| NEW DRAGON ASIA CORP ITEM 1A Risk Factors 4 ITEM 1A RISK FACTORS In addition to the other information in this annual report, the following factors should be considered carefully in evaluating the Company’s business and prospects |
| THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT ON THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR STATEMENTS We are subject to, among others, the following risks: RISKS RELATED TO OUR CLASS A COMMON STOCK We have never declared or paid any dividends on our Class A Common Stock |
| The declaration and payment in the future of any cash or stock dividends on the Class A Common Stock will be at the discretion of our Board of Directors and will depend upon a variety of factors, including our ability to service our outstanding indebtedness, if any, and to pay dividends on securities ranking senior to the Class A Common Stock, including the shares of our outstanding Series A and Series B Preferred Stock, our future earnings, if any, capital requirements, financial condition and such other factors as our Board of Directors may consider to be relevant from time to time |
| We do not expect to declare or pay any dividends on our Class A Common Stock in the foreseeable future |
| We are controlled by our major shareholder, which is controlled by our Chairman, Mr |
| Ling Wang, our Vice President and a director, is the holder of record of 100prca of the equity interests of Long Feng Food Overseas Ltd |
| (“Long Feng Food”), which in turn owns 100prca of the equity interests of New Dragon Pacific Holding Ltd, which in turn holds 100prca of the equity interests of New Dragon Asia Food Ltd |
| Lu has sole voting and dispositive control over the shares of Long Feng Food and, accordingly, has sole voting and dispositive control of the shares of us held by New Dragon Asia Food Ltd, which is our majority shareholder |
| Lu through this shareholder, effectively exercises control over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions |
| This concentration of ownership may also have the effect of delaying or preventing a change in control of us that may not be viewed as beneficial by other shareholders |
| RISKS RELATED TO OUR BUSINESS Our business may experience adverse effects from competition in the noodle, flour and soybean product markets |
| The noodle, flour and soybean product markets in the PRC are highly competitive |
| Competition in these markets takes many forms, including the following: - establishing favorable brand recognition; - developing products sought by consumers; - implementing appropriate pricing; - providing strong marketing support; and - obtaining access to retain outlets and sufficient shelf space |
| Many of our competitors are larger and have greater financial resources, including our primary competitors, the manufactures of each of the brand names “Master Kang” and “President” |
| We may not be able to compete successfully with such competitors |
| Competition could cause us to lose our market share, increase expenditures or reduce pricing, each of which could have a material adverse effect on our business and financial results |
| An inability to respond quickly and effectively to new trends would adversely impact our competitive position |
| Our failure to maintain our technological capabilities or to respond effectively to technological changes could adversely affect our ability to retain existing business and secure new business |
| We will need to constantly seek out new products and develop new solutions to maintain in our portfolio |
| If we are unable to keep current with new trends, our competitors’ technologies or products may render us noncompetitive and our products obsolete |
| 4 _________________________________________________________________ Increases in prices of main ingredients and other materials could adversely affect our business |
| The main ingredients that we use to manufacture our products are wheat, soybeans and eggs |
| We also use paper products, such as corrugated cardboard, as well as films and plastics, to package our products |
| The prices of these materials have been, and we expect them to continue to be, subject to volatility |
| We may not be able to pass price increases in these materials onto our customers, which could have an adverse effect on our financial results |
| We are subject to risks associated with joint ventures and third party agreements |
| We conduct certain of our milling and sales operations through joint ventures established with certain Chinese parties |
| Any deterioration of these strategic relationships may have an adverse effect on our operation |
| Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition |
| Under its current leadership, the Chinese government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization |
| There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice |
| We may have limited legal recourse under Chinese law if disputes arise under our agreements with joint ventures or third parties |
| The Chinese government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade |
| However, the government’s experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable |
| If our new business ventures are unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or, may hinder or prevent us from accessing important information regarding the financial and business operations of these acquired companies |
| The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination |
| Any rights we may have to specific performance, or to seek an injunction under Chinese law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring |
| The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations |
| We may be subject to product liability claims and product recalls, which could negatively impact its profitability |
| We sell food products for human consumption, which involves risks such as product contamination or spoilage, product tampering and other adulteration of food products |
| We may be subject to liability if the consumption of any of its products causes injury, illness or death |
| In addition, we will voluntarily recall products in the event of contamination or damage |
| A significant product liability judgment or a widespread product recall may negatively impact our profitability for a period of time depending on product availability, competitive reaction and consumer attitudes |
| Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that company products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image |
| We have limited business insurance coverage |
| The insurance industry in China is still in an early stage of development |
| Insurance companies in China offer limited business insurance coverage |
| As a result, we do not have any business liability insurance coverage for our operations |
| Moreover, while business disruption insurance is available, management has determined that the risks of disruption and cost of the insurance are such that we do not require it at this time |
| Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources |
| We have a limited concentration of credit risk |
| Concentration of credit risk with respect to customer receivables is limited due to the large number of customers comprising our customer base, and their dispersion across China |
| In addition, we perform ongoing credit evaluations of each customer’s financial condition and maintain reserves for potential credit losses |
| Such losses in the aggregate have not exceeded management’s expectations |
| We have acquired several companies and businesses and plan to continue to acquire companies in the future |
| Entering into an acquisition entails many risks, any of which could harm our business, including: (a) diversion of management’s attention from other business concerns; (b) failure to integrate the acquired company with our existing businesses; (c) additional operating expenses not offset by additional revenue; and (d) dilution of our stock as a result of issuing equity securities |
| If we are unable to implement our acquisition strategy, we may be less successful in the future |
| A key component of our growth strategy is accomplished by acquiring additional flour and noodle factories and, if our acquisition of a soybean business proves successful, our acquisition strategy may expand to include future acquisitions of soybean businesses |
| While there are many such companies, we may not always be able to identify and acquire companies meeting our acquisition criteria on terms acceptable to us |
| Additionally, financing to complete significant acquisitions may not always be available on satisfactory terms |
| Further, our acquisition strategy presents a number of special risks to us that we would not otherwise contend with absent such strategy, including possible adverse effects on our earnings after each acquisition, diversion of management’s attention from our core business due to the special attention that a particular acquisition may require, failure to retain key acquired personnel and risks associated with unanticipated events or liabilities arising after each acquisition, some or all of which could have a material adverse effect on our business, financial condition and results of operations |
| RISKS ASSOCIATED WITH DOING BUSINESS IN THE PEOPLE’S REPUBLIC OF CHINA We are subject to the risks associated with doing business in the People’s Republic of China |
| As most of our operations are conducted in the PRC, we are subject to special considerations and significant risks not typically associated with companies operating in North America and Western Europe |
| These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange |
| Our results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things |
| Although the majority of productive assets in the PRC 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 |
| Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that: - We will be able to capitalize on economic reforms; - The Chinese government will continue its pursuit of economic reform policies; - The economic policies, even if pursued, will be successful; - Economic policies will not be significantly altered from time to time; and - Business operations in China will not become subject to the risk of nationalization |
| Economic reform policies or nationalization could result in a total investment loss in our Class A Common Stock |
| Since 1979, the Chinese government has reformed its economic systems |
| Because many reforms are unprecedented or experimental, they are expected to be refined and improved |
| Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures |
| This refining and readjustment process may negatively affect our operations |
| Over the last few years, China’s economy has registered a high growth rate |
| Recently, there have been indications that rates of inflation have increased |
| In response, the Chinese government has taken measures to curb this excessively expansive economy |
| These measures include restrictions on the availability of domestic credit, reducing the purchasing capability of certain of its customers, and limited re-centralization of the approval process for purchases of some foreign products |
| The Chinese government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects or markets |
| These measures may adversely affect our manufacturing operations |
| 6 _________________________________________________________________ To date, reforms to China’s economic system have not adversely impacted our operations and are not expected to adversely impact operations in the foreseeable future; however, there can be no assurance that the reforms to China’s economic system will continue or that we will not be adversely affected by changes in China’s political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation and changes in the rate or method of taxation |
| On November 11, 2001, China signed an agreement to become a member of the World Trade Organization (“WTO”), the international body that sets most trade rules, further integrating China into the global economy and significantly reducing the barriers to international commerce |
| China’s membership in the WTO was effective on December 11, 2001 |
| China has agreed upon its accession to the WTO to reduce tariffs and non-tariff barriers, remove investment restrictions and provide trading and distribution rights for foreign firms |
| The tariff rate reductions and other enhancements will enable us to develop better investment strategies |
| In addition, the WTO’s dispute settlement mechanism provides a credible and effective tool to enforce members’ commercial rights |
| Also, with China’s entry to the WTO, it is believed that the relevant laws on foreign investment in China will be amplified and will follow common practices |
| The Chinese legal system is not fully developed and has inherent uncertainties that could limit the legal protections available to investors |
| The Chinese legal system is a system based on written statutes and their interpretation by the Supreme People’s Court |
| Prior court decisions may be cited for reference but have limited legal precedents |
| Since 1979, the PRC government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade |
| Two examples are the promulgation of the Contract Law of the PRC to unify the various economic contract laws into a single code, which went into effect on October 1, 1999, and the Securities Law of the People’s Republic of China, which went into effect on July 1, 1999 |
| However, because these laws and regulations are relatively new, and because of the limited volume of published cases and their non-binding nature, interpretation and enforcement of these laws and regulations involve uncertainties |
| In addition, as the Chinese legal system develops, changes in such laws and regulations, their interpretation or their enforcement may have a material adverse effect on our business operations |
| Enforcement of regulations in China may be inconsistent |
| Although the Chinese government introduced new laws and regulations to modernize its securities and tax systems on January 1, 1994, China does not yet possess a expansive body of business law |
| As a result, the enforcement, interpretation and implementation of regulations may prove to be inconsistent and it may be difficult to enforce contracts |
| We may experience lengthy delays in resolution of legal disputes |
| As China has not developed a dispute resolution mechanism similar to the Western court system, dispute resolution over Chinese projects and joint ventures can be difficult and there is no assurance that any dispute involving our business in China can be resolved expeditiously and satisfactorily |
| We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits Unites States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business |
| Foreign companies, including some that may compete with us, are not subject to these prohibitions |
| Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China |
| We have attempted to implement safeguards to prevent and discourage such practices by our employees and agents |
| We cannot assure you, however, that our employees or other agents will not engage in such conduct for which we might be held responsible |
| If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations |
| 7 _________________________________________________________________ Impact of governmental regulation on our operations |
| We may be subjected to liability for product safety that could lead to a product recall |
| Our operations and properties are subject to regulation by various Chinese government entities and agencies |
| As a producer of food products, our operations are subject to production, packaging, quality, labeling and distribution standards |
| Our production and distribution facilities are also subject to various local environmental laws and workplace regulations |
| We believe that our current legal and environmental compliance programs adequately address such concerns and that we are in compliance with applicable laws and regulations |
| However, compliance with, or any violation of, current and future laws or regulations could require material expenditures or otherwise adversely effect our business and financial results |
| We may be liable if the consumption of any of our products cause injury, illness or death |
| We may also be required to recall certain of our products that become contaminated or are damaged |
| We are not aware of any material product liability judgment against us |
| However, a product liability judgment or a product recall could have a material adverse effect on our business or financial results |
| It may be difficult to serve us with legal process or enforce judgments against our management or us |
| In addition, all of our directors and officers are non-residents of the United States, and all, or substantial portions of the assets of such non-residents, are located outside the United States |
| As a result, it may not be possible to effect service of process within the United States upon such persons |
| Moreover, there is doubt as to whether the courts of China would enforce: - Judgments of United States courts against us, our directors or our officers based on the civil liability provisions of the securities laws of the United States or any state; or - Original actions brought in China relating to liabilities against non-residents or us based upon the securities laws of the United States or any state |
| The Chinese government could change its policies toward private enterprise or even nationalize or expropriate it, which could result in the total loss of your investment |
| Our business is subject to significant political and economic uncertainties and may be adversely affected by political, economic and social developments in China |
| Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization |
| The Chinese government may not continue to pursue these policies or may significantly alter them to our detriment from time to time with little, if any, prior notice |
| Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to shareholders, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business |
| Nationalization or expropriation could even result in the total loss of our investment in China and in the total loss of your investment |
| If relations between the United States and China worsen, our stock price may decrease and we may have difficulty accessing US capital markets |
| At various times during recent years, the United States and China have had significant disagreements over political and economic issues |
| Controversies may arise in the future between these two countries |
| Any political or trade controversies between the United States and China, whether or not directly related to our business, could adversely affect the market price of our Class A Common Stock and our ability to access US capital markets |
| The Chinese economic, political and social conditions as well as government policies could affect our business |
| All of our business, assets and operations are located in China |
| The economy of China differs from the economies of most developed countries in many respects, including: - government involvement - level of development - growth rate - control of foreign exchange; and - allocation of resources 8 _________________________________________________________________ The economy of China has been transitioning from a planned economy to a more market-oriented economy |
| Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government |
| In addition, the Chinese government continues to play a significant role in regulating industry by imposing industrial policies |
| It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies |
| The economy of China has experienced significant growth in the past 20 years, but growth has been uneven both geographically and among various sectors of the economy |
| The Chinese government has implemented various measures from time to time to control the rate of economic growth |
| For example, our operating results and financial condition may be adversely affected by: - changes in the rate or method of taxation - imposition of additional restrictions on currency conversion and remittances abroad - reduction in tariff or quota protection and other import restrictions; and - changes in the usage and costs of state-controlled transportation services Fluctuations in the value of the Chinese Renminbi relative to foreign currencies could affect our operating results |
| Substantially all our revenues and expenses are denominated in the Chinese Renminbi |
| However, we use the United States dollar for financial reporting purposes |
| The value of Chinese Renminbi against the United States dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions |
| The Chinese government values the exchange rate of the Chinese Renminbi against a number of currencies, rather than just exclusively to the United States dollar |
| Although the Chinese government has stated its intention to support the value of the Chinese Renminbi, we cannot assure you that the government will not revalue it |
| As our operations are primarily in China, any significant revaluation of the Chinese Renminbi may materially and adversely affect our cash flows, revenues and financial condition |
| For example, to the extent that we need to convert United States dollars into Chinese Renminbi for our operations, appreciation of this currency against the United States dollar could have a material adverse effect on our business, financial condition and results of operation |
| Conversely, if we decide to convert our Chinese Renminbi into United States dollars for other business purposes and the United States dollar appreciates against this currency, the United States dollar equivalent of the Chinese Renminbi would be reduced |
| To date, we have not engaged in any hedging transactions in connection with our operations |