notice"). The Holder may elect to receive
shares of Common Stock at a conversion rate equal to a 20% discount to the
average closing bid price for the previous five days to the date of the Holder's
Conversion Notice. The Holder will have a maximum conversion price of $.55 per
share and a minimum conversion price of $.20 per share. The Holder may elect to
convert a portion or all of any unpaid interest and/or principal due to the
Holder regardless as to whether the criteria as detailed herein are satisfied.
Principal payments will begin on the first day of the fourth month following the
final closing date of the offering. The amount of principal to be paid each
month shall be 1/21 of the total amount offered plus any accrued interest. The
remaining balance of the principal value of the Notes will be due on the first
day of the twenty-fourth month following the final closing of the offering.
However, we, at our sole option, may elect to pay the current portion of
principal and/or interest in shares of our Common Stock. We are obligated to
provide the Holder with fifteen (15) days written notice prior to such payment
("Company Conversion Notice"). The Holder may receive shares of Common Stock at
23
<page>
a conversion rate equal to a 20% discount to the average closing bid price for
the previous five days to our Company Conversion Notice, subject to a $.55
ceiling. We can elect to convert the current portion of unpaid interest and/or
principal due to the Holder under the condition that certain criteria are met
which include: (a) the Common Stock received for payment is fully registered at
the time of receipt and is delivered without restriction of any kind; and (b)
the average daily trading volume as measured for the prior twenty days to
payment is as follows: (i) 100,000 shares per day for principal balance in
excess of $2,000,000; (ii) 75,000 shares per day for principal balance in excess
of $500,000 but less than $2,000,000; (iii) 50,000 shares per day for principal
balance less than $500,000; (iv) no less than 100,000 shares per day if the
remaining principal balance is in excess of $2,000,000.00; and (v) the average
daily price per share as measured from the five trading days prior payment is no
less than $0.24 per share. The stock must be delivered within 5 business days of
the first of the then current month.
Net cash used in operating activities for the nine months ended March 31, 2005,
was $217,451, as compared to net cash provided by operating activities of
$1,719,575 for the nine months ended March 31, 2004.
Net cash used in investing activities for the nine months ended March 31, 2005
was $280,017, as compared to net cash used in investing activities for the nine
months ended March 31, 2004, of $1,851,926. For the nine months ended March 31,
2005, we used cash for capital expenditures of $153,348 and the advance of funds
to related parties of $513,142 offset by cash provided by a decrease in
short-term investments of $386,473. For the nine months ended March 31, 2004, we
used cash for capital expenditures of $32,275 and advanced related parties
$1,819,651.
Net cash provided by financing activities for the nine months ended March 31,
2005 was $438,200 as compared to net cash used in financing activities for the
nine months ended March 31, 2004 of $(48,310). For the nine months ended March
31, 2005, we received proceeds of $101,450 from loans payable, net proceeds of
$321,750 from debentures payable, and contributions of $15,000. For the nine
months ended March 31, 2004, we received proceeds from loans payable of $54,347
and offset by shareholder distribution of $102,657.
On March 31, 2005, Yonglongxin borrowed money pursuant to several lines of
credit that we established with three banks. We received a loan of $387,000 from
Guangdong Development Bank (Ningbo Branch) with one year term from March 23,
2005 to March 22, 2006, with an annual interest rate of 6.264%. We received a
loan of $570,000 from Ningbo Commercial Bank (Tianyuan Branch), with two-years
term from March 21, 2005 to February 21, 2007. We received a loan of $240,000
from Ningbo Communication Bank (Xingning Branch), for a one year term ending
April 30, 2006, with an annual interest rate of 6.464%. All three loans are
renewable when they mature. We generate enough cash flow from financing and
operations for our debt services. We don't anticipate these loans will have
material impact on our liquidity. These loans are secured by inventory,
equipment and our CEO David Wu's personal assets, We are current on all payments
relating to these loans and expect to renew the loans at terms and at interest
rates comparable to our current loans.
We currently have no material commitments for capital expenditures.
While we have sufficient funds to conduct our business and operations as they
are currently undertaken, we want to build an additional manufacturing line in
order to expand our paper product production. Based upon our preliminary
estimates, this will require capital and other expenditures of approximately USD
$1 million to $2 million. We do not presently have sufficient working capital to
fund this project and we will need to raise additional working capital to
complete this project. We do not presently have any external sources of capital
and will in all likelihood raise the capital in a debt or equity offering as
outlined above. There can be no assurance that acceptable financing to fund this
project can be obtained on suitable terms, if at all. Our ability to continue to
implement our growth strategy could suffer if we are unable to raise the
additional funds on acceptable terms that will have the effect of adversely
affecting our ongoing operations and limiting our ability to increase our
revenues in the future.
Inflation
Although our operations are influenced by general economic conditions, we do not
believe that inflation had a material effect on our results of operations during
our nine month period ended March 31, 2005.
24
<page>
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these consolidated financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates based on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
25
DESCRIPTION OF BUSINESS
History
We were incorporated on February 17, 1993, under the name "LBF Corporation"
pursuant to the laws of the State of Nevada to engage in any lawful corporate
purpose. In December 1997, we filed a registration statement with the United
States Securities and Exchange Commission on Form 10-SB registering our Common
Stock under the Securities Exchange Act of 1934, as amended (the "34 Act"). Our
intention at that time was to seek to acquire assets or shares of an entity
actively engaged in business that generated revenues or provided a business
opportunity, in exchange for our securities. In effect, this filing caused us to
be a full "reporting company" under the 34 Act.
Effective April 17, 1999, we acquired certain assets owned by an unaffiliated
person, including a proposed electronic commerce web site and the right to
certain business names, including "Shopshopshopping.com," "Retailhighway.com"
and "Greatestmall on earth.com" (the "Assets"). We issued 2,500,000 shares of
our Common Stock equal to ownership of approximately 33% of our then outstanding
shares in exchange for all of the Assets. In addition, our shareholders approved
an amendment to our Articles of Incorporation changing our name to "Retail
Highway.com, Inc." As a result of this acquisition, our principal business
objective was changed to becoming a primary portal and transaction point for
online extensions of "Bricks and Mortar" ("BAM") retail stores. Because of
negative business conditions, we ceased these operations in June 2002 and began
seeking a merger or acquisition candidate. Relevant thereto, effective October
4, 2004, pursuant to an Agreement and Plan of Reorganization, we issued
24,625,000 shares of our Common Stock for the acquisition of all of the
outstanding capital stock of Dragon International Group Corp. ("Dragon"), a
Florida corporation.
Dragon was founded in June 2004. On June 30, 2004, Dragon acquired 70% ownership
interest of Ningbo Anxin International Company, Limited ("Anxin"). Anxin is
located in Ningbo, Zhejiang Province, China, 200 miles south of Shanghai, and
was established in 1997. It is a company operating in international trade as
well as a manufacturer in the integrated packaging paper industry. It holds an
ISO9000 certificate and national license to import and export. In addition to
its own operations, Anxin operates three subsidiaries, including: (i) Shanghai
Anhong Paper Co. Ltd., ("Anhong"), a trading company located in Shanghai, with
another manufacturing facility in Ningbo, whose main products are "Federal" SBS
and "Hang Kong" CCB; (ii) Ningbo Long'an Industry and Trade Co. Ltd ("Long'an"),
which has been set up to begin the business of Indonesia "Hang Kong" CCB and
holds the national license to import and export; and (iii) Jiangdong Yonglongxin
Special Paper Co., Ltd. ("Yonglongxin"), which holds an ISO9000 certificate and
has five series of products, including golden and silver paperboards, aluminum
foil paperboards, pearl paperboards, laser paperboards and mirror-like
paperboards Anxin has a distribution network covering east and central China. On
December 31, 2004, we issued 4,000,000 Common Shares for the remaining 30%
interest in Anxin.
In order to consolidate operations, we discontinued operations of Anhong in
December 2004 and discontinued operations of Long'an in January 2005. We
consolidated these operations and businesses of Anhong and Long'an into Anxin's.
Business
Our principal operations are conducted through our wholly owned subsidiary,
Ningbo Anxin International Company Limited ("Anxin"). Anxin is located in
Ningbo, Zhejiang Province, China, 200 miles south of Shanghai, and was
established in 1997. Anxin is one of China's leading manufacturers and
distributors of specialty paper products, and packaging materials. Anxin
operates one subsidiary, Jiagdong Yonglongxin Special Paper Co. LTD
("Yonglongxin"). Anxin holds an ISO9000 certificate and national license to
import and export its product line globally. Anxin's main products are "Federal"
SBS, "Hang Kong" CCB, golden and silver paperboards, aluminum foil paperboards,
pearl paperboards, laser paperboards and mirror-like paperboards. Anxin
currently has a distribution network covering east and central China.
26
<page>
We have cultivated strategic relationships with several of the world's largest
manufacturers of paper and specialty packaging products. "Federal" SBS (solid
bleached sulfate) is manufactured by International Paper Company ("IP"), a
leading paper manufacturing company. "Hang Kong" CCB (cast coated board) is
manufactured by Asia Pulp & Paper Co. Ltd. ("APP"), an Indonesian company that
is one of the largest manufacturers in Asia. Our management believes that these
two companies provide products that represent the highest quality choices for
China's domestic high-level packaging materials industry. Anxin is a primary
distributor for IP and APP in China. The products mainly aim at top-level
packaging materials. They are utilized for the packaging of cigarettes, alcohol,
gifts, cosmetics, pharmaceuticals and tea. Our primary markets are the printing
and tobacco manufacturing industries. Current clients of Anxin include Dare
Technology Co., Ltd. (a Chinese Publicly Listed Company), Shanghai Tobacco
Industry Printing Factory and Xuzhou Tobacco Industry Company. Of these
companies, none accounted for 10% or more of our gross revenues. Among all the
products manufactured and distributed by us, we believe that "Federal" SBS,
which represents approximately 15% of the total Chinese domestic market, and
"Hang Kong" CCB, which represents approximately 20% of the total domestic market
in China, have the greatest upside potential.
We believe that China represents the world's fastest growing economy.
Furthermore, while no assurances can be provided, we expect the enormous export
potential of the Chinese economy to continue its rapid growth rate due to low
manufacturing costs. Inherent with this tremendous export market of Chinese
goods is a growing packaging market to deliver these products. Anxin expects to
capture a growing share of the packaging market. We attained listing on the U.S.
capital markets to access investment capital necessary to capitalize on this
potential market opportunity. As we develop, we are eager to cultivate
opportunities to consolidate the specialty packaging market and garner a growing
share of the rapidly growing economy of the PRC.
Products
Our main products are SBS, CCB, composite paperboard (holographic paperboard,
mirror-like paperboard, aluminum foil card, pearl paperboard, transferring
paperboard). The following are the feature, function and quality standard system
of those products. SBS, CCB and composite paperboard account for approximately
41%, 39% and 20%, respectively, of our total annual revenue.
SBS: "Federal" SBS is the product of IP (International Paper Group) which is
made from pure wood pulp. It is the packaging material of high-grade cigarettes,
wine and cosmetics and is suitable for different printing equipment. SBS is also
the raw material of composite paperboard and transferring paperboard. The
products have met the quality system of IP.
Presently our market share in China of "Federal" SBS is approximately 10% of the
domestic sales, which are estimated to be approximately 80,000 tons last year.
We believe that there are two principal reasons why we have a relatively small
portion of the market, including (i) the quality of SBS made by domestic
manufacturers or joint venture manufacturers, like the brands of Zhonghua,
Hongta and Taiyang has been improved greatly and those products gradually have
substituted for imported SBS; and (ii) the market of "Federal "SBS is narrow,
mainly focused on high-grade commodities. We believe we are in a favorable
position among the domestic agents of "Federal" SBS. However, in the future we
may lose this position with the improvement of domestic SBS. Our main competitor
for SBS is Ningbo Zhuoli Corporation, who has approximately 5% to 6% of this
market.
27
<page>
Our principal customers of "Federal" SBS are the cigarette factories and the
printing factories who provide services for the cigarette factories, the
transferring factories of composite paperboard, and transfer paperboard. These
companies include Shanghai Cigarette Industry Printing Factory and Danyang
Xinglian Corporation, each of who account for over 10% of our total revenues
(10.03% and 11.16%, respectively). We believe that our relationship with these
companies is good.
We purchase the raw materials necessary for the production of SBS from
International Paper Pacific Millennium Limited, a partner of IP in Asia, by
issuing a Letter of Credit. The annual volume is about 8,000 tons. We are the
main seller of International Paper Pacific Millennium Limited in Asia.
CCB: "Hang Kong" CCB is the product of APP, which comes from Indonesia. The
product is whiter than other paperboard and is the most shining and smooth among
many kinds of paperboard. CCB is the main outside packaging material of boxes of
cigarettes, cosmetics, wine and others. The product has met the quality standard
of APP. We have been the agent of CCB for 7 years and have established what we
consider a long-term and friendly cooperative relationship with APP. Annual
domestic sales of Anxin in CCB business are more than 5,000 tons, about 15% of
APP's annual output and 30% to 40% of the annual sales amount of APP in mainland
China. Correspondingly, the demand for CCB, that is the packaging material for
premium cigarettes, is also expected to increase gradually. In addition, in the
Chinese domestic market there is only one brand of CCB, "Hang Kong" CCB. The
quality of "Hang Kong" CCB has been accepted by the market and the products have
a good reputation. We believe that new brands of CCB cannot be expected to be
accepted by the market and as a result, our position as a leader is not expected
to change in the foreseeable future. Our main competitor in this market segment
is Ningbo Zhuoli Corporation, whose annual sales are about 3,000 tons.
Our principal customers of "Hang Kong" CCB are located mainly in eastern China
and they are also mainly the cigarette factories, the printing factories
providing service for the cigarette factories and the transferring factories of
composite paperboard and transfer paperboard. Recently, we have begun to develop
the market in Southern China and Yunnan province.
We purchase the raw materials necessary for the production of CCB from APP by
issuing in-sight Letters of Credit at the price of CIF Shanghai (cost +
insurance + freight). We are the main distributor of APP in China with the
annual amount about 5,000 tons.
Composite paperboard: Composite paperboard is made from SBS and CCB. After
composition and coating, SBS and CCB become the composition paperboard that is
the high-grade packaging material for high-grade cigarettes, wine and cosmetics.
It is suitable for different printing equipment. We have operated this segment
of our business for seven years since our inception and our products have been
accepted by the market and have a good reputation. We expect that, with the
improvement of domestic cigarette grade, the quality requirements for the
composite paperboard will be higher and demand will increase. Current market
segments are not available, but we believe we are in the middle of the market.
However, because of the aging of our equipment and the increase of the quality
requirements from the clients, we may lose our current market position if our
equipment and technology is not updated. We intend to use a large portion of the
proceeds we received from our recently completed private offering to upgrade
these areas. We have two principal competitors in this market, including
Xinglian Aluminum Limited Corporation, which is the subsidiary of Jiangsu Dare
Group. The revenue of Xinglian is approximate $250 million. The other competitor
is Shanghai Luxin Packaging Material Corporation, with revenues more than $100
million. The main clients are printing factories (packaging materials for
28
<page>
cigarette, wine and cosmetics). Our principal customers in this segment include
Jiangsu Dare Danyang Printing Corporation, Hubei Jinsanxia Printing Limited
Corporation, Xuzhou Huayi Colorful Printing Limited Corporation and Ningbo
Tiancheng Printing Limited Corporation. None of them accounts for 10% or more of
our annual revenues.
Our principal raw material suppliers for Composite Paperboard are International
Paper Pacific Millennium Limited, APP and Taiwan Guangqun. We have had long term
relationships with all of these companies. Aluminum membrane plating material is
provided by Taiwan Guangqun.
Our raw materials for SBS and CCB are stored in Shanghai by Shanghai Zhenxin
Storage Co. Ltd. The cost of storage is calculated based on the daily volume,
plus the cost of unfolding the boxes, packing, moving into the warehouse and
moving out of the warehouse. Zhenxin has purchased insurance for the goods kept
by it. We store the raw material of composite paperboard in our own warehouse.
Sales and Marketing
Since inception, we have sold our products directly to the end user through the
use of salespersons, who visit the clients directly and then sign the supplying
agreement with the clients. Our sales people are paid a salary and are not paid
on commission. We have also advertised supply information in trade publications
and magazines. We are currently attempting to increase our sales of SBS by
developing new clients, which efforts mainly focus on the market of South China.
We also hope to expand ours business by increasing the domestic Zhonghua SBS and
water-proved art paper, a new product.
We develop our clients for CCB through 4 channels, including media promoting,
personal or corporation relationship, advertising in the newspaper and trade
publications, and by attending trade conferences. We market our composite
paperboard in a similar manner. In addition, because Yonglongxing is a welfare
factory, it enjoys the low corporate tax policy. We receive rebate from
value-added taxes and we don't pay corporate income tax. Thus we can price
competitively.
In addition, recently we have begun selling our products through our website
www.drgg.net and www.chinaalibaba.com.
SBS and CCB are packaged in our own factory and shipped by vessel and
transferred by train or truck after arriving at the destination port. Composite
paperboard is packaged by brown paper plus heating contracting membrane and it
is transported by truck. Trucking is provided by Shanghai Hongyuan Logistics
Co., Ltd. and the cost is calculated according to the tons of freight. The
logistics company bears the risk during the transportation.
29
<page>
Manufacturing
The following is the manufacturing process of composite paperboard, including
holographic paperboard, mirror-like paperboard, aluminum foil paperboard, pearl
paperboard and transferring paperboard.
The manufacturing process of composite paperboard: Membrane, gelatinizing,
compounded with bottom paper, coating, and drying, cooling, disparting, finished
products.
The manufacturing process of transferring paperboard: Transferring membrane
gelatinizing, compounded with bottom paper, drying, cooling, moving away the
membrane, coating, drying, cooling, disparting, finished products.
All the manufacturing processes are automatically completed in a production line
by machines. Only our workers are needed for each shift per product line. In the
transferring paperboard manufacturing, the critical of high quality is the
formula of the coating, skills of machine adjustment and the software.
Acquisitions
In July 2005, we acquired 60% interest in Hangzhou Yongxin Paper Company,
Limited. ("Yongxin"). Yongxin, established in 2003, is located in Hangzhou of
Zhejiang Province, China, and manufactures and sells high-end cigarette packing
material and was a direct competitor of ours. We issued an aggregate of
1,000,000 shares of our Common Stock in consideration therefor. We plan to
consolidate Yongxin's operations with our own subsidiary in Ningbo. All
operations will be located in the new manufacturing facilities in Ningbo. We
acquired Yongxin as part of our ongoing desire to consolidate our interests in
our industry. Yongxin generated approximately $1.25 million in revenues in 2004
and has experienced management in the paper packaging industry.
In August 2005, we acquired the Xianyang Naite Research & Development Center,
located in Ningbo, China, which was created to improve production efficiencies
in the specialty packaging industry. We paid $25,000 in cash and issued 500,000
shares of our Common Stock in consideration for this acquisition. The new
Research & Development Center is expected to reduce time to commercialization
for new products substantially and allow us to leverage innovative paper
transferring techniques developed at the Center, thereby enhancing our position
as one of China's leading specialty paper companies, as well as providing a
competitive advantage in the industry. Current modes of paper transfer in the
Chinese specialty paper packaging segment are inferior to global standards. The
quality of the products cannot meet the rapidly increasing requirements of
consumers.
In June 2005, we reached an agreement to buy a manufacturing facility from
Ningbo Xinyi Company, Limited ("Xinyi"). Xinyi will transfer ownership of 23,345
square meters of property, including a recently completed 8,500 square meter
manufacturing facility in exchange for an outstanding receivable due to Dragon.
The receivable of approximately $2 million will be exchanged for the
manufacturing facility and land valued at approximately $2.5 million. This new
facility allows us to upgrade our manufacturing capabilities, providing a
significant amount of land to expand on in the future. Furthermore, the
transaction is expected to reduce costs, as we will eliminate the leasing costs
on our current facility. We intend on moving our current plant into the new
facility, and consolidating the new R&D Center and manufacturing facility under
one roof.
In May 2005, we signed a letter of intent to acquire a 51% ownership interest of
Shanghai Jinkui Packing Material Company, Limited ("Jinkui"). Jinkui, founded in
2002, is a manufacturer of packing materials for pharmaceutical products. In
2003, Jinkui passed Good Manufacturing Practice (GMP) with the Chinese State
30
<page>
Food and Drug Administration and ISO9000 Quality Assurance System. The
pharmaceutical packaging industry in China was estimated at $2 billion in 2004.
This transaction allows us to diversify our line of products and expand into a
new and significant market sector. As of the date of this Prospectus, no
definitive terms have been reached on this transaction but negotiations are
continuing.
We anticipate continuing our acquisition efforts, if and when we identify an
entity we believe has synergy with our existing businesses and acceptable terms
can be reached.
Patents and Trademarks
Although the process for protecting patents in the PRC varies greatly from that
of the US, there has been a recent increase in governmental protection of
intellectual property rights that coincided with the development of capitalism
in China. We have taken all steps necessary to register the brand name
"Yonglongxin". We have no other patents or trademarks.
Industry Background
The global paper market remains a growth industry. China represents a
significant opportunity due the lack of supply and rapidly growing demand
(Crouching fiber, paper dragon: China and the global paper market. Metafore
2000. www.metafore.org.). From 1991 to 2002, the consumption of paper and paper
board grew at 8.94% and 9.57% annually in China, respectively. As of the date of
this Prospectus, the production and consumption volume of paper and paper board
in China is only second to the United States in the world. Due to the growing
demand and support from national policy, this industry has been expanding since
2002 (Economic Transition and Demand Pattern: Evidence from China's Paper and
Paperboard Industry. By Haizheng Li, Jifeng Luo, Patrick McCarthy Focus on the
Future, UBS Global Paper and Forest Products Conference. Bjorn Hagglund. 23
September 04).
National imports to the PRC account for approximately 15% of the total
consumption in China.(Positioning Canada in China's Paper Chase, Asia Pacific
Bulletin. 27 February'04) Currently the supply structure of the paper industry
in China is insufficient as compared with the national demand. Approximately 80%
of domestic production capacity is middle- and low-end paper. (Chinese Dragon
Keeps On Roaring, Mary Murphy. 1 Feb'05. www.packaging-online.com) This segment
of the national paper industry experiences significant competition which
represent low margins to the manufacturer. However, high quality application of
paper products depend on imported products. Our focus is to capitalize on this
dearth of supply. Our intent is to capture a share of the national market by
manufacturing a premium quality product. There is a supply gap in the high-end
paper market, causing high margins and relatively little competition. We intend
to expand upon our tradition of customer satisfaction in the high quality end of
the market; as this represents an improved profit margin.
Analysts forecast that the China economy will enjoy significant growth through
2005 and the foreseeable future. The demand for high quality paper products
should witness significant growth. Management expects the market demand for
paper for cigarette packaging products to increase consistently. We forecast a
10% to 15% annual growth in cigarette packing supplies. Holographic film should
experience a 15% to 20% growth rate due to a lack of replacement products.
Dragon is a primary participant in this segment of the market and, while no
assurances can be provided, we expect to obtain a growing share of the market in
the near future.
31
<page>
Competition
Our industry is highly competitive and includes both small firms and large
diversified firms which have the financial, technical and marketing capabilities
to compete on a national level. The industry is not dominated by any one firm.
Our principal competitor for our SBS and CCB products is Ningbo Zhouli
Corporation, who generates approximately 4500 tons and 3000 tons annually,
respectively. For our composite paperboard product, there are three principal
competitors, including Xinglian Aluminum Foil Limited Corporation, which as a
subsidiary of Jiangsu Dare Group. Xinglian generates approximately $145,000 in
annual revenues from this product. Nanjing Gold Foil Corporation generates
approximately $302,000 in annual revenues and Shanghai Lvxin Packaging
Corporation generates approximately $121,000 in revenues from this product.
We believe that we are a leading participant in our industries. However, a large
number of established and well-financed entities are active in our industry.
Nearly all such entities have financial resources, technical expertise and
managerial capabilities similar to ours and, consequently, we expect that our
industry will remain very competitive in the foreseeable future.
Government Regulations
Our industry is not subject to any specific regulations. We believe that our
operations are conducted in compliance with all of the federal, state and local
statutes and regulations that affect our operations.
Employees
As of the date of this Prospectus, our wholly owned subsidiary, Yonglongxing,
employs 46 persons, including 3 in sales, 7 in management and administration,
with the balance working on the production line. The total number of Anxin
employees is 14, including 5 in sales and marketing and 9 in management. None of
our employees are members of a union. We consider our employee labor relations
to be good.
Property
Our headquarters are located at Bldg 14, Suite A09, International Trading
Center, 29 Dongdu Road, Ningbo, China 315000. This space consists of
approximately 540 square feet of office space and is leased through December 31,
2008, at a monthly rental rate of $125. Anxin's operations are located at this
location as well. The operations of Yonglongxing are located in Fuming County
Zhang'ai Village Economic Cooperation Group, which consists of approximately
2950 meters (300,000 square feet), which location is subject to a lease
agreement that expires December 31, 2008 at an annual rent of $34,525 (280,000
RMB). This space consists of approximately 60,000 square feet of office space
32
<page>
and 240,000 square feet of manufacturing. We believe that these locations will
meet our requirements for the foreseeable future. We also believe our leases are
on terms competitive with similar locations in the respective areas.
In May 2005, we reached an agreement to buy a manufacturing facility from Ningbo
Xinyi Company, Limited. Ningbo Xinyi Company, Limited transferred ownership of
23,345 square meters of property, including a recently completed 8,500 square
meter manufacturing facility in exchange for an outstanding account receivable.
The land is valued at approximately $2.5 million. See "Certain Relationships and
Related Trasnactions."
This new facility allows us to upgrade our manufacturing capabilities and
provides a significant amount of land to expand on in the future. Furthermore,
the transaction is expected to reduce costs, as we will eliminate the leasing
costs on our current facility. We intend on moving our current plant into the
new facility, and consolidating the new R&D Center and manufacturing facility
under one roof in the near future.
Legal Proceedings
We are not a party to, nor are we aware of any pending legal proceeding.
Management believes there is no litigation threatened in which we face potential
loss or exposure or which will materially affect shareholders' equity or our
business or financial condition upon completion of this offering.
33
MANAGEMENT
Executive Officers, Directors and Key Personnel
The following table sets forth information regarding our executive officers and
directors:
Name Age Position
David Wu 35 Chief Executive Officer, President &
Chairman of the Board
Xuejun Chen 35 Vice President & Director
Xiali Gan 39 Chief Financial Officer & Director
Orson Zhang 38 Secretary
Our Articles of Incorporation and Bylaws provide that the number of members of
our Board of Directors shall be not less than one (1) and not more than nine (9)
members. Our current number of directors is three (3). Directors are elected by
the shareholders at the annual meeting and serve until their successors are duly
elected and qualified. Directors are elected for a term of one (1) year. All our
officers serve at the discretion of our Board of Directors.
The following is a biographical summary of the business experience of our
directors and executive officers:
Resumes:
David Wu became our Chairman of the Board, Chief Executive Officer and
President on October 4, 2004. Since August 1997, he has also been Chief
Executive Officer and Chairman of Ningbo Anxin International Co. Ltd. and has
held the same positions with Ningbo City Jiangdong Yonglongxin Special Paper Co.
Ltd., in November 1999, each of which is a wholly owned subsidiary. In 1994, he
has became the first distributor of "Federal" SBS in the Chinese market and
initiated operations in China. He established Ningbo Daxie Development Zone
Loyalty Trade Corporation in 1996, which focuses its business on the packing
materials industry (the main product is SBS). He received his B.S. from Zhejiang
University in 1992. He devotes substantially all of his business time to our
Company.
Xuejun Chen became our Vice President and a director on October 4, 2004. He
first entered the packing materials industry in 1994 as a salesman for "Federal"
SBS. In June 1999, he became the Vice General Manager of Ningbo Anxin
International Co. Ltd, our wholly owned subsidiary and added "Hang Kong" CCB as
an additional product. He devotes substantially all of his business time to our
Company.
34
<page>
Xiali Gan became our Chief Financial Officer on October 4, 2004. From September
1986 through June 1993, she was the financial manager of Ningbo Development Zone
Import and Export Corporation. From June 1993 through November 1997, she was the
vice manager of Ningbo Bonded Area International Trade Corporation. In December
1997, she was employed as the Accounting Manager of Ningbo Anxin International
Co. Ltd. and in November 1999 was appointed to the similar position with Ningbo
City Jiangdong Youglongxin Special Paper Company, Ltd. She graduated from Ningbo
Senior College with a degree in accounting in 1986. She devotes substantially
all of her business time to our Company.
Orson Zhang became our Secretary on October 4, 2004. From 1995 to 1996, he was
the vice director of Huaiyin Light Industrial Machinery Factory. In 1997, he
became the Chairman of the Board and General Manager of Jiangsu Xinshen Food
Co., Ltd., Jiangsu Provence, China. In July 1999, he became the standing Vice
General Manager of Jiangsu DARE Xinlian Foil Goods Co., Ltd. In February 2001,
he was the QA/QC Manager of SH International Paper Pacific Millennium Cup Co.,
Ltd., Shanghai, China. From February 2003 through October 2004, he was the Vice
General Manager of SH DIJI Investment Management Co., Ltd., Shanghai, China. He
graduated from Northwestern Light Industrial College in 1988, and majored in
Autocontrol Technology. He also received an MBA degree from Southeast University
in 2001. He devotes substantially all of his business time to our Company.
Board Committees
We do not currently have any committees of the Board of Directors.
Family Relationships
There is no family relationship between any director or executive officer of
Dragon and any other director or executive officer of Dragon.
EXECUTIVE COMPENSATION
Remuneration
The following table reflects all forms of compensation for services to
us for the fiscal years ended June 30, 2004 and 2003, of our Chief Executive
Officer. No other member of our management receives aggregate compensation of
$100,000 or more.
35
<page>
SUMMARY COMPENSATION TABLE
<table>
<caption>
Long Term Compensation
-----------------------
Annual Compensation Awards Payouts
------------------------------- ----------------------- -----------------
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Annual Restricted Securities All Other
Name and Compen- Stock Underlying LTIP Compen
Principal Salary Bonus sation Award(s) Options/SARs Payouts -sation
Position Year ($) ($) ($) ($) (#) ($) ($)
-------- ---- ------ ---- --- --- --- --- ---
David Wu, CEO, 2004 $14,508 $-0- $0 $0 - $ 0 $0
President & 2003 $ 5,326 $-0- $0 $0 - $ 0 $0
Director
</table>
We maintain a policy whereby our directors may be compensated for out of pocket
expenses incurred by each of them in the performance of their relevant duties.
Compensation of Directors
Our directors do not currently and have never received any compensation for
serving as directors. However, we expect to adopt a plan of reasonable
compensation for our directors. We intend to reimburse all of our non-employee
directors for all direct expenses incurred by them in attending a board of
director meeting and any committee meeting on which they serve.
Employment Agreements
We currently do not have any employment agreements with any of our executive
officers.
Stock Plan
In June 2005, our Board of Directors and a majority of our shareholders approved
by consent our "2005 Stock Option Plan" (the "Plan"). This Plan provides for the
grant of incentive and non-qualified stock options that may be issued to key
employees, non-employee directors, independent contractors and others and we
have reserved 5,000,000 shares of our Common Stock for issuance under the Plan.
The options are to be granted for a term of not more than five (5) years and
other terms and conditions that are usual and customary. As of the date of this
prospectus, no options to purchase shares have been granted.
The purpose of the Plan is to aid us in retaining the services of executive and
key employees and in attracting new management personnel when needed for future
operations and growth, and to offer such personnel additional incentive to put
forth maximum efforts for the success of our business and opportunities to
obtain or increase proprietary interest and, thereby, to have an opportunity to
share in our success.
36
<page>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Party Transactions
At March 31, 2005, we had a net receivable from several affiliated entities
owned by David Wu, our Chief Executive Officer and President, amounting to
$2,559,040. These advances were payable on demand and personally guaranteed by
Mr. Wu. However, in May 2005, we reached an agreement to buy a manufacturing
facility from Ningbo Xinyi Company, Limited. Ningbo Xinyi Company, Limited
transferred ownership of 23,345 square meters of property, including a recently
completed 8,500 square meter manufacturing facility in exchange for this
outstanding receivable. The land is valued at approximately $2.5 million.
This new facility allows us to upgrade our manufacturing capabilities and
provides a significant amount of land to expand on in the future. Furthermore,
the transaction is expected to reduce costs, as we will eliminate the leasing
costs on our current facility. We intend on moving our current plant into the
new facility, consolidating the new R&D Center and manufacturing facility under
one roof in the near future.
Our former President, from time to time, provided advances to us for operating
expenses. These advances were short-term in nature and non-interest bearing. The
amount due to our former President at March 31, 2005, was $18,345 and is
included in accrued expenses on our accompanying balance sheet. See "Financial
Statements."
In September 2002, our former President loaned us $10,000 to pay operating
expenses pursuant to a note. This note is convertible into 1,333,333 shares of
our Common Stock at a conversion price of $0.0075 per share and was due on the
earlier of (i) our successfully consummating a merger or acquisition; or (ii)
one year from the date of the note. When we closed our merger with Dragon
International Group Corp., the term of this note was converted into a demand
note. Interest accrues at the rate of 3% per annum and aggregated $532 through
March 31, 2005. Additionally, in April 2004, our former President entered into a
convertible note agreement with us to convert $31,124 of advances to pay
operating expenses into to a convertible note. This note is convertible into
4,149,867 shares of our Common Stock at a conversion price of $0.0075 per share
and is due on the earlier of (i) our successfully consummating a merger or
acquisition; or (ii) one year from the date of the note. When we closed our
merger with Dragon International Group Corp., the term of this note was
converted into a demand note. Interest accrues at the rate of 3% per annum and
aggregated $558 through March 31, 2005. During the nine months ended March 31,
2005, we issued 4,136,789 shares of Common Stock in connection with the
conversion of $31,026 of this debt. At March 31, 2005, convertible notes payable
outstanding amounted to $10,188, which is convertible into 1,358,400 shares of
our Common Stock.
37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The table below lists the beneficial ownership of our voting securities as of
the date of this Prospectus by each person known by us to be the beneficial
owner of more than 5% of such securities, as well as by all our directors and
officers. Unless otherwise indicated, the shareholders listed possess sole
voting and investment power with respect to the shares shown.
<table>
<s> <c> <c> <c>
Name and Address Amount and Nature of Percent of
Title of Class of Beneficial Owner Beneficial Ownership Class
Common David Wu (1) 12,285,000 31.4%
Bldg 14
Suite A09, International Trading Center,
29 Dongdu Road
Ningbo, China 315000
Common Shi Shun Li 7,150,000 18.3%
Bldg 14
Suite A09, International Trading Center,
29 Dongdu Road
Ningbo, China 315000
Common Zhou Ying 4,200,000 10.7%
Bldg 14
Suite A09, International Trading Center,
29 Dongdu Road
Ningbo, China 315000
Common Wu Cai Yi 3,150,000 8%
Bldg 14
Suite A09, International Trading Center,
29 Dongdu Road
Ningbo, China 315000
Common All Officers and Directors as a Group (4 12,285,000 31.4%
persons)
</table>
- ---------------------------------
(1) Officer and director of our Company.
38
DESCRIPTION OF SECURITIES
The stock being registered under this Form SB-2 is Common Stock of Dragon
International Group Corp., having a par value of $0.001 per share. The total
number of shares of Common Stock that we have authority to issue is two hundred
million (200,000,000) shares, par value of $0.001 per share. All of the Common
Stock authorized under our Articles of Incorporation has equal voting rights and
powers without restrictions in preference. The holder of any of our Common Stock
shall possess voting power for the election of directors and for all other
purposes, subject to such limitations as may be imposed by law and by any
provision of the Articles of Incorporation in the exercise of their voting
power. The holders of our Common Stock shall have neither pre-emption nor
dividend rights pursuant to our Articles of Incorporation, as amended.
The Articles of Incorporation also authorize twenty-five million shares of
Preferred Stock, par value of $0.001 per share, none of which has been issued,
and which is not part of this Prospectus. The Preferred Stock is entitled to
preference over the Common Stock with respect to the distribution of assets of
Dragon International Group Corp. in the event of liquidation, dissolution, or
winding-up of Dragon International Group Corp., whether voluntarily or
involuntarily, or in the event of the any other distribution of assets of Dragon
International Group Corp. among its stockholders for the purposes of winding-up
affairs. The authorized but unissued shares of Preferred Stock may be divided
into and issued in designated series from time to time by one or more
resolutions adopted by the Board of Directors. The directors, in their sole
discretion, have the power to determine the relative powers, preferences, and
right of each series of preferred stock.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, subject to certain limited exceptions, eliminate
the personal liability of a director to our Company or our shareholders for
monetary damage for any breach of duty as a director. There is no elimination of
liability for (i) any breach of a duty of loyalty, (ii) an act or omission which
includes intentional misconduct or knowing violation of law, or (iii) any
transaction from which a director derives an improper personal benefit. In
addition, if at any time the Nevada law is amended to authorize further
elimination or limitation of the personal liability of a director, then the
liability of each director shall be eliminated or limited to the fullest extent
permitted by such provisions, as so amended, without further action by the
shareholders, unless the provisions of the Nevada statute require such action.
Insofar as indemnification for liability arising under the Securities Act may be
permitted to officers and directors of Dragon pursuant to the foregoing
provisions, we have been told that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is therefore
unenforceable.
39
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares of
Common Stock by the Selling Stockholders. We will not receive any proceeds from
the resale of the Common Stock by the Selling Stockholders. We will receive
proceeds from the exercise of the Warrants. Assuming all the shares registered
below are sold by the Selling Stockholders, none of the Selling Stockholders
will continue to own any shares of our Common Stock.
The following table also sets forth the name of each person who is offering the
resale of shares of Common Stock by this Prospectus, the number of shares of
Common Stock beneficially owned by each person, the number of shares of Common
Stock that may be sold in this Offering and the number of shares of Common Stock
each person will own after the Offering, assuming they sell all of the shares
offered.
This Prospectus, as it may be amended or supplemented from time to time, is
deemed to relate to the 15,779,300 shares of Common Stock that, in the
aggregate, underlie our outstanding Warrants and Notes that may be sold by the
holders thereof upon exercise of their Warrants or conversion of their Notes, as
applicable. Each investor has executed and delivered to us a confirmation that
they are each an "accredited investor," as that term is defined under the
Securities Act of 1934, as amended. The Selling Stockholders and the number of
shares of our Common Stock underlying their Warrants and Notes are as follows:
# of Shares
# of Common Shares Underlying
Name Convertible from Notes Warrants (1)
CE Revocabale Trust Cal Eisenberg Trustee, 125,000 50,000
Norman Jacobs 250,000 100,000
Phillip Schiller 125,000 50,000
Leonard Schiller 125,000 50,000
Douglas Wertheimer 125,000 50,000
Edward Messreni 125,000 50,000
Howard M. Schoor Qualified Personal Residence Trust 250,000 100,000
Frances Schoor Qualified Personal Residence Trust 250,000 100,000
Jo-Bar Enterprises LLC 500,000 200,000
Dan Lee 500,000 200,000
Louis Sudler 500,000 200,000
Richard L. Bazelon & Eileen A. Bazelon 500,000 200,000
Pooja Patil 125,000 50,000
Jayakumar & Purnima Patil 250,000 100,000
Jeffrey & Judith Miller 125,000 50,000
Nunley Investments, LLC 500,000 200,000
George Anna Gleason 125,000 50,000
Austin Gleason Pension Plan 250,000 100,000
W.M Huse M.D. & Margaret R. Huse M.D. 250,000 100,000
Donald R. Smith 500,000 200,000
Norman H. Cohen & Stephanie Randall Partnership 125,000 50,000
Michel Janis and Rosamond Janis 250,000 100,000
John Zale 125,000 50,000
Richard David 750,000 300,000
Nite Capital, LP 500,000 200,000
Linda Van Le 124,500 49,800
James Adametz 125,000 50,000
Khala Nicolas 250,000 100,000
Andrew I. Telsey 100,000 40,000
Edge Capital Partners, Ltd. 250,000 350,000 (2)
Victor Novogrodsky 312,500 437,500 (3)
40
<page>
Elicia David 375,000 525,000 (4)
Austin Gleason 125,000 175,000 (5)
Rasen Trust 125,000 175,000 (5)
Henry G. Herzing 1999 Trust 350,000 490,000 (6)
The Mulkey II Limited Partnership 250,000 350,000 (7)
Leonard Schiller - 25,000 (8)
Richard Galterio - 109,200 (8)
Vincent Labarabara - 110,000 (8)
Peter Fulton - 36,000 (8)
Mario Marsillo - 76,000 (8)
Skyebanc, Inc. - 143,800 (9)
----------- ---------
Totals 9,637,000 6,142,300
- -----------------------
(1) Unless otherwise indicated, these Warrants are exercisable at $.30 per
Warrant.
(2) Includes 100,000 Warrants exercisable at $.30 per Warrant and 250,000
Warrants exercisable at $.40 per Warrant.
(3) Includes 125,000 Warrants exercisable at $.30 per Warrant and 312,500
Warrants exercisable at $.40 per Warrant.
(4) Includes 150,000 Warrants exercisable at $.30 per Warrant and 375,000
Warrants exercisable at $.40 per Warrant.
(5) Includes 50,000 Warrants exercisable at $.30 per Warrant and 125,000
Warrants exercisable at $.40 per Warrant.
(6) Includes 140,000 Warrants exercisable at $.30 per Warrant and 350,000
Warrants exercisable at $.40 per Warrant.
(7) Includes 100,000 Warrants exercisable at $.30 per Warrant and 250,000
Warrants exercisable at $.40 per warrant.
41
<page>
(8) Assignee of Skyebanc, Inc. These Warrants are exercisable at $.01 per
Warrant.
(9) These Warrants are exercisable at $.01 per Warrant.
PLAN OF DISTRIBUTION
Each Selling Stockholder of the Common Stock of Dragon International Group
Corporation, a Nevada corporation, and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. A Selling Stockholder may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the broker-
dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-
dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales;
o broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this Prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved. One
of the Selling Stockholders, Skyebanc, Inc. ("Skyebanc"), is a registered broker
dealer and an NASD member firm. Skyebanc served as placement agent in our
recently completed private placement offering and received, in addition to
commissions, warrants to purchase an aggregate of 500,000 shares of our Common
Stock with an exercise price of $0.01 per share in connection with our July 2005
offering. The registration statement of which this Prospectus forms a part
includes the shares underlying the warrants held by Skyebanc.
42
<page>
In connection with the sale of our Common Stock or interests therein, the
Selling Stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
Common Stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of our Common Stock short and deliver these
securities to close out their short positions, or loan or pledge the Common
Stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this Prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
Prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Stockholder has informed the
Company that it does not have any agreement or understanding, directly or
indirectly, with any person to distribute the Common Stock; however, they may
elect to sell their shares through Skyebanc as described below. As a broker
dealer who is also a Selling Stockholder, Skyebanc may be deemed an underwriter
with respect to the shares it may sell pursuant to this Prospectus.
In order to comply with the securities laws of some states, the Selling
Stockholders must sell the shares in those states only through registered or
licensed brokers or dealers. In addition, in some states the Selling
Stockholders must sell the shares only if we have registered or qualified those
shares for sale in the applicable state or an exemption from the registration or
qualification requirement is available and the selling shareholder complies with
the exemption.
Dragon International Group Corp. is required to pay certain fees and
expenses incurred by us incident to the registration of the shares. Dragon
International Group Corp. has agreed to indemnify the Selling Stockholders
against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by this
Prospectus that qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this Prospectus. Each Selling
Stockholder has advised us that they have not entered into any agreements,
understandings or arrangements with any underwriter or broker-dealer regarding
the sale of the resale shares. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares by the Selling
Stockholders.
Skyebanc has indicated to us its willingness to act as selling agent on behalf
of the selling shareholders named in the Prospectus under "SELLING STOCKHOLDERS"
that purchased our privately placed securities. All shares sold, if any, on
behalf of Selling Stockholders by Skyebanc would be in transactions executed by
Skyebanc on an agency basis and commissions charged to its customers in
connection with each transaction shall not exceed a maximum of 4.5% of the gross
proceeds. Skyebanc does not have an underwriting agreement with us and/or the
Selling Stockholders and no Selling Stockholders are required to execute
transactions through Skyebanc. In the event that there are other broker dealer
firms involved in the distribution of securities on behalf of Selling
Stockholders, the maximum commission or discount to be received will not be
greater than 8% of the sale of any securities which were registered pursuant to
this Prospectus under SEC Rule 415.
43
<page>
NASD Notice to Members 88-101 states that in the event a Selling Stockholder
intends to sell any of the shares registered for resale in this Prospectus
through a member of the NASD participating in a distribution of our securities,
such member is responsible for insuring that a timely filing is first made with
the Corporate Finance Department of the NASD and disclosing to the NASD the
following:
o it intends to take possession of the registered Securities or to
facilitate the transfer of such certificates;
o the complete details of how the Selling Stockholders shares are and
will be held, including location of the particular
accounts;
o whether the member firm or any direct or indirect affiliates thereof
have entered into, will facilitate or otherwise participate in any
type of payment transaction with the Selling Stockholders, including
details regarding any such transactions; and
o in the event any of the Securities offered by the Selling
Stockholders are sold, transferred, assigned or hypothecated by
Selling Stockholder in a transaction that directly or indirectly
involves a member firm of the NASD or any affiliates thereof, that
prior to or at the time of said transaction the member firm will
timely file all relevant documents with respect to such
transaction(s) with the Corporate Finance Department of NASD for
review.
No persons associated with us or the Selling Stockholders may participate in the
distribution of the shares to be offered by Selling Stockholders unless they
meet the safe harbor provisions of the SEC Rule 3a4-1 promulgated under the
Securities Exchange Act of 1934 with respect to exemption from registration as a
broker/dealer.
We agreed to keep this Prospectus effective until the earlier of (i) the date on
which the shares may be resold by the Selling Stockholders without registration
and without regard to any volume limitations by reason of Rule 144(e) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to the Prospectus or Rule 144 under the Securities Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to our Common Stock for a period of two
business days prior to the commencement of the distribution. In addition, the
Selling Stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations there under, including Regulation M, which may
limit the timing of purchases and sales of shares of our Common Stock by the
Selling Stockholders or any other person. We will make copies of this Prospectus
available to the Selling Stockholders and have informed them of the need to
deliver a copy of this Prospectus to each purchaser at or prior to the time of
the sale.
Any Selling Stockholder may from time to time pledge or grant a security
interest in some or all of the shares of Common Stock or Warrants owned by them
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of Common Stock from
time to time under this Prospectus, or under an amendment to this Prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933
amending the list of Selling Stockholders to include the pledgee, transferee or
other successors in interest as Selling Stockholders under this Prospectus.
44
<page>
The Selling Stockholders also may transfer the shares of Common Stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this Prospectus.
At the time a Selling Stockholder makes a particular offer of shares we will, if
required under applicable rules and regulations, distribute a Prospectus
supplement that will set forth:
o the number of shares that the Selling Stockholder is offering;
o the terms of the offering, including the name of any underwriter,
dealer or agent;
o the purchase price paid by any underwriter;
o any discount, commission and other underwriter compensation;
o discount, commission or concession allowed or reallowed or paid to
any dealer; and o the proposed selling price to the public.
We will not receive any proceeds from sales of any shares by the Selling
Stockholders.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Effective October 20, 2004, the firm of Stark Winter Schenkein & Co., LLP
("SWS"), our independent accountant during the period from August 29, 2002 to
October 20, 2004, was dismissed. Our Board of Directors authorized this action.
SWS had audited our financial statements for our fiscal years ended June 30,
2004, 2003 and 2002.
In connection with the audit of our financial statements as of June 30, 2004,
2003 and 2002 and through the date of this Report, there were no disagreements
with SWS on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope of procedures, which disagreements, if
not resolved to the satisfaction of SWS, would have caused them to make
reference in connection with its reports to the subject matter of the
disagreements.
The audit report of SWS on our financial statements as of June 30, 2004 and
2003, did not contain an adverse opinion or disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope, or accounting principles,
except as follows:
SWS's report contained a separate paragraph stating "the accompanying financial
statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the financial statements, the Company has
suffered recurring losses from operations and has working capital and
stockholders' deficits. These factors raise substantial doubt about the
Company's ability to continue as a going concern.. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty."
45
<page>
Effective November 8, 2004, we retained the firm of Sherb & Co, LLP ("Sherb") to
audit our financial statement for our fiscal year ending June 30, 2005, and
include such report as part of our annual report on Form 10-KSB for our fiscal
year ending June 30, 2005. This change in independent accountants was approved
by our Board of Directors. During the fiscal years ended June 30, 2004 and 2003
and the subsequent interim periods through October 20, 2004, we did not consult
with Sherb regarding the application of accounting principles to a specified
transaction, the type of audit opinion that might be rendered on our financial
statements or any other matters or reportable events.
LEGAL MATTERS
Andrew I. Telsey, P.C., Englewood, Colorado will issue an opinion with respect
to the validity of the shares of Common Stock being offered hereby. Andrew I.
Telsey, sole shareholder of Andrew I. Telsey, P.C., owns 200,000 shares of our
Common Stock, a convertible note convertible into 370,000 shares of our Common
Stock, a $20,000 convertible note which he purchased in our recent private
offering, and 40,000 common stock purchase warrants exercisable at $.30 per
warrant.
EXPERTS
The financial statements as of June 30, 2004 and for the year ended June 30,
2004 and 2003 are incorporated in this Prospectus, to the extent and for the
periods indicated in their reports, have been audited by Sherb & Co. LLP,
Certified Public Accountants, and are included herein in reliance upon the
authority of this firms as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act of
1933, as amended, relating to the shares of Common Stock being offered by this
Prospectus, and reference is made to such registration statement. This
Prospectus constitutes the Prospectus of Dragon International Group Corporation,
filed as part of the registration statement, and it does not contain all
information in the registration statement, as certain portions have been omitted
in accordance with the rules and regulations of the Securities and Exchange
Commission.
Upon effectiveness of our registration statement on Form SB-2, we will be
subject to the informational requirements of the Securities Exchange Act of 1934
that require us to file reports, proxy statements and other information with the
Securities and Exchange Commission. Such reports, proxy statements and other
information may be inspected at public reference facilities of the SEC at
Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549. Copies of such
material can be obtained from the Public Reference Section of the SEC at
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed
rates. The public could obtain information on the operation of the public
reference room by calling the Securities and Exchange Commission at
1-800-SEC-0330. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
46
<page>
Dragon International Group Corporation
15,779,300 Shares
--------------------------
PROSPECTUS
--------------------------
[________________________], 2005
47
<page>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Under the Nevada Revised Statutes and our Articles of Incorporation, as amended,
our directors and officers will have no personal liability to us or our
shareholders for monetary damages incurred as the result of the breach or
alleged breach by a director or officer of his "duty of care." This provision
does not apply to the directors': (i) acts or omissions that involve intentional
misconduct, fraud or a knowing and culpable violation of law, or (ii) approval
of an unlawful dividend, distribution, stock repurchase or redemption. This
provision would generally absolve directors of personal liability for negligence
in the performance of duties, including gross negligence.
The effect of this provision in our Articles of Incorporation is to eliminate
the rights of our Company and our shareholders (through shareholder's derivative
suits on behalf of our Company) to recover monetary damages against a director
for breach of his fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in the situations
described in clauses (i) and (ii) above. This provision does not limit nor
eliminate the rights of our Company or any shareholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care. Section 78.7502 of the Nevada Revised Statutes grants
corporations the right to indemnify their directors, officers, employees and
agents in accordance with applicable law.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be permitted to directors, officers, or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
of 1933, as amended, and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
Estimates of fees and expenses incurred or to be incurred in connection with the
issuance and distribution of securities being registered, all of which are being
paid exclusively by the Company and commissions are as follows:
Securities and Exchange Commission registration fee $ 538.59
Printing and mailing costs and fees 1,000.00 *
Legal fees and costs 35,000.00 *
Accounting fees and costs 10,000.00 *
Transfer Agent fees 1,000.00 *
Miscellaneous expenses 2,000.00 *
------------
TOTAL $49,538.59 *
=============
- ---------------------
* Estimated
48
<page>
Item 26. Recent Sales of Unregistered Securities.
In August 2005, we issued 500,000 shares of our Common Stock as part of the
acquisition of Xiayan Naite.
In July 2005, we issued 1,000,000 shares of our Common Stock in exchange for 60%
interest in Yougxin.
On May 9, 2005, we commenced a private offering of Units, each Unit consisting
of a secured, convertible promissory note and warrants, totaling up to a maximum
of $2,500,000. We sold an aggregate of $1,927,400 of these Units to an aggregate
of 42 "accredited investors," as that term is defined under the Securities Act
of 1933,as amended. The minimum subscription was for $100,000 or one Unit;
however, we reserved the right to accept subscriptions for a fractional Unit,
which we did. Each Unit consisted of a secured convertible note with a face
value of the principal amount invested by each investor, carrying an annual
coupon of 8%, payable on a monthly basis in cash or Common Stock on the first of
every month and two hundred thousand(200,000) common stock purchase warrants,
each to purchase a share of our Common Stock for every dollar invested,
exercisable at a purchase price of $.30 per share for a period of five years
following the final closing date of the offering period, subject to adjustment
upon the occurrence of specific events, including stock dividends, stock splits,
combinations or reclassifications of our Common Stock. The Notes mature two
years after issuance. We have the option to satisfy principal and interest
payments in cash or Common Stock. The principal and interest is convertible into
shares of our "registered" Common Stock based on the following criteria: At the
sole election of the Holder, any portion of the unpaid principal balance of the
Note, together with any interest that may have accrued through the date of such
conversion, may be converted into shares of our Common Stock. The Holder shall
provide us with fifteen (15) days written notice prior to such payment ("Holder
Conversion Notice"). The Holder may elect to receive shares of Common Stock at a
conversion rate equal to a 20% discount to the average closing bid price for the
previous five days to the Holder Conversion Notice. The Holder will have a
maximum conversion price of $.55 per share and a minimum conversion price of
$.20 per share. The Holder may elect to convert a portion or all of any unpaid
interest and/or principal due to the Holder regardless as to whether the
criteria as detailed herein are satisfied.
Skyebanc, Inc., an NASD broker dealer, acted as selling agent in connection with
the offering. We granted warrants to purchase 500,000 shares of our Common Stock
to Skyebanc, Inc. for its services with regard to the offering at an exercise
price of $.01 per share, which warrants expire on July 1, 2010.
On March 1, 2005, we closed a private offering of Units, each Unit consisting of
an 8% Secured Convertible Debenture and 250,000 Class "A" Warrants, each warrant
exercisable to purchase one (1) share of our Common Stock at an exercise price
of $.40 per share for a period of five (5) years following the closing of the
offering. The investors in this offering were also granted "piggyback"
registration rights for the shares underlying the warrants, as well as the
shares reserved for issuance in the event of conversion of the Debentures. We
received gross proceeds of $357,500 from the sale of these Units ($321,750 net).
The Units were sold to a total of 7 "accredited investors," as that term is
defined under the Securities Act of 1933, as amended. The Debentures were
scheduled to mature six months following the closing of the offering. Interest
only is payable monthly. Each of the investors to this offering elected to
convert to our new offering, described above.
49
<page>
Effective February 7, 2005, holders of outstanding convertible promissory notes
exercised their respective conversion rights applicable thereto and we issued an
aggregate of 3,041,789 Common Shares to four holders pursuant to the terms of
their notes.
Effective January 17, 2005, a holder of a convertible promissory note exercised
his conversion rights applicable thereto and we issued 1,095,000 Common Shares
to him pursuant to the terms of said note.
On or about December 31, 2004, we issued 4,000,000 shares of our Common Stock to
one person in consideration for the remaining 30% interest in Anxin.
Effective October 4, 2004, we entered into an Agreement and Plan of
Reorganization (the "Merger"), with Dragon International Group Corp, Ningbo,
China ("Dragon"), whereby Dragon did agree to merge with us. We were the
surviving entity in the Merger. We also undertook a reverse stock split of our
Common Stock, whereby one (1) share of Common Stock was issued in exchange for
every eight (8) shares of Common Stock outstanding immediately prior to the
effective date of the Merger. We issued an aggregate of 25,905,233 "restricted"
shares of our Common Stock to the Dragon shareholders, representing
approximately 95% of our issued and outstanding Common Stock following the
Merger.
Item 27. Exhibits.
Exhibit No. Description
2.5 Agreement and Plan of Reorganization between Retail
Highway.com, Inc. and Dragon International Group Corp.
Previously filed as an exhibit to the Company's Form 8-K
dated October 4, 2004.
2.6 Amendment to Plan of Reorganization. Previously filed as an
exhibit to the Company's Form 8- K dated October 4, 2004.
2.7 Stock Purchase Agreement for 30% interest in Anxin.
Previously filed as an exhibit to the Company's Form 8-K
dated December 31, 2004.
2.8 Form of Secured Convertible Debenture. Previously filed as
an exhibit to the Company's Form 8-K dated March 1, 2005
2.9 Form of Security Agreement - March 2005 Offering.
Previously filed as an exhibit to the Company's Form 8-K
dated March 1, 2005
2.10 Form of Warrant - March 2005 Offering. Previously filed as
an exhibit to the Company's Form 8-K dated March 1, 2005
2.11 Form of Secured Convertible Promissory Note - July 2005
Offering. *
2.12 Form of Warrant - July 2005 Offering. *
50
<page>
3.1 Articles of Incorporation. Previously filed as an exhibit to
the Company's Form 10-SB filed December 10, 1997.
3.2 Amendment to Articles of Incorporation. Previously filed
as an exhibit to the Company's Form 10-SB filed December
10, 1997.
3.3 Bylaws. Previously filed as an exhibit to the Company's
Form 10-SB filed December 10, 1997.
3.4 Amendment to Articles of Incorporation. Previously filed
as an exhibit to the Company's Form 8-K filed April 30,
1999.
3.5 Articles of Merger between Retail Highway.com, Inc. and
Dragon International Group Corp. Previously filed as an
exhibit to the Company's Form 8-K/A filed December 6, 2004.
5.1 Consent of Andrew I. Telsey, P.C.*
10.1 Office Lease - Principal place of business*
10.2 Additional business lease - in Fuming County Zhang'ai Village
Economic Cooperation Group*
10.3 Stock Purchase Agreement between the Company, Anxin and
Xianyang Naite Research & Development Center dated August 1,
2005.*
10.4 Stock Purchase Agreement between the Company, Anxin and
Hangzhou Yongxin Paper Company, Limited, dated July 1, 2005.*
10.5 Stock Purchase Agreement between Anxin and Ningbo Xinyi
Company, Limited, dated June 1, 2005.*
10.6 Consulting Agreement between the Company and China Direct
Investments, Ltd.*
10.7 Credit Line Agreement Of Guangdong Development Bank
10.8 Mortgage Loan Contract Commercial Bank of Ning
21.1 List of Subsidiaries*
24.1 Consent of Andrew I. Telsey, P.C. (see Exhibit 5.1 hereto)*
24.2 Consent of Sherb & Co., L.L.P.*
- ------------
* Filed herewith.
51
<page>
Item 28. Undertakings.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post effective amendment to this Registration Statement:
(a) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) to reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(c) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or
any material changes as such information in the Registration Statement.
2. That for the purpose of determining any liability under the
Securities Act, such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered herein,
and the offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered hereby which remain unsold at
the termination of the Offering.
4. To file during any period in which we offer or sell securities, a
post effective amendment to this registration statement, to reflect in
the prospectus any facts or events which, or individually or together,
represent a fundamental change in the information in the registration
statement.
5. In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer or
expenses incurred or paid by a director, officer or controlling person
of the small business issuer in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
6. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the small business issuer pursuant
to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
52
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
Dragon International Group Corporation, the Registrant certifies that it has
reasonable grounds to believe that it meets all of the requirements for filing
on Form SB-2 and authorized this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Ningbo,
China on August 15, 2005.
DRAGON INTERNATIONAL GROUP CORPORATION
By: /s/ David Wu
----------------------------
David Wu, Chief Executive
Officer and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Wu his attorney-in-fact and agent,
with full power of substitution and resubstitution, for him in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully as to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ David Wu Chief Executive Officer, August 15, 2005
- ------------------------- President and Director
David Wu
/s/ Xuejun Chen Vice President and Director August 15, 2005
- -------------------------
Xuejun Chen
/s/ Xiali Gan Chief Financial Officer August 15, 2005
- ------------------------- & Director
Xiali Gan
<page>
FINANCIAL STATEMENT INDEX
Page
Consolidated Balance Sheet
March 31, 2005 (Unaudited).................................F-2
Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended
March 31, 2005 and 2004....................................F-3
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended March 31, 2005 and 2004..........F-4
Notes to Consolidated Financial Statements.......................F-5 -F-14
Report of Independent Registered Public Accounting Firm.....................F-15
Consolidated Financial Statements:
Consolidated Balance Sheet-June 30, 2004....................................F-16
Consolidated Statements of Operations-June 30, 2004.........................F-17
Consolidated Statements of Stockholders' Equity-June 30, 2004...............F-18
Consolidated Statements of Cash Flows- June 30, 2004........................F-19
Notes to Consolidated Financial Statements- June 30, 2004..............F-20-F-28
<page>
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2005
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 226,588
Accounts receivable (net of allowance
for doubtful accounts of $57,780) 3,205,317
Inventories 1,013,259
Advances to employees 264,847
Due from related parties 3,072,182
Prepaid expenses and other 292,077
-------
Total Current Assets 8,074,270
PROPERTY AND EQUIPMENT - Net 398,487
OHER ASSETS 14,018
------
Total Assets $ 8,486,775
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,117,150
Convertible debentures payable, net 96,985
Convertible notes payable 10,188
Accounts payable 2,596,062
Accrued expenses 1,239,732
Advances from customers 64,917
------
Total Current Liabilities 5,125,034
LONG-TERM DEBT, net of current portion 120,773
-------
Total Liabilities 5,245,807
---------
STOCKHOLDERS' EQUITY:
Common stock ($.001 Par Value; 200,000,000 Shares Authorized;
37,585,234 shares issued and outstanding) 37,585
Additional paid-in capital 647,272
Retained earnings 2,556,111
---------
Total Stockholders' Equity 3,240,968
---------
Total Liabilities and Stockholders' Equity $ 8,486,775
===========
See notes to consolidated financial statements
F-2
<page>
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<table>
<caption>
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
---------------------------------- ------------------------------------
2005 2004 2005 2004
---------------- ---------------- ----------------- -----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<s> <c> <c> <c> <c>
NET REVENUES $ 2,472,996 $ 6,031,646 $ 14,564,067 $ 14,715,401
COST OF SALES 2,127,644 5,386,828 13,646,147 13,074,644
---------------- ---------------- ----------------- -----------------
GROSS PROFIT 345,352 644,818 917,920 1,640,757
---------------- ---------------- ----------------- -----------------
OPERATING EXPENSES:
Selling expenses 120,371 27,627 338,595 642,573
General and administrative 105,836 238,678 387,334 351,558
---------------- ---------------- ----------------- -----------------
Total Operating Expenses 226,207 266,305 725,929 994,131
---------------- ---------------- ----------------- -----------------
INCOME FROM OPERATIONS 119,145 378,513 191,991 646,626
---------------- ---------------- ----------------- -----------------
OTHER INCOME (EXPENSE):
Other income 27,943 124,559 57,856 252,002
Interest expense, net (54,105) (13,966) (105,787) (54,087)
---------------- ---------------- ----------------- -----------------
Total Other Income (Expense) (26,162) 110,593 (47,931) 197,915
---------------- ---------------- ----------------- -----------------
INCOME BEFORE INCOME TAXES 92,983 489,106 144,060 844,541
INCOME TAXES 70 (30,574) (49,213) (89,627)
---------------- ---------------- ----------------- -----------------
NET INCOME $ 93,053 $ 458,532 $ 94,847 $ 754,914
================ ================ ================= =================
NET INCOME PER COMMON SHARE
Basic $ 0.00 $ 0.02 $ 0.00 $ 0.03
================ ================ ================= =================
Diluted $ 0.00 $ 0.02 $ 0.00 $ 0.03
================ ================ ================= =================
Weighted Common Shares Outstanding - Basic 36,094,090 24,625,000 29,774,932 24,625,000
================ ================ ================= =================
Weighted Common Shares Outstanding - Diluted 36,094,090 24,625,000 29,774,932 24,625,000
================ ================ ================= =================
</table>
See notes to consolidated financial statements
F-3
<page>
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<table>
<caption>
For the Nine
Months Ended
March 31,
----------------------------------------
2005 2004
------------------- -------------------
(Unaudited) (Unaudited)
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 94,847 $ 754,914
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 53,306 34,205
Amortization of discount on debentures payable 23,684 -
Debt issuance costs 2,979 -
Changes in assets and liabilities:
Accounts receivable (1,106,472) (1,955,020)
Inventories 1,813,955 (148,993)
Prepaid and other current assets 372,876 696,662
Advances to employees 306,547 (12,487)
Other assets (14,018) 65,135
Accounts payable (1,697,935) 3,219,669
Accrued expenses 256,802 (711,326)
Advances to customers (324,022) (223,184)
------------------- -------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (217,451) 1,719,575
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Due from related parties (513,142) (1,819,651)
Decrease in short-term investments 386,473 -
Capital expenditures (153,348) (32,275)
------------------- -------------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (280,017) (1,851,926)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable 101,450 54,347
Proceeds from debentures payable 321,750 -
Contributed capital 15,000 -
Distributions to shareholders - (102,657)
------------------- -------------------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES 438,200 (48,310)
------------------- -------------------
NET DECREASE IN CASH (59,268) (180,661)
CASH - beginning of year 285,856 501,135
------------------- -------------------
CASH - end of period $ 226,588 $ 320,474
=================== ===================
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities
Issuance of common stock for debt $ 57,601 $ -
=================== ===================
Deferred discount and deneficial conversion on debentures payable $ 284,199 $ -
=================== ===================
</table>
See notes to consolidated financial statements.
F-4
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Dragon International Group Corp. (formerly Retail Highway.com, Inc. ("Retail" or
the "Company") was incorporated in the State of Nevada on February 17, 1993
under the name "LBF Corporation" and has been in the development stage since its
inception. Effective April 17, 1999, the Company acquired certain assets to
facilitate the Company's entry into electronic commerce and changed its name to
Retail Highway.com, Inc.
On or around August 13, 2004, as amended on September 30, 2004 and effective
October 4, 2004, under an Agreement and Plan of Reorganization, the Company
issued 24,625,000 shares of the Company's common stock for the acquisition of
all of the outstanding capital stock of Dragon International Group Corp.,
("Dragon") a Florida corporation. For financial accounting purposes, the
exchange of stock will be treated as a recapitalization of Retail with the
former shareholders of the Company retaining 1,280,234 or approximately 5% of
the outstanding stock.
In connection with the merger, the Company effected a reverse stock split of the
Company's common stock, whereby one (1) share of common stock was issued in
exchange for every eight (8) shares of common stock outstanding immediately
prior to October 4, 2004, the effective date. All share and per-shares
information has been restated to reflect this reverse stock split.
Additionally, as part of the Merger, the Company amended its Articles of
Incorporation, whereby the Company changed its name to Dragon International
Group Corp. as well as reestablished its capitalization to the authorized
capital structure immediately prior to the Merger, which consists of 25,000,000
shares of Preferred Stock, par value $0.001 per share, and 50,000,000 Common
Shares, par value $.001 per share. Further, the Company's prior management
resigned their respective positions with the Company and was replaced by
management of Dragon.
F-5
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
The Company (Continued)
Dragon, a Florida corporation, was founded in June 2004. On June 30, 2004,
Dragon acquired 70% ownership interest of Ningbo Anxin International Co. Ltd.
("Anxin"). Anxin is located in Ningbo, Zhejiang Province, China, 200 miles south
of Shanghai, and was established in 1997. It is a company operating in
international trade as well as a manufacturer in the integrated packaging paper
industry. It holds an ISO9000 certificate and national license to import and
export. In addition to its own operations, Anxin operates three subsidiaries,
including: (i) Shanghai Anhong Paper Co. Ltd., ("Anhong"), a trading company
located in Shanghai, with another manufacturing facility in Ningbo; Anhong's
main products are "Federal" SBS and "Hang Kong" CCB; (ii) Ningbo Long'an
Industry and Trade Co. Ltd ("Long'an"), which has been set up to begin the
business of Indonesia `Hang Kong" CCB. It holds the national license to import
and export; and (iii) Jiangdong Yonglongxin Special Paper Co., Ltd.
("Yonglongxin"). Yonglongxin holds an ISO9000 certificate and has five series of
products, including golden and silver paperboards, aluminum foil paperboards,
pearl paperboards, laser paperboards and mirror-like paperboards. Anxin has a
distribution network covering east and central China. The Stock Purchase
Agreement between Dragon and Anxin has been accounted for as a reverse
acquisition under the purchase method for business combinations. Accordingly,
the combination of the two companies is recorded as a recapitalization of
Dragon, pursuant to which Anxin is treated as the continuing entity.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The accompanying financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
periods presented. These financial statements should be read in conjunction with
the financial statements for the year ended June 30, 2004 and notes thereto
contained on Form 10-KSB of the Company as filed with the Securities and
Exchange Commission. The results of operations for the nine months ended March
31, 2005 are not necessarily indicative of the results for the full fiscal year
ending June 30, 2005.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
F-6
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
Net income per share
Basic income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
income per share is computed by dividing net income by the weighted average
number of shares of common stock, common stock equivalents and potentially
dilutive securities outstanding during each period.
Stock-based compensation
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
Revenue recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured.
The Company's revenues from the sale of products are recorded when the goods are
shipped, title passes, and collectibility is reasonably assured.
F-7
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION 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. As
of March 31, 2005, the exchange rate for the Chinese Renminbi (RMB) was $1 US
for 8.28 RMB.
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
March 31, 2005 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.
F-8
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 2 - INVENTORIES
At March 31, 2005, inventories consisted of the following:
Raw materials $ 447,821
Finished goods 565,438
--------------
$ 1,013,259
==============
NOTE 3 - RELATED PARTY TRANSACTIONS
Due from related parties
The consolidated financial statements include balances and transactions with
related parties. At March 31, 2005, the Company had a net receivable from
several affiliated entities owned by an officer of the Company amounting to
$3,072,182. These advanced are payable on demand and are personally guaranteed
by the officer.
Due to related party
The former President of the Company, from time to time, provided advances to the
Company for operating expenses. These advances are short-term in nature and
non-interest bearing. The amount due to the former President at March 31, 2005
was $18,345 and is included in accrued expenses on the accompanying balance
sheet.
NOTE 4 - CONVERTIBLE NOTES PAYABLE
In September 2002, the former President of the Company lent the Company $10,000
to pay operating expenses pursuant to a note. This note is convertible into
1,333,333 shares of the Company's common stock at a conversion price of $0.0075
per share and is due on the earlier of (i) the Company successfully consummating
a merger or acquisition; or (ii) one year from the date of the note. Interest
accrues at the rate of 3% per annum and aggregated $532 through March 31, 2005.
Additionally, in April 2004, the former President of the Company entered into a
convertible note agreement with the Company to convert $31,124 of advances to
pay operating expenses into to a convertible note. This note is convertible into
4,149,867 shares of the Company's common stock at a conversion price of $0.0075
per share and is due on the earlier of (i) the Company successfully consummating
a merger or acquisition; or (ii) one year from the date of the note. Interest
accrues at the rate of 3% per annum and aggregated $558 through March 31, 2005.
During the nine months ended March 31, 2005, the Company issued 4,136,789 shares
of common stock in connection with the conversion of $31,026 of this debt. At
March 31, 2005, convertible notes payable outstanding amounted to $10,188, which
is convertible into 1,358,400 shares of common stock.
F-9
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 4 - CONVERTIBLE NOTES PAYABLE (continued)
In May, 2004, the Company's attorney entered into an agreement with the Company
to convert $15,171 of accounts payable for legal services to a note. This note
was convertible into 2,022,667 shares of the Company's common stock at a
conversion price of $0.0075 per share and was due on the earlier of (1) the
Company successfully consummating a merger or acquisition; or (ii) upon demand.
Interest accrued at the rate of 18% per annum. On October 4, 2004, this note was
converted into 2,022,667 shares of common stock.
In August 2004, a vendor entered into an agreement with the Company to convert
$11,404 of accounts payable to a convertible note. This note was convertible
into 1,520,544 shares of the Company's common stock at a conversion price of
$0.0075 per share and was due on the earlier of (1) the Company successfully
consummating a merger or acquisition; or (ii) upon demand. Interest accrued at
the rate of 18% per annum. On October 4, 2004, this note was converted into
1,520,544 shares of common stock.
NOTE 5 - DEBENTURES PAYABLE
During fiscal 2003, the Company raised capital from accredited investors under a
private placement memorandum. Each unit consisted of a promissory note of
$50,000 and a common stock purchase warrant to purchase 25,000 shares of the
Company's common stock exercisable at $.16 per share. The purchase warrants
expire in five years from the date of the warrant. The notes had a term of one
year and provided for interest accrual on the unpaid principal balance of 10%
per year.
Effective March 15, 2005, the Company raised capital from accredited investors
under a private offering of Units. The private offering provided for the sale of
12 units at a price of $25,000 per unit in order to raise up to a total of
$300,000. The private offering sold additional units for a total capital raise
of $357,500. Each unit consisted of a $25,000 8% Secured Convertible Debenture
and a Class A common stock purchase warrant to purchase 250,000 of the Company's
common stock at $.40 per share for a period of five (5) years following the
closing of the offering. The investors in this offering were also granted
"piggyback" registration rights for the shares underlying the warrants, as well
as the shares reserved for issuance in the event of conversion of the
Debentures. The Company received gross proceeds of $357,500 from the sale of
these Units ($321,750 net). The Units were sold to a total of 7 "accredited"
investors, as that term is defined under the Securities Act of 1933, as amended.
The Debentures are secured by property with an estimated value of $227,900 and
12,250,000 shares of Common Stock owned by David Wu, the Company's President and
Chief Executive Officer. The Debentures mature six (6) months following the
closing of the offering. Interest only is payable monthly.
F-10
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 5 - DEBENTURES PAYABLE (continued)
Conversion of the Debenture can occur several ways as follows:
1. The Company may convert a portion of the remaining principal and
accrued interest due into shares of common stock, upon notice, at a
conversion rate equal to a 20% discount to the weighted average bid
price for the previous five days prior to receipt of such Notice of
Conversion with a floor of $.40 per share. The Company can elect to
convert provided that the Company notifies the Holder of its intent to
convert to shares of common stock by the 15th calendar day of the month
preceding such anticipated conversion and provided that:
i. The common stock received for payment is fully registered
at the time of receipt and is delivered without restriction of
any kind
ii. The average daily trading volume of the Company's common
stock as measured for the prior 60 days to Notice of
Conversion is no less than 50,000 shares per day to the
Holder; or
iii. The weighted average daily price per share as measured
from the five trading days prior to Notice of Conversion is no
less than $0.50 per share; or
iv. Any payment of the principal balance due herein must be
received by the Holder within three (3) business days of the
first day of the month
Further, the Company may elect to convert the remaining principal and
accrued interest due into shares of common stock at the greater of: (i)
10% of the remaining principal value of the Debenture for the previous
five (5) days prior to receipt of such Notice of Conversion; or (ii)
25% of the average weighted daily value of the common shares.
2. The Holder can elect to convert all remaining principal and interest
due into shares of common stock at a 20% discount to the market with a
floor of $.40. At no time can the conversion price be in excess of $.75
per share. Such anticipated conversion may only occur in the event the
following criteria are met: (a) the common stock received for payment
is fully registered at the time of receipt and is delivered without
restriction of any kind; (b) the average daily trading volume as
measured for the 60 days prior to Notice of Conversion is no less than
50,000 shares per day; (c) the weighted average daily price per share
as measured from the five trading days prior to Notice of Conversion is
no less than $.50 per share; and (d) the stock must be delivered within
three (3) business days of the 1st of the current month.
F-11
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 5 - DEBENTURES PAYABLE (continued)
In connection with the 1,787,500 warrants issued with the debentures, the
Company recorded imputed interest in the amount of $239,510 that will be
amortized over the life of the debentures. Additionally in connection with the
debentures, the Company recorded a beneficial conversion amount of $44,688 as
that will be amortized over the life of the debentures. For the nine months
ended March 31, 2005, the amount of amortization of imputed interest and
beneficial conversion charged to interest expense was $23,683.
NOTE 6 - STOCKHOLDERS EQUITY
Common Stock
In August 2004, the Company's board of directors approved a 1 for 8 reverse
stock split. All per share data included in the accompanying consolidated
financial statement have been adjusted retroactively to reflect the reverse
split.
On October 4, 2004, holders of convertible promissory notes aggregating $26,575
exercised their conversion rights applicable thereto. Accordingly, the Company
issued an aggregate of 3,543,211 common shares to five persons and/or entities
(see note 4).
On October 4, 2004, under an Agreement and Plan of Reorganization, the Company
issued 24,625,000 shares of the Company's common stock for the acquisition of
all of the outstanding capital stock of Dragon International Group Corp.,
("Dragon") a Florida corporation.
On December 31, 2004, in connection with the acquisition of the remaining 30% of
its subsidiary, the Company issued 4,000,000 shares of common stock.
On January 17, 2005, holders of convertible promissory notes aggregating $13,424
exercised their conversion rights applicable thereto. Accordingly, the Company
issued an aggregate of 1,789,823 common shares (see note 4).
On February 7, 2005, holders of convertible promissory notes aggregating $17,602
exercised their conversion rights applicable thereto. Accordingly, the Company
issued an aggregate of 2,346,966 common shares (see note 4).
F-12
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 6 - STOCKHOLDERS EQUITY (continued)
Stock Warrants
On March 15, 2005, in connection with the private offering discussed in Note 5,
the Company granted 1,787,500 warrants to purchase 1,787,500 shares of the
Company's common stock exercisable at $.40 per share. The purchase warrants
expire in five years from the date of the warrant.
A summary of the status of the Company's outstanding stock warrants as of March
31, 2005 and changes during the period then ended is as follows:
Weighted
Average
Exercise
Shares Price
----------- --------------
Outstanding at July 1, 2004 - $ -
Granted 1,787,500 0.40
Exercised - -
Forfeited - -
-------------- ------------
Outstanding at March 31, 2005 1,787,500 $ 0.40
============== ==============
Warrants exercisable at end of period 1,787,500 $ 0.40
============== ==============
Weighted-average fair value of
warrants granted during the period $0.40
=============
The following information applies to all warrants outstanding at March 31, 2005:
<table>
<caption>
Warrants Outstanding Warrants Exercisable
---------------------------- -------------------------
<s> <c> <c> <c> <c> <c>
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life (Years) Price Shares Price
------------------------ ----------- ------------ ----------- -------------- ----------
$ 0.40 1,787,500 5.00 $ 0.40 1,787,500 $ 0.40
</table>
NOTE 7 - OPERATING RISK
(a) Country risk
The Company's revenues are 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.
F-13
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 7 - OPERATING RISK (continued)
(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 U.S. companies do gain
access to the PRC markets, they may be able to offer products at a lower price.
There can be no assurance that the Company will remain competitive should this
occur.
(c) Exchange risk
The Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of Chinese
Remnibi converted to US dollars on that date. The exchange rate could fluctuate
depending on changes in the political and economic environments without notice.
(d) Political risk
Currently, PRC is in a period of growth and is openly promoting business
development in order to bring more business into PRC. Additionally PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company's ability to operate
the PRC subsidiaries could be affected.
(e) Key personnel risk
The Company's future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.
(f) Performance of subsidiaries risk
All of the Company's revenues is 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.
F-14
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
F-15
<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
F-16
<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
F-17
<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
F-18
<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.
F-19
<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.
F-20
<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.
F-21
<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.
F-22
<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.
F-23
<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.
F-24
<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.
F-25
<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%
================= ================
F-26
<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.
F-27
<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.
F-28
<page>