United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: December 31, 2004
Commission File Number: 0-23485
DRAGON INTERNATIONAL GROUP CORP.
(Exact name of registrant as specified in its charter)
Nevada 98-0177646
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Bldg 14
Suite A09, International Trading Center,
29 Dongdu Road
Ningbo, China 315000
(Address of principal executive offices)(Zip code)
(86) 574-56169308
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of November 8, 2005; 39,635,234 outstanding shares of common
stock, $.001 par value per share.
This amended Quarterly Report on Form 10-QSB/A1 of Dragon International Group
Corp. for the fiscal quarter ended December 31, 2004 is being filed for the
purpose of
o Revising net revenues and corresponding cost of sales related to an
error in the elimination of inter-company revenues and related cost of
sales. For the six months ended December 31, 2004 and 2003, we
initially did not eliminate certain inter-company sales and the related
cost of sales of $5,774,337 and $1,011,595, respectively. Accordingly,
we decreased revenues and cost of sales for the six months ended
December 31, 2004 by $5,774,337 and $1,011,595, respectively. For the
three months ended December 31, 2004 and 2003, we initially did not
eliminate certain inter-company revenues and the related cost of sales.
Accordingly, we decreased revenues and cost of sales for the three
months ended December 31, 2004 by $5,774,337. For the three months
ended December 31, 2003, we increased revenues and cost of sales by
$2,061,289 since net revenues and costs were overstated for the three
month period ended September 30, 2003,
This report on Form 10QSB/A1 supercedes in its entirety the previously filed
Quarterly Report for December 31, 2004.
DRAGON INTERNATIONAL GROUP CORP.
FORM 10-QSB
QUARTERLY PERIOD ENDED DECEMBER 31, 2004
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet
December 31, 2004 (Unaudited).....................................3
Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended December 31, 2004 and 2003.....4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended December 31, 2004 and 2003...............5
Notes to Consolidated Financial Statements............................6-14
Item 2 - Management's Discussion and Analysis or Plan of Operation...14-20
Item 3 - Controls and Procedures........................................20
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings..............................................21
Item 2 - Changes in Securities and Use of Proceeds......................21
Item 3 - Default upon Senior Securities ................................21
Item 4 - Submission of Matters to a Vote of Security Holders............21
Item 5 - Other Information..............................................21
Item 6 - Exhibits and Reports on Form 8-K...............................22
Signatures..............................................................23
-2-
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2004
(Unaudited)
<table>
<caption>
ASSETS
<s> <c>
CURRENT ASSETS:
Cash and cash equivalents $ 672,326
Short-term investments 362,319
Accounts receivable (net of allowance for doubtful accounts of $55,835) 2,225,201
Inventories 899,477
Advances to employees 128,658
Due from related parties 2,497,705
Prepaid expenses and other 198,993
----------
Total Current Assets 6,984,679
PROPERTY AND EQUIPMENT - Net 413,255
OHER ASSETS 13,820
----------
Total Assets $ 7,411,754
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,059,179
Convertible notes payable 41,214
Accounts payable 1,590,992
Accrued expenses 759,187
Advances from customers 7,719
----------
Total Current Liabilities 4,458,291
LONG-TERM DEBT, net of current portion 120,773
----------
Total Liabilities 4,579,064
----------
STOCKHOLDERS' EQUITY:
Common stock ($.001 Par Value; 200,000,000 Shares Authorized;
33,448,445 shares issued and outstanding) 33,448
Additional paid-in capital 336,184
Retained earnings 2,463,058
----------
Total Stockholders' Equity 2,832,690
----------
Total Liabilities and Stockholders' Equity $ 7,411,754
============
</table>
See notes to consolidated financial statements
-3-
<page>
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(As Restated - See Note 1)
<table>
<caption>
For the Three Months For the Six Months
Ended December 31, Ended December 31,
------------------------------- ---------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- --------------- ---------------- ---------------
<s> <c> <c> <c> <c>
NET REVENUES $ 2,773,884 $ 4,414,324 $ 6,316,734 $ 7,672,160
COST OF SALES 2,507,284 3,755,870 5,744,166 6,676,221
--------------- --------------- ---------------- ---------------
GROSS PROFIT 266,600 658,454 572,568 995,939
--------------- --------------- ---------------- ---------------
OPERATING EXPENSES:
Selling expenses 67,983 74,170 218,224 283,700
General and administrative 211,918 41,693 281,498 112,880
--------------- --------------- ---------------- ---------------
Total Operating Expenses 279,901 115,863 499,722 396,580
--------------- --------------- ---------------- ---------------
INCOME FROM OPERATIONS (13,301) 542,591 72,846 599,359
OTHER INCOME (EXPENSE):
Other income 10,695 113,956 29,913 127,443
Interest expense, net (29,745) (22,453) (51,682) (40,121)
--------------- --------------- ---------------- ---------------
Total Other Expenses (19,050) 91,503 (21,769) 87,322
--------------- --------------- ---------------- ---------------
INCOME BEFORE INCOME TAXES (32,351) 634,094 51,077 686,681
INCOME TAXES (9,692) (41,643) (49,283) (59,053)
--------------- --------------- ---------------- ---------------
NET INCOME (LOSS) $ (42,043) $ 592,451 $ 1,794 $ 627,628
=============== =============== ================ ===============
PER SHARE INFORMATION:
NET INCOME (LOSS) PER COMMON SHARE:
BASIC $ (0.00) $ 0.02 $ 0.00 $ 0.02
=============== =============== ================ ===============
DILUTED $ (0.00) $ 0.02 $ 0.00 $ 0.02
=============== =============== ================ ===============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 29,392,783 28,168,211 28,780,497 28,168,211
=============== =============== ================ ===============
DILUTED 29,392,783 33,651,411 34,263,697 33,651,411
=============== =============== ================ ===============
</table>
See notes to consolidated financial statements
-4-
<page>
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<table>
<caption>
For the Six
Months Ended
December 31,
----------------------------------------
2004 2003
------------------- -------------------
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,794 $ 627,628
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 36,643 22,535
Changes in assets and liabilities:
Accounts receivable (126,356) (838,945)
Inventories 1,927,737 492,033
Prepaid and other current assets 433,189 (686,622)
Advances to employees 442,736 6,040
Other assets (13,820) 65,784
Accounts payable (2,703,005) 855,245
Accrued expenses (223,743) (126,750)
Advances from customers (381,220) (151,553)
------------------- -------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (606,045) 265,395
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Due from related parties 61,335 -
Decrease in short-term investments 24,154 -
Capital expenditures (151,453) (31,860)
------------------- -------------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (65,964) (31,860)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable 1,043,479 -
Contributed capital 15,000 -
Payments on loans payable - (120,774)
Distributions to shareholders - (72,464)
------------------- -------------------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,058,479 (193,238)
------------------- -------------------
NET INCREASE IN CASH 386,470 40,297
CASH - beginning of year 285,856 501,135
------------------- -------------------
CASH - end of period $ 672,326 $ 541,432
=================== ===================
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and fianncing activity $ 26,859 $ -
=================== ===================
</table>
See notes to consolidated financial statements.
-5-
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Dragon International Group Corp. (formerly Retail Highway.com, Inc. ("Retail" 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 affected 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 we have changed our name to Dragon International Group
Corp. as well as reestablishing our capitalization to the authorized capital
immediately prior to the Merger, which consists of 25,000,000 shares of
Preferred Stock, par value $0.001 per share, and 50,000,000 Common Shares, par
value $.001 per share. Further, the Company's prior management resigned their
respective positions with the Company and was replaced by management of Dragon.
-6-
<page>
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(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, established in 1997, is located in the Zhejiang Province of
Ningbo in China, approximately 200 miles south of Shanghai. Anxin is involved in
the pulp and paper industry, operating as a manufacturer and distributor of
paper and integrated packaging paper products. Anxin, through a subsidiary,
holds an ISO9000 certificate and national license to import and export products.
In addition to its own operations, Anxin operates four subsidiaries, including:
(i) Jiangdong Yonglongxin Special Paper Company, Limited ("Yonglongxin"), holds
an ISO9000 certificate and operates a civil welfare manufacturing facility
Fuming County Zhang'ai Village in Ningbo, China..(ii) Hangzhou Yongxin Paper
Company, Limited ("Yongxin"). Yongxin manufactures, sells and distributes
cigarette packing materials (iii) Ningbo Xinyi Paper Product Industrial Company,
Limited ("Xinyi"). Xinyi operates in the pulp and paper industry, operating a
manufacturing facility and (iv) Xianyang Naite Research & Development Center
("R&D Center") The R&D Center was created to develop, design and improve
production methods in the specialty packaging industry in China. 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. 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 8-KA2 of the Company as filed with the Securities and Exchange
Commission. The results of operations for the six months ended December 31, 2004
are not necessarily indicative of the results for the full fiscal year ending
June 30, 2005.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
-7-
<page>
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(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 (loss) per share
Basic income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period.
Diluted income per share is computed by dividing net income by the weighted
average number of shares of common stock, common stock equivalents and
potentially dilutive securities outstanding during each period. As of December
31, 2004 and 2003, the Company did not have any common stock equivalents or
potentially dilutive securities outstanding.
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 collectability is reasonably assured.
-8-
<page>
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(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 December 31, 2004, 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
December 31, 2004 and 2003 was not material.
Concentration of Credit Risk
Financial instruments that 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 that 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.
-9-
<page>
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Restatement
For the three and six months ending December 31, 2004 and 2003, the Company
revised net revenues and cost of sales related to an error in the elimination of
inter-company revenues and cost of sales. The Company initially reflected
revenues and cost of sales figures prior to the elimination of inter-company
revenues and costs of revenues. Additionally, net revenues and cost of sales
were understated for the three months ended December 31, 2003 since net revenues
and costs of sales were overstated for the three month period ended September
30, 2003. Since there were no inter-company profits or losses associated with
the inter-company sales, there was no change to the Company's gross profit or
net income. Accordingly, the adjustments to the statement of operations were
as follows:
<table>
<caption>
For the Three For the Three For the Six Months For the Six Months
Months Ended Months Ended Ended December 31, Ended December 31,
December 31, 2004 December 31, 2003 2004 2003
<s> <c> <c> <c> <c>
-------------------- --------------------- --------------------- --------------------
Prior to Restatement
Net Revenues $ 8,548,221 $ 2,353,035 $ 12,091,071 $ 8,683,755
Cost of Sales 8,281,621 1,694,581 11,518,503 7,687,816
-------------------- --------------------- --------------------- --------------------
Gross Profit $ 266,600 $ 658,454 $ 572,568 $ 995,939
==================== ===================== ===================== ====================
As Restated
Net Revenues $ 2,773,884 $ $ 6,316,734 $ 7,672,160
4,414,324
Cost of Sales 2,507,284 3,755,870 5,744,166 6,676,221
-------------------- --------------------- --------------------- --------------------
Gross Profit $ 266,600 $ 658,454 $ 572,568 $ 995,939
==================== ===================== ===================== ====================
</table>
NOTE 2 - INVENTORIES
At December 31, 2004, inventories consisted of the following:
Raw materials $ 422,588
Finished goods 476,889
--------------
$ 899,477
==============
-10-
<page>
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 3 - RELATED PARTY TRANSACTIONS
Due from related parties
The consolidated financial statements include balances and transactions with
related parties. At December 31, 2004, the Company had a net receivable from
several affiliated entities owned by an officer of the Company amounting to
$2,497,705. 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 December 31,
2004 was $18,345 and is included in accrued expenses on the accompanying balance
sheet.
Convertible note payable - related party
In September 2002, the former President of the Company lent the Company $10,000
to pay operating expenses pursuant to a note. This note is convertible into
1,333,333 shares of the Company's common stock at a conversion price of $0.0075
per share and is due on 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 December 31,
2004.
In April 2004, the former President of the Company entered into a convertible
note agreement with the Company to convert $31,124 of advances to pay operating
expenses into 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 December 31, 2004.
-11-
<page>
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 4 - CONVERTIBLE NOTES PAYABLE
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
is convertible into 2,022,667 shares of the Company's common stock at a
conversion price of $0.0075 per share and is due on the earlier of (1) the
Company successfully consummating a merger or acquisition; or (ii) upon demand.
Interest accrues at the rate of 18% per annum. On October 4, 2004, this note was
converted into 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 is convertible into
1,520,544 shares of the Company's common stock at a conversion price of $0.0075
per share and is due on the earlier of (1) the Company successfully consummating
a merger or acquisition; or (ii) upon demand. Interest accrues at the rate of
18% per annum. On October 4, 2004, this note was converted into 1,520,544 shares
of common stock.
NOTE 5 - 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.
-12-
<page>
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 6 - 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.
(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
Reminbi 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.
-13-
<page>
DRAGON INTERNATIONAL GROUP CORP.
(FORMERLY RETAIL HIGHWAY.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 6 - OPERATING RISK (Continued)
(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.
NOTE 6 - SUBSEQUENT EVENTS
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. 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.
-14-
<page>
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following analysis of our results of operations and financial condition
should be read in conjunction with our financial statements for our fiscal year
ended June 30, 2004 and notes thereto contained in our report on Form 8-K/A2 as
filed with the Securities and Exchange Commission.
This report on Form 10-QSB/A1 contains forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those discussed in the forward-looking statements and from
historical results of operations. Among the risks and uncertainties which could
cause such a difference are those relating to our dependence upon certain key
personnel, our ability to manage our growth, our success in implementing the
business strategy, our success in arranging financing where required, and the
risk of economic and market factors affecting us or our customers. Many of such
risk factors are beyond our control.
On or around August 13, 2004, as amended on September 30, 2004 and effective
October 4, 2004, under 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. For financial accounting purposes, the exchange of stock
was treated as a recapitalization of Retail with our former shareholders
retaining 1,280,234, or approximately 5% of the outstanding stock.
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"). Anxin, established in 1997, is located
in the Zhejiang Province of Ningbo in China, approximately 200 miles south of
Shanghai. Anxin is involved in the pulp and paper industry, operating as a
manufacturer and distributor of paper and integrated packaging paper products.
Anxin, through a subsidiary, holds an ISO9000 certificate and national license
to import and export products. In addition to its own operations, Anxin operates
four subsidiaries, including: (i) Jiangdong Yonglongxin Special Paper Company,
Limited ("Yonglongxin"), holds an ISO9000 certificate and operates a civil
welfare manufacturing facility Fuming County Zhang'ai Village in Ningbo,
China..(ii) Hangzhou Yongxin Paper Company, Limited ("Yongxin"). Yongxin
manufactures, sells and distributes cigarette packing materials (iii) Ningbo
Xinyi Paper Product Industrial Company, Limited ("Xinyi"). Xinyi operates in the
pulp and paper industry, operating a manufacturing facility and (iv) Xianyang
Naite Research & Development Center ("R&D Center") The R&D Center was created to
develop, design and improve production methods in the specialty packaging
industry in China. 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.
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 Anxin, pursuant to which Dragon is treated as the continuing
entity.
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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.
A summary of significant accounting policies is included in Note 1 to the
audited financial statements included Form 8-K/A2 as filed with the Securities
and Exchange Commission dated October 4, 2004. Management believes that the
application of these policies on a consistent basis enables us to provide useful
and reliable financial information about the company's operating results and
financial condition.
Estimating allowance for doubtful accounts. The preparation of financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and contingencies at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. For this reason, actual results could differ from those
estimates. Management must make estimates surrounding their ability to collect
revenues and related accounts receivable. Management specifically analyzes
accounts receivable, historical and current economic trends, previous bad debts,
customer concentrations, credit worthiness of customers, and payment terms of
customer accounts, when evaluating adequacy of the allowance for doubtful
accounts.
We record property and equipment at cost. Depreciation and amortization are
provided using the straight-line method over the estimated economic lives of the
assets, which are from five to ten years. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred.
We account for stock options issued to employees in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation cost is measured on the date of grant as the excess of the current
market price of the underlying stock over the exercise price. Such compensation
amounts, if any, are amortized over the respective vesting periods of the option
grant. We adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based Compensation
- -Transition and Disclosure", which permits entities to provide pro forma net
income (loss) and pro forma earnings (loss) per share disclosures for employee
stock option grants as if the fair-valued based method defined in SFAS No. 123
had been applied. We account for stock options and stock issued to non-employees
for goods or services in accordance with the fair value method of SFAS 123.
We follow the guidance of the Securities and Exchange Commission's Staff
Accounting Bulletin 104 for revenue recognition. In general, we record revenue
when persuasive evidence of an arrangement exists, services have been rendered
or product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectability is reasonably assured. Our revenues from the
sale of products are recorded when the goods are shipped, title passes, and
collectibility is reasonably assured.
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RESULTS OF OPERATIONS
Comparison of Our Results of Operations for the Six Month Periods Ended
December 31, 2004 and 2003
For the six months ended December 31, 2004, our revenues were $6,316,734, as
compared to $7,672,160 for the six months ended December 31, 2003, a decrease of
$1,355,426 or approximately 17.7.%. We attribute this decrease in net revenues
to a decrease in revenues from the manufacture and sale of our paper products.
For the six months ended December 31, 2004, cost of sales amounted to
$5,744,166, or 90.9% of net revenues, as compared to cost of sales of $6,676,221
or 87% of net revenues for the six months ended December 31, 2003, a decrease of
3.9%. This decrease resulted from a decrease in the dollar amount of revenue, as
well as an increase in raw material costs and overhead costs such as utilities
during the six months ended December 31, 2004 as compared to the six months
ended December 31, 2003.
Gross profit for the six months ended December 31, 2004 was $572,568 or 9.1% of
revenues, as compared to $995,939 or 13% of revenues for the six months ended
December 31, 2003.
For the six months ended December 31, 2004, total operating expenses were
$499,722, as compared to $396,580 for the six months ended December 31, 2003, an
increase of $103,142, or approximately 26%.
Included in this increase was:
For the six months ended December 31, 2004, selling expenses amounted
to $218,224, as compared to $283,700 for the six months ended December 31, 2003,
a decrease of $65,476 or approximately 23%. This decrease is attributable to
increased shipping costs and local tax costs associated with our increased
revenues. Additionally, for the six months ended December 31, 2004, we increased
our advertising and promotions spending compared to the same period in the prior
year. We expect out selling expenses to increase as our revenues increase and
expect to spend increased funds on adverting and promotion of our products.
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o For the six months ended December 31, 2004, general and
administrative expenses were $281,498, as compared to $112,880 for
the six months ended December 31, 2003, an increase of $168,618, or
approximately 150%. For the six months ended December 31, 2004, we
incurred professional fees of approximately $70,000 related to our
acquisition of Anxin as compared to $0 for the six months ended
December 31, 2003, an increase of $70,000 or 100%. Additional
increases were due to increase shipping and handling costs and
increase marketing related fees.
For the six months ended December 31, 2004, other income amounted to
$29,913 as compared to other income of expenses of $127,443 for the six months
ended December 31, 2003. Other income for the six months ended December 31, 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 six months ended December 31, 2004, interest expense was
$51,682, as compared to $40,121 for the six months ended December 31, 2003 and
was related to increased borrowings.
As a result of these factors, we reported net income of $1,794 (less
than $.01 per share) for the six months ended December 31, 2004, as compared to
net income of $627,628 (approximately $.02 per share) for the six months ended
December 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had cash and cash equivalents of
$672,326.
Net cash used in operating activities for the six months ended
December 31, 2004, was $591,045, as compared to net cash provided by operating
activities of $230,218 for the six months ended December 31, 2003.
Net cash used in investing activities for the six months ended December
31, 2004 was $65,964, as compared to net cash used in investing activities for
the six months ended December 31, 2003, of $31,860. For the six months ended
December 31, 2004, we used cash for capital expenditures of $151,453, offset by
cash provided by a decrease in short-term investments and repayments of related
party advances. For the six months ended December 31, 2003, we used cash for
capital expenditures of $31,860.
Net cash provided by financing activities for the six months
ended December 31, 2004 was $1,043,479 as compared to net cash used in financing
activities for the six months ended December 31, 2003 of $(193,238). For the six
months ended December 31, 2004, we received proceeds of $1,043,479 from loans
payable. For the six months ended December 31, 2003, we repaid loans payable of
$120,774 and had a shareholder distribution of $72,464.
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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. In relation to an offering of
securities the Company received net proceeds of $1,734,660. A portion of the
proceeds will be used to update our manufacturing facilities.
RISK FACTORS
An investment in our securities involves a high degree of risks.
Following are a description of those risks of which our management is currently
aware:
Our revenues are mainly derived from sale of paper products in the
Peoples Republic of China (PRC). We hope to expand our operations to countries
outside the PRC. However, such expansion has not been commenced and there are no
assurances that we will be able to achieve such an expansion successfully.
Therefore, a downturn or stagnation in the economic environment of the PRC could
have a material adverse effect on our financial condition and results of
operations.
In addition to competing with other companies, we 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 we will remain competitive should this occur.
We cannot guarantee that the current exchange rate will remain steady,
therefore there is a possibility that we could post the same amount of profit
for two comparable periods and because of a fluctuating exchange rate actually
post higher or lower profit depending on exchange rate of Chinese Reminbi
converted to US dollars on that date. The exchange rate could fluctuate
depending on changes in the political and economic environments without notice.
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, our ability to operate
the PRC subsidiaries could be affected.
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Our future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
us and could have an adverse effect on business development. We do 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.
Our revenues are derived via the operations of our Chinese
subsidiaries. Economic, governmental, political, industry and internal company
factors outside of our 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 our subsidiaries are located in China and have
specific risks associated with that and the intensifying competition for our
products and services and those of the subsidiaries
ITEM 3. CONTROLS AND PROCEDURES
Disclosure controls and procedures and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time period specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in our reports filed under the
Securities Exchange Act of 1934 is accumulated and communicated to management
including our President as appropriate, to allow timely decisions regarding
required disclosure. Our management, including our President, does not expect
that our disclosure controls and procedures will prevent all error and all
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control system's objectives
will be met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions.
Based upon that evaluation, our company's President has concluded that
our disclosure controls and procedures were not effective because of the
significant deficiency and the material weakness described below.
In this amended Quarterly Report on Form 10-QSB/A1, we are restating
our consolidated statement of operations for the three and six months ended
December 31, 2004 and 2003, respectively, as previously filed with the
Securities and Exchange Commission.
The restatement of our consolidated financial statements is also being
made to correct an error in the elimination of inter-company revenues and cost
of sales as described in Note 1 to our financial statements appearing elsewhere
in this report. As a result of this error, we have determined that there was a
significant deficiency in our internal control over financial reporting as of
December 31, 2004 related to elimination of inter-company revenues and cost of
sales. We have also determined that this control deficiency constituted a
material weakness. We have taken the remedial steps necessary to eliminate the
material weakness relating to financial disclosure controls that resulted in
this restatement.
Other than the changes discussed above, there have been no changes in
our internal control over financial reporting that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
On October 4, 2004, holders of convertible promissory notes
aggregating $26,575 exercised their conversion rights applicable thereto and we
issued an aggregate of 3,543,211 common shares to five persons and/or entities.
We relied upon the exemption from registration afforded by Regulation D and
Regulation S, as applicable, promulgated under the Securities Act of 1933, as
amended, to issue these securities.
On December 31, 2004, in connection with the acquisition of the
remaining 30% its subsidiary, we issued 4,000,000 shares of common stock.
Subsequent Event
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. 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.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
In October 2004, the holders of a majority of our issued and outstanding common
stock authorized our entering into the Agreement and Plan of Reorganization with
Dragon.
Item 5. Other Information
None
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Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits
Exhibit
Number Description
- -------- ----------------
31.1 Certification by Chief Executive Officer Pursuant to Section 302
31.2 Certification by Chief Financial Officer Pursuant to Section 302
32.1 Certification by Chief Executive Officer Pursuant to Section 906
32.2 Certification by Chief Financial Officer Pursuant to Section 906
(2) Reports on Form 8-K
On October 1, 2004, we filed a report on Form 8-K, advising that effective
October 4, 2004, pursuant to an Agreement and Plan of Reorganization, dated on
or about August 13, 2004, as amended on September 30, 2004, we issued 24,625,000
"restricted" shares of our Common Stock, including (i) 22,750,000 "restricted"
Common Shares to the Dragon shareholders on a pro rata basis, and (ii) 1,875,000
"restricted" Common Shares to those entities designated by Dragon pursuant to
contractual obligations of Dragon in exchange for all of the outstanding capital
stock of Dragon, with our former shareholders retaining 1,280,234 shares, or
approximately 5% of our outstanding stock. In connection with the merger, we
effected a reverse stock split of our common stock, whereby one (1) share of
common stock was issued in exchange for every eight (8) shares of common stock
outstanding immediately prior to October 4, 2004, the effective date. The record
date of this reverse stock split was October 1, 2004.
This report also included disclosure that on or about October 4, 2004,
holders of convertible promissory notes aggregating $26,574 elected to convert
this balance into an aggregate of 3,543,211 common shares, which were issued to
an aggregate of eight persons and/or entities.
On or about November 9, 2004, we filed a report on Form 8-K, advising
that 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 addition, 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. In addition,
this report also amended the prior disclosure concerning a mistake in the number
of shares issued pursuant to the conversion of certain outstanding convertible
promissory notes.
On or about December 6, 2004, we filed an amendment to our Form 8-K
filed October 1, 2004, wherein we included the financial statements required to
be filed as part of the Agreement and Plan of Reorganization with Dragon.
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Subsequent Event
On February 16, 2005, we filed a report on Form 8-K, advising that a
holder of a convertible promissory note elected to convert the same in to
1,095,000 shares of our common stock.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this amendment to its report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Ningbo, China on
November 10, 2005.
DRAGON INTERNATIONAL GROUP CORP.
By: /s/ David Wu
David Wu,
CEO, Principal Executive Officer
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