10QSB 1 v023658_10-qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM l0-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005 [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________to _________ Commission file number 000-27351 American Dairy, Inc. -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Utah 87-0445575 --------------------------------- --------------------------------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) C-16 Shin chen international building, No. 10, Jiu-shen Road, Zho Yan Chu, Beijing, The People's Republic of China -------------------------------------------------------------------------------- (Address of principal executive offices) 011-0452-4312688 -------------------------------------------------------------------------------- (Issuer's telephone number) Not Applicable -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [_] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [_] No [_] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 13,969,539 shares as of August 12, 2005. Transitional Small Business Disclosure Format (Check one): Yes [_] No [X] AMERICAN DAIRY, INC. INDEX PART I: FINANCIAL INFORMATION Item 1: Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheet as of June 30, 2005 3 Condensed Consolidated Statements of Operations for the Three And Six Month Periods Ended June 30, 2005 and 2004 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005, And 2004 5 Notes to the Condensed Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis or Plan of Operations 17 Item 3 Controls and Procedures 22 PART II OTHER INFORMATION Item 1 Legal Proceedings 20 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 20 Item 3 Defaults upon Senior Securities 20 Item 4 Submission of Matters to a Vote of Security Holders 20 Item 5 Other Information 21 Item 6 Exhibits and Reports on Form 8-K 21 Signatures 21 2 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AMERICAN DAIRY INC. CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 2005 (Unaudited) ASSETS Current assets: Cash $ 7,396,535 Accounts receivable Trade 4,033,310 Other 1,378,842 Inventories 5,512,132 Prepaid expenses 867,012 Advances to suppliers 965,005 Other tax refundable 58,707 ----------- Total current assets 20,211,543 ----------- Property and equipment: Fixed assets, net of accumulated depreciation of $593,856 16,101,684 Construction in progress 15,278,420 ----------- 31,380,104 ----------- Other assets: Goodwill 7,000 ----------- 7,000 ----------- Total assets $51,598,647 =========== See accompanying notes to financial statements. 3 AMERICAN DAIRY INC. CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 2005 (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 7,960,745 Other liabilities - fixed asset purchase obligation 5,300,000 Current portion of long term debt 101,812 Advances from related parties 1,137,166 Advances from employees 1,204,331 Deferred income 2,260,458 Short-term loans and notes payable 6,993,482 ----------- Total current liabilities 24,957,994 ----------- Long term debt, net of current portion shown above 3,326,389 ----------- Minority interest 485,743 ----------- Stockholders' equity: Common stock, $.001 par value; 50,000,000 shares authorized; 13,969,539 issued and outstanding 13,970 Additional paid-in capital 8,718,611 Retained earnings 14,095,940 ----------- Total stockholders' equity 22,828,521 ----------- Total liabilities and stockholders' equity $51,598,647 =========== See accompanying notes to financial statements. 4
AMERICAN DAIRY INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended June 30, Six Months Ended June 30, ---------------------------- ---------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ SALES $ 15,143,413 $ 9,620,155 $ 29,264,329 $ 17,768,156 COST OF GOODS SOLD 7,593,697 4,510,579 14,891,055 8,575,922 ------------ ------------ ------------ ------------ Gross Profit 7,549,716 5,109,576 14,373,274 9,192,234 ------------ ------------ ------------ ------------ OPERATING AND ADMINISTRATIVE EXPENSES: Distribution expenses 4,023,034 3,133,316 7,914,636 6,047,072 General and administrative expenses 509,820 463,365 779,975 701,311 Other operating expenses -- 24,103 -- 24,103 Depreciation 201,645 19,672 238,608 34,953 ------------ ------------ ------------ ------------ 4,734,499 3,640,456 8,933,219 6,807,439 ------------ ------------ ------------ ------------ Income from operations 2,815,217 1,469,120 5,440,055 2,384,795 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Other income (expenses) 51,789 (15,838) 62,135 8,357 Gain on disposal of assets -- 2,628 -- 2,628 Interest and finance costs (43,756) (10,629) (45,613) (22,165) ------------ ------------ ------------ ------------ 8,033 (23,839) 16,522 (11,180) ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 2,823,250 1,445,281 5,456,577 2,373,615 (PROVISION FOR) BENEFIT FROM INCOME TAXES -- -- -- 261,621 ------------ ------------ ------------ ------------ $ 2,823,250 $ 1,445,281 $ 5,456,577 $ 2,635,236 ============ ============ ============ ============ NET INCOME BASIC NET INCOME PER COMMON SHARE $ 0.21 $ 0.12 $ 0.40 $ 0.22 ============ ============ ============ ============ WEIGHTED AVERAGE BASIC SHARES OUTSTANDING 13,756,377 11,750,970 13,656,918 11,750,970 ============ ============ ============ ============ DILUTED NET INCOME PER COMMON SHARE $ 0.18 $ 0.12 $ 0.36 $ 0.22 ============ ============ ============ ============ WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 15,409,938 11,750,970 15,310,479 11,750,970 ============ ============ ============ ============
See accompanying notes to financial statements. 5
AMERICAN DAIRY INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 2005 2004 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,456,577 $ 2,635,236 Adjustments to reconcile net income to operating activities Depreciation 238,608 133,305 Compensation expense for stock issued 642,850 -- Gain on disposal of assets -- 2,628 Changes in assets and liabilities: (Increase) decrease in - Accounts and notes receivable (3,362,730) (1,065,373) Other receivables (778,623) (372,965) Inventories (469,734) (73,772) Prepaid expenses (301,943) (59,009) Advances to suppliers (657,339) 113,621 Other tax refundable (21,324) 300,069 Increase (decrease) in - Accounts payable and accrued expenses (1,073,211) 1,158,188 Other liabilities-fixed asset purchases obligations 5,300,000 -- Advances from related parties (4,415) 723,633 Advances from employees 550,466 159,300 Deferred income (7,434,065) (4,053,001) Tax payable -- (210,299) -------------- -------------- Net cash used by operating activities (1,914,883) (608,439) -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (7,315,504) (150,988) Payments received on note receivable 217,391 -- Contributions by minority interest 305,285 -- Deposit on land, building and equipment -- (580,569) Additions to construction in progress (555,073) (1,154,171) -------------- -------------- Net cash (used by) investing activities (7,347,901) (1,885,728) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term debt 6,993,482 302,118 Proceeds from long-term debt 2,520,542 -- Proceeds from stock issuance 550,000 -- Repayment of advance from shareholder -- 58,525 Repayment of long-term loans (49,902) -- Purchase obligation -- (72,463) -------------- -------------- Net cash provided by financing activities 10,014,122 288,180 -------------- -------------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 751,338 (2,205,987) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,645,197 3,040,600 -------------- -------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,396,535 $ 834,613 ============== ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid, net of capitalized amounts $ 10,017 -- ============== ============== Income taxes paid $ -- $ -- ============== ============== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Stock issued for services $ 642,850 $ -- ============== ==============
See accompanying notes to financial statements. 6 AMERICAN DAIRY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 (UNAUDITED) -------------------------------------------------------------------------------- 1. DESCRIPTION OF BUSINESS ORGANIZATIONAL STRUCTURE American Dairy, Inc. ("American Dairy" or the "Company") was incorporated in the State of Utah on December 31, 1985, originally with the name of Gaslight, Inc. It was inactive until March 30, 1988 when it changed its corporate name to Lazarus Industries, Inc. and engaged in the business of manufacturing and marketing medical devices. This line of business was discontinued in 1991, and it became a non-operating public company shell. During 2003, the Company changed its name to American Dairy, Inc. Effective May 7, 2003, American Dairy completed the acquisition of 100% of the issued and outstanding capital stock of American Flying Crane Corporation ("AFC"), a Delaware corporation. As a result, AFC became a wholly owned subsidiary of American Dairy. In preparation for this acquisition, which was treated as a reverse merger for financial reporting purposes, American Dairy completed a 1 to 19 reverse stock split reducing the number of shares of common stock outstanding from 7,485,147 to 394,168. In addition, American Dairy shareholders canceled 258,638 shares reducing the number of shares outstanding at the acquisition date to 135,530 shares. American Dairy purchased all of the outstanding capital stock of AFC from its shareholders in exchange for 9,650,000 shares of restricted common stock. This acquisition was treated as a purchase for financial reporting purposes with AFC being the purchaser and American Dairy being the purchased entity. This purchase resulted in the creation of $7,000 in goodwill. AFC was incorporated on January 15, 2002 in Delaware, with 50,000,000 authorized shares of common stock at a par value of $0.0001 per share and 10,000 of which authorized shares are currently issued and outstanding. AFC owns 100% of the registered capital of Heilongjiang Feihe Dairy Co., Limited ("Feihe Dairy") and Feihe Dairy in turn owns 100% of the registered shares of BaiQuan Feihe Dairy Co. Limited ("BiaQuan Dairy") and Heilongjiang Sanhao Dairy Co., Limited ("Sanhao Dairy") which was liquidated into BisQuan Dairy during 2004, and 95% of Beijing Feihe Biotechnology Scientific and Commercial Co., Limited (Beijing Feihe) with the other 5% being held in trust for the Company. AFC also owns 60% of the registered capital of Shanxi Feihesantai Biotechnology Scientific and Commercial Co., Limited (Shanxi) formed to develop and operating a walnut processing plant. Currently, the principal core activity of AFC is investment holdings, while the principal core activities of Feihe Dairy, Sanhao Dairy and BiaQuan Dairy are manufacturing and distribution of dairy products under the Feihe trademarks. The principal core activity of Shanxi is the production and distribution of walnut powder. The subsidiaries' principal country of operations is the People's Republic of China ("PRC"). Heilongjiang Feihe Dairy Co. Limited ("Feihe Dairy") was registered in Heilongjiang Province, in the People's Republic of China ("PRC") as a limited liability company on August 21, 1996 with a registered capital of $894,226 (Rmb. 7,404,193). 7 AMERICAN DAIRY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 (UNAUDITED) -------------------------------------------------------------------------------- Feihe Dairy's wholly-owned subsidiaries, Heilongjiang Sanhao Dairy Co. Limited ("Sanhao Dairy") was registered in Heilongjiang Province in the People's Republic of China as a limited liability company on March 28, 2001 with registered capital of $433,110 (Rmb.3,586,150) and a defined period of existence of four years to February 28, 2005 and BaiQuan Feihe Dairy Co. Limited ("BaiQuan Dairy") were registered on September 16, 2002 with a registered capital of $120,773 (Rmb.1,000,000) and a defined period of existence of one year to September 15, 2003. Upon an application by the Company, BaiQuan Dairy's defined period of existence was extended for a further period of three years to October 20, 2006. During 2004, Sanhao Dairy was liquidated into BaiQuan Dairy. Feihe Dairy's subsidiary Beijing Feihe Biotechnology Scientific and Commercial Co., Limited (Beijing Feihe) was registered on June 8, 2004, in the People's Republic of China as a limited liability company with registered share capital of $1,207,729 (Rmb 10,000,000) and a defined period of existence of 20 years to June 7, 2024. AFC's 60% owned subsidiary Shanxi Feihesantai Biotechnology Scientific and Commercial Co., Limited (Shanxi) was registered in Shanxi province, in the People's Republic of China ("PRC") as a limited liability Company on April 15, 2004, with a registered capital of $402,174 (Rmb.3,330,000) and a defined period of existence of 15 years to April 15, 2019. Shanxi's remaining 40% of registered capital of $402,174 (Rmb.3,330,000) is owned by Licheng Shantai Technology Enterprises Co., Limited. Included in the condensed consolidated financial statements are the following subsidiaries: o American Flying Crane Corporation o Heilongjiang Feihe Dairy Co., Limited o Heilongjiang Sanhao Dairy Co., Limited o BaiQuan Feihe Dairy Co., Limited o Beijing Feihe Biotechnology Scientific and Commercial Co., Limited o Shanxi Feihesantai Biotechnology Scientific and Commercial Co., Limited As of June 30, 2005, Feihe Dairy had a new production facility, Feihe Industrial Park, under construction. Construction is substantially complete as of June 30, 2005, and production is anticipated to commence in October 2005. Additionally, Shanxi's principal production facility was still under construction at June 30, 2005, with completion of the facility expected by the end of 2005. 2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and related notes. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the balance sheet of American Dairy, Inc. and subsidiaries as of June 30, 2005, and the results of their operations for the three and six month periods ended June 30, 2005 and 2004, and their cash flows for the six month periods ended June 30, 2005 and 2004. The results of operations for the three and six month periods ended June 30, 2005 and 2004 are not necessarily indicative of the results to be expected for the entire year. 8 AMERICAN DAIRY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 (UNAUDITED) -------------------------------------------------------------------------------- 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies: CONSOLIDATION POLICY - All significant inter-company transactions and balances within the Company are eliminated on consolidation. CASH AND EQUIVALENTS - The Company considers all highly liquid debt instruments purchased with maturity period of three months or less to be cash equivalents. The carrying amounts reported in the accompanying consolidated balance sheet for cash and cash equivalents approximate their fair value. ACCOUNTS RECEIVABLE - Provision is made against accounts receivable to the extent which they are considered to be doubtful. Accounts receivable in the balance sheet is stated net of such provision. As of June 30, 2005, no provision for doubtful accounts was considered necessary. INVENTORIES - Inventories comprise raw materials, consumables and goods held for resale and are stated at the lower of cost or market value. Cost is calculated using the weighted average method and includes any overhead costs incurred in bringing the inventories to their present location and condition. Market value represents the estimated selling price in the ordinary course of business less the estimated costs necessary to complete the sale. CONSTRUCTION-IN-PROGRESS - All facilities purchased for installation, self-made or subcontracted are accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, including cost of facilities, installation expenses and the interest capitalized during the course of construction for the purpose of financing the project. Upon completion and readiness for use of the project, the cost of construction-in-progress is to be transferred to fixed assets. LONG-LIVED ASSETS AND DEPRECIATION - The Company recognizes impairment losses on long-lived assets used in operations when impairment indicators are present and the undiscounted cash flows estimated to be generated by these assets are less than their carrying values. Long-lived assets held for disposal are valued at the lower of carrying amount or fair value less cost to sell. The cost of property, plant and equipment less anticipated salvage values of 10% is being depreciated on a straight-line basis over the estimated useful lives of the related assets. Land use rights are being amortized on a straight-line basis over the term of the use agreement. Estimated useful lives used for computing depreciation are as follows: Buildings 33 years Plant and machinery 20 years Motor vehicles 9 years Computers and equipment 5 years 9 AMERICAN DAIRY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 (UNAUDITED) -------------------------------------------------------------------------------- DEFERRED REVENUES - Revenue from the sale of goods or services is recognized when goods are delivered or services are rendered. Receipts in advance for goods to be delivered or services to be rendered in the subsequent year are carried forward as deferred revenue. REVENUE RECOGNITION - Revenue from the sale of goods is recognized on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and the title has passed. Interest income is recognized when earned, taking into account the principal amounts outstanding and the interest rates applicable. Sundry income includes compensations received from the State Bureau as incentive to relocate from the previous factory premises, profit from the sales of raw materials to third parties and write back of long outstanding trade payables. FOREIGN CURRENCIES - The financial position and results of operations of the Company are determined using the local currency ("Renminbi" or "Yuan") as the functional currency. Foreign currency transactions during the year are converted at the average rate of exchange during the reporting period. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the market rate of exchange ruling at that date. All exchange differences are dealt with in the statements of operation. The Company's principal country of operations is in The People's Republic of China. The registered equity capital and fixed assets denominated in the functional currency are translated at the historical rate of exchange at the time of capital contribution and purchases of fixed assets and exchange differences arising from translating equity capital, reserves and fixed assets at the exchange rate ruling at the balance sheet date are dealt with as an exchange fluctuation reserve in shareholders' equity. TAXATION - Taxation on overseas profits has been calculated on the estimated assessable profits for the year at the rates of taxation prevailing in the country in which the Company operates. Provision for the PRC income tax is calculated at the prevailing rate based on the estimated assessable profits less available tax relief for losses brought forward. Enterprise income tax Under the Provisional Regulations of the PRC Concerning Income Tax on Enterprises promulgated by the State Council and which came into effect on January 1, 1994, income tax is payable by enterprises at a rate of 33% of their taxable income. Preferential tax treatment may, however, be granted pursuant to any law or regulations from time to time promulgated by the State Council. Enterprise income tax ("EIT") is provided on the basis of the statutory profit for financial reporting purposes, adjusted for income and expense items, which are not assessable or deductible for income tax purposes. Under the Business Promotion Policy Concerning Income Tax on Foreign Enterprises promulgated by the QiQiHaEr City Municipal Government, foreign owned enterprises registered in QiQiHaEr City are entitled to a tax holiday of seven years for full EIT exemption as though the EIT has been paid during the tax holiday periods. The preferential tax treatment will commence when the Company commences to generate assessable income after all accumulated tax losses have been deducted from the assessable income. 10 AMERICAN DAIRY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 (UNAUDITED) -------------------------------------------------------------------------------- Value added tax The Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, value added tax is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC. Value added tax payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of value added tax included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same financial year. DEFERRED TAXES - Deferred taxes are accounted for at the current tax rate in respect of timing differences between profit as computed for taxation purposes and profit as stated in the accounts to the extent that a liability or asset is expected to be payable or receivable in the foreseeable future. ADVERTISING COSTS - Advertising costs, except for costs associated with direct-response advertising, are charged to operations when incurred. The costs of direct-response advertising are capitalized and amortized over the period during which future benefits are expected to be received. RETIREMENT BENEFIT COST - According to the People's Republic of China regulations on pension, a company contributes to a defined contribution retirement plan organized by municipal government in the province in which the Company was registered and all qualified employees are eligible to participate in the plan. Contributions to the plan are calculated at 20% of the employees' salaries above a fixed threshold amount and the employees contribute 4% while the Company contributes the balance contribution of 16%. Wholly owned foreign enterprises are exempted from contribution to the retirement plan. FAIR VALUE OF FINANCIAL STATEMENTS - The carrying amounts of certain financial instruments, including cash, accounts receivable, note receivable, other receivables, accounts payable, accrued expenses, advances from staff, notes payable and other payables approximate their fair values as of June 30, 2005 because of the relatively short-term maturity of these instruments. FOREIGN CURRENCIES - The financial position and results of operations of the Company are determined using the local currency ("Renminbi" or "Yuan") as the functional currency. Foreign currency transactions during the year are converted at the average rate of exchange during the reporting period. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the market rate of exchange ruling at that date. All exchange differences are dealt with in the statements of operation. The Company's principal country of operations is in The People's Republic of China. 11 AMERICAN DAIRY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 (UNAUDITED) -------------------------------------------------------------------------------- USE OF ESTIMATES - The preparation of financial statements in accordance with generally accepted accounting principles require management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 4. CONCENTRATIONS OF BUSINESS AND CREDIT RISK The Company maintains certain bank accounts in the PRC which are not protected by FDIC insurance or other insurance. Geographic Concentration; Fluctuations in Regional Economic Conditions. Nearly all of American Dairy's sales are concentrated in the northern area of China. Accordingly, American Dairy is susceptible to fluctuations in its business caused by adverse economic conditions in this region. American Dairy's products are priced higher than non-premium quality dairy products. Although American Dairy believes that the quality, freshness, flavor and absence of artificial ingredients in its products compensate for this price differential, there can be no assurance that consumers will be willing to pay more for such products in unfavorable economic conditions, or at all. Difficult economic conditions in other geographic areas into which American Dairy may expand may also adversely affect its business, operations and finances. The Company provides credit in the normal course of business. Substantially all customers are located in The Peoples Republic of China. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. The Company is self insured for all risks and carries no liability or property insurance coverage of any kind. 5. INVENTORIES Inventories consist of the following as of June 30, 2005: Raw and partially processed materials $ 4,526,791 Finished goods 985,341 ------------ $ 5,512,132 ============ 6. CONSTRUCTION-IN-PROGRESS The Company had two major construction projects under construction at June 30, 2005 as detailed below: Feihe Dairy processing facilities $ 11,029,805 Shanxi walnut processing facility 4,248,615 ------------ Total $ 15,278,420 ============ 12 AMERICAN DAIRY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 (UNAUDITED) -------------------------------------------------------------------------------- Pursuant to a Construction Contract dated July 25, 2004 with Heilongjiang Cultivation Co., Limited for the construction of new production factory facilities in Kedong County, Heilongjiang Province at the contract sum of $4,210,870 (Rmb.34,866,000), the construction of the new production factory facilities were expected to be completed by September 1, 2004. The Directors expect that the construction of the new production factory facilities including refurbishment, decoration and installation of production plant and machineries will be completed during the third quarter of 2005. Construction-in-progress also includes construction of the new walnut powder production and distribution facility of the Company's 60% owned subsidiary, Shanxi. 7. NOTES PAYABLE During the quarter ended March 31, 2005, a short-term loan of $974,158 (Rmb.8, 066,027) was obtained from Beibei Food Factory to finance the Company's daily operations. This short-term loan is unsecured, interest free and is repayable on demand. The Company expects to repay this note in the third quarter of 2005. Effective April 27, 2005, the Company closed an unregistered offering of its Series A Convertible Note in the principal amount of $3,000,000 that bears interest at 6 1/2% per annum for a term of one year. This principal and accrued interest is convertible into the common stock of the Company at $8.00 per share at any time during the term of the note. On June 24, 2005, the Company obtained a short-term loan of $3,019,324 from China Construction Bank. This loan matures on June 20, 2006, is secured by plant and machineries, and bears interest at 6.696% per annum payable on the 20th day of each month. 8. LONG TERM DEBT At June 30, 2005, the Company had a 5.76% note payable to a financial institution. This note is secured by a building. This note is to be repaid in monthly principal payments of $7,498 plus interest over 96 months. Effective June 30, 2005, the Company closed an unregistered offering of two Series B Convertible Notes in the principal amount of $5,000,000 that bear interest at 7 1/2% per annum for a term of two years. The principal and accrued interest are convertible into the common stock of the Company at $10.00 per share at any time during the term of the note. The Company has received payment of $2,500,000 for one note, and expects to receive the second payment of $2,500,000 on or before August 14, 2005, at which time such second note will be executed. Principal payments due by year for the next five years and thereafter on these notes are as follows: Fiscal year ended December 31, Amount 2005 $ 101,812 2006 2,831,522 2007 89,976 2008 89,976 2009 89,976 Thereafter 224,939 Total $ 3,428,201 13 AMERICAN DAIRY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 (UNAUDITED) -------------------------------------------------------------------------------- 9. RELATED PARTY TRANSACTIONS At June 30, 2005, the Company had a balance to directors/shareholders in the amount of $1,137,166. These advances are non-interest bearing and have no repayment terms. 10. INCOME TAX Enterprise income tax ("EIT") in The People's Republic of China is provided on the basis of the statutory profit for financial reporting purposes, adjusted for income and expense items, which are not assessable or deductible for income tax purposes. No income tax has been provided as Feihe Dairy is entitled to a tax holiday of seven years for full EIT exemption as though the EIT has been paid during the tax holiday periods. There are no material timing differences between the reporting of book and taxable income which would give rise to a deferred income tax asset or liability as of June 30, 2005. 11. EARNINGS PER SHARE SFAS No. 128 requires a reconciliation of the numerator and denominator of the basic and diluted earnings per shares (EPS) computations. The following reconciles the components of the EPS computation:
-------------------------------------------------------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount FOR THE THREE MONTHS ENDED JUNE 30, 2005 Basic EPS income available to Common shareholders $ 2,823,250 13,756,377 $ .21 EFFECT OF DILUTIVE SECURITIES: Warrants issued 1,653,561 $ .04 Diluted EPS income available to $ 2,823,250 15,409,938 $ .18 Common FOR THE THREE MONTHS ENDED JUNE 30, 2004 Basic EPS income available to $ 1,445,281 11,750,970 $ .12 Common shareholders EFFECT OF DILUTIVE SECURITIES: Warrants issued Diluted EPS income available to $ 1,445,281 11,750,970 $ .12 Common
14 AMERICAN DAIRY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 (UNAUDITED) --------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount FOR THE SIX MONTHS ENDED JUNE 30, 2005 Basic EPS income available to Common shareholders $ 5,456,577 13,656,918 $ .40 EFFECT OF DILUTIVE SECURITIES: Warrants issued 1,653,561 $ .04 Diluted EPS income available to $ 5,456,577 15,310,479 $ .36 Common FOR THE SIX MONTHS ENDED JUNE 30, 2004 Basic EPS income available to $ 2,635,236 11,750,970 $ .22 common shareholders EFFECT OF DILUTIVE SECURITIES: Warrants issued Diluted EPS income available to $ 2,635,236 11,750,970 $ .22 common
During the quarter ended June 30, 2005, the Company issued Series A and Series B Convertible Notes Payable (See Notes 7 and 8). These notes allow the holder to convert each note to common stock of the Company at any time during the term of the note. At June 30, 2005, the effects of such a conversion on earnings per share were anti-dilutive. 12. STOCK OPTIONS AND WARRANTS Effective May 7, 2003, the Company adopted and approved its 2003 Incentive Stock Plan (the "Plan") which reserved 3,000,000 shares of Common Stock for issuance under the Plan. The Plan allows the Company to issue awards of incentive non-qualified stock options, stock appreciation rights, and stock bonuses to directors, officers, employees and consultants of the Company which may be subject to restrictions. The Company applies APB 25 and related interpretations in accounting for its plan. Compensation for services that a corporation receives under APB 25 through stock-based compensation plans should be measured by the quoted market price of the stock at the measurement date less the amount, if any, that the individual is required to pay. Compensation expense of $642,850 was recorded during the period ended June 30, 2005 related to the Plan. No compensation expense was recorded during the period ended June 30, 2004. 15 AMERICAN DAIRY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 (UNAUDITED) -------------------------------------------------------------------------------- As of June 30, 2005, the Company had 2,654,117 warrants outstanding at an average exercise price of $2.40 per warrant for one share each of the Company's common stock. The warrants will expire three years from the issuance date, with 828,571 expiring in 2006 and the balance of 1,825,546 expiring in 2007. During the quarter ended June 30, 2005, 314,285 warrants were exercised for $1.75 per share, resulting in proceeds of $550,000 to the Company. 13. COMMITMENTS As of June 30, 2005, the Company has future commitments for construction-in-progress of $2,178,971, to acquire land use rights totaling $269,872, and to pay future advertising costs totaling $1,083,501. In accordance with the terms and conditions of a Sale and Purchase Agreement dated February 23, 2005 between Feihe Dairy and a vendor for the sale and purchase of a land use right in Beijing, in the People's Republic of China, Feihe Dairy agreed to acquire the commercial property for consideration of $987,863 of which three installments totaling $396,075 have been paid as of June 30, 2005. In accordance with the terms and conditions of a Sale and Purchase Agreement dated July 25, 2003, the Company has agreed to acquire land use rights and a factory in Kedong County for a total consideration of $400,966. If payment is not made by July 24, 2004, the Company has agreed to issue 200,000 shares of its common stock in full and final settlement of the consideration. The financial commitment has not been paid and the Vendor has demanded that the consideration be settled in full by the issue of 200,000 common stocks of American Dairy, Inc., at the exercise price of $2 each, totaling $400,000. The liability has been booked as of June 30, 2005 and there is no outstanding commitment. In accordance with the terms and conditions of a Construction Contract (the "Contract") dated October 2, 2004 between Feihe Dairy and Eastern Liaoning Construction Co., Limited for the construction of steel frame of the new factory, the Company agreed to pay the steel frame of the new factory at the agreed total construction costs of $724,638 of which deposits totaling $241,546 have been paid as of December 31, 2004. The balance of $483,092 shall be settled based on the progress of the construction. In accordance with the terms and conditions of a Contract dated October 1, 2004, Feihe Dairy entered into a Sales and Purchase Contract (the "Contract") with Heilongjiang Da San Yuan Dairy Machinery Co., Limited for the design, manufacture and installation of production plant and machineries at a consideration of $7,234,300 of which $5,538,421 have been paid. The balance of $1,695,879 shall be settled based on the progress of the construction. Pursuant to the Asset Purchase Agreement dated May 20, 2005, Nutricia Nutritionals Co., Limited, Heilongjiang agreed to sell and the Company agreed to purchase certain assets, operational agreements of business and inventories as listed at a consideration of $7,300,000 with respect to the assets and inventory of $130,000 totaling $7,430,000. As of June 30, 2005, $2,000,000 of the consideration has been paid by the Company. The remaining balance is payable in two installments of $2,000,000 and $3,430,000 which were due on July 1, 2005 and July 23, 2005, respectively. The Company has not met the payment terms of the Asset Purchase Agreement. If all of the payments of the purchase price were not completed by July 31, 2005, the seller may rescind or terminate the Agreement. Management expects to pay the balance of the consideration during the third quarter of 2005 and complete the transaction. 16 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS (1) Caution Regarding Forward-Looking Information When used in this report, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding events, conditions, and financial trends that may affect the Company's future plans of operations, business strategy, operating results, and financial position. Persons reviewing this report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. These risks and uncertainties, many of which are beyond our control, include (i) the sufficiency of existing capital resources and the Company's ability to raise additional capital to fund cash requirements for future operations; (ii) volatility of the stock market; and (iii) general economic conditions. Although the Company believes the expectations reflected in these forward-looking statements are reasonable, such expectations may prove to be incorrect. (2) Plan of Operations The predecessor of American Dairy, Inc. (the "Company") had been inactive for a number of years, and has had no revenue from operations during the quarter ended June 30, 2005 or the quarter ended June 30, 2004. The Company entered into a Stock Exchange Agreement (the "Exchange Agreement") with American Dairy Holdings, Inc. ("American Dairy"), a Delaware corporation, and the shareholders of American Dairy. This transaction closed May 7, 2003. Following the completion of this transaction, the Company changed its name to "American Dairy, Inc.," new management was appointed, and the milk processing operations of American Dairy became the principal operations of the Company. The operations of the Company are conducted primarily through its wholly-owned subsidiary, Feihe Dairy, and Feihe Dairy's subsidiaries, Sanhao Dairy and Baiquan Feihe, all of which are enterprises organized and operating in The People's Republic of China ("PRC"). Feihe Dairy engages in the production and distribution of milk powder, soybean milk powder and other dairy products in the PRC. The principal activities of Sanhao Dairy and Baiquan Feihe are the production and supply of processed milk to Feihe Dairy. The products are sold primarily under the registered trademark "Feihe". The Company and its subsidiaries believe that they have sufficient capital to meet their cash requirements at the present level of operations over the next twelve months. However, it is management's plan to expand the operations of American Dairy as quickly as reasonably practicable. Under these circumstances, the Company will need substantial additional capital to fund such expansion efforts. There can be no assurance that the Company will be able to raise capital when desired, or on terms favorable to the Company. American Dairy and its subsidiaries do not anticipate any significant changes in its number of employees over the next twelve months. The Company's plan of operation will depend on its ability to continue its current operations and to gain greater market share in the PRC. There is no assurance that the operations of the Company will be successful. (3) Results of Operations Comparison of operations for the three months ended June 30, 2005 with the three months ended June 30, 2004: The Company had a $1,377,969 or a 95% increase in net income to $2,823,250 during the three months ended June 30, 2005 from $1,445,281 the comparable period in 2004. Components of sales and expenses resulting in this increase in net income are discussed below. Sales revenues increased by $5,523,258 or 57% quarter-on-quarter to $15,143,413 for the quarter ended June 30, 2005 compared to the same corresponding quarter in 2004 of $9,620,155. The second quarter's sales revenues represented average monthly sale revenues of $5,047,804 compared to the corresponding quarter in 2004 of $3,206,718. The reasons of the favorable variance in sales revenues for the second quarter ended June 30, 2005 were as follows: - Increased popularity of "Feihe" brand in mainland China following the successful advertising campaigns in the previous year and extensive networks of principal agents in 25 provinces of the PRC. - Demand was boosted by improved and high quality ingredients for several products such as Ca+Zn, CPP series, the newly introduced rice powder and nucleotides series, and the markets in the PRC generally accepted these products. - Increase in sales quantities of several major products such as milk powder with nucleotides series and CPP series in the second quarter of 2005 compared to the corresponding quarter in 2004 by approximately 296% and 173%, respectively. - Extensive sales network enhances the distribution of Feihe Dairy's products to different provinces in the northeastern part of China - the "milk belt". It not only enhanced the popularity of 'Feihe' trademark, but also promoted the Feihe's products to remote areas in China. 17 - Increase in overall sales quantity by 575,016 kilograms or 17% quarter-on-quarter to 3,966,193 kilograms for the quarter ended June 30, 2005 compared to the same corresponding quarter of 3,391,177 kilograms in 2004. - The dairy milk scandal in China in 2003 and 2004 and the resulting strict control over dairy producers' quality and ingredients drove many unscrupulous dairy producers and their tainted dairy products out of the market. Consumers concentrated on dairy products produced by such reputable dairy producers and Feihe Dairy. The average selling price of all products during the quarter ended June 30, 2005 increased by 38% as compared to the quarter ended June 30, 2004. Accordingly, the favorable variance in sales revenues was mainly attributed to increases in sales volume and average selling price. Cost of goods sold increased by $3,083,118 or 68% quarter-on-quarter to $7,593,697 for the quarter ended June 30, 2005 compared to the same corresponding quarter in 2004 of $4,510,579. Quarter-on-quarter increases in cost of goods sold of 68% exceeded increases in sales revenues of 57%. Gross profit increased by $2,440,140 or approximately 47% quarter-on-quarter to $7,549,716 for the quarter ended June 30, 2005 compared to the same corresponding quarter in 2004 of $5,109,576. Gross profit margin decreased to 49% for the quarter ended June 30, 2005 compared to 53% for the same corresponding quarter in 2004. The variance was principally due to an increase in sales volume and orders. Distribution and other operating costs represented expenditures in connection with the distribution of milk powder and soybean powder. Distribution expenses increased by $889,718 or 28% quarter-on-quarter to $4,023,034 for the quarter ended June 30, 2005 compared to $3,133,316 for the corresponding quarter in 2004. Variance in selling expenses was principally attributable to the increases in advertising and promotions costs and supermarket display and consignment expenses, in excess of the decrease in salary and inspection expenses. Administrative expense increased by $46,455 or 10% to $509,820 during the three months ended June 30, 2005 from $463,365 during the same period in 2004. The increase is due primarily to fees paid for commissions and listing fees, as well as increases in administrative staff salaries at the Feihe Dairy level. Total other income/expenses increased by $ 67,628 quarter-on-quarter to $51,789 for the quarter ended June 30, 2005 compared to ($15,838) for the same corresponding quarter in 2004. During the three months ended June 30, 2005 and 2004, the Company incurred $43,756 and $10,629, respectively, of interest and financing costs associated with debts. Net income increased by $1,377,969 or 95% quarter-on-quarter to $2,823,250 for the quarter ended June 30, 2005 compared to the same corresponding quarter in 2004 of $1,445,281. The favorable variance in net income was mainly due to increases in gross profit by $2,440,140 or 47% quarter-on-quarter to $7,549,716 for the quarter ended June 30, 2005, in excess of increases in general expenses. Comparison of operations for the six months ended June 30, 2005 compared with the six months ended June 30, 2004: The Company had a $2,821,341 or 107% increase in net income from $2,635,236 during the six months ended June 30, 2004 to $5,456,577 for the comparable period in 2005. Components of sales and expenses resulting in this increase in net income are discussed below. Sales increased by $11,496,173 or 65% from $17,768,156 for the six months ended June 30, 2004 to $29,264,329 for the six months ended June 30, 2005. The first six months sales revenues represented average monthly sale revenues of $4,877,388 compared to the corresponding six months in 2004 of $2,961,359.The reasons for the favorable variance in sales revenues for the six months ended June 30, 2005 were as follows: - Increased popularity of "Feihe" brand in mainland China following the successful advertising campaigns in the previous year and extensive networks of principal agents in 25 provinces of the PRC. - Demand was boosted by improved and high quality ingredients for several products such as Ca+Zn, CPP series, and nucleotides series, and the markets in the PRC generally accepted these products. - Increase in sales quantities of several major products such as milk powder with nucleotides series and CPP series in the first six months of 2005 compared to the corresponding period in 2004 by approximately 541% and 119%, respectively. - Extensive sales network enhances the distribution of Feihe Dairy's products to different provinces in the northeastern part of China - the "milk belt". It not only enhanced the popularity of 'Feihe' trademark, but also promoted the Feihe's products to remote areas in China. - Increase in overall sales quantity by 727,176 kilograms or 11% period-on-period to 7,614,266 kilograms for the half year ended June 30, 2005 compared to the same corresponding period of 6,887,090 kilograms in 2004. - The dairy milk scandal in China in 2003 and 2004 and the resulting strict control over dairy producers' quality and ingredients drove many unscrupulous dairy producers and their tainted dairy products out of the market. Consumers concentrated on dairy products produced by such reputable dairy producers and Feihe Dairy. 18 The average selling price of all products during the six months ended June 30, 2005 increased by 51% as compared to the six months ended June 30, 2004. Accordingly, the favorable variance in sales revenues was mainly attributed to increases in sales volume and average selling price. Cost of goods sold increased by $6,315,133 or 74% from $8,575,922 for the six months ended June 30, 2004 to $14,891,055 for the comparable period in 2005. Period-on-period increases in cost of goods sold of 74% had unfavorably exceeded increases in sales revenue of 65%. Gross profit increased by $5,181,040 or approximately 56% from $9,192,234 for the six months ended June 30, 2004 compared to the same corresponding six months in 2005 of $14,373,274, mainly attributable to increase in sales volume and orders. Gross profit margin decreased to 49% for the six months ended June 30, 2005 compared to 51% for the same corresponding period in 2004, principally due to increases in certain raw materials, such as whey powder, sugar and fat free powder. Distribution expenses increased by $1,867,564 or 31% from $6,047,072 in the six months ended June 30, 2004 to $7,914,636 for the comparable period in 2005. Variance in selling expenses was principally attributable to the increases in advertisements, sundry expense, and supermarket display and consignment. Administrative expenses increased by $78,664 or 11% from $701,311 during the six months ended June 30, 2004 to $779,975 during the same period in 2005. This increase is due primarily to increases in administrative salaries and other administrative costs associated with increased sales. During the six months ended June 30, 2005 and 2004, the Company incurred $45,613 and $22,165, respectively, in interest and financing costs associated with debts. Net income increased by $2,821,341 or 107% to $5,456,577 for the six months ended June 30, 2005 compared to the same corresponding six months in 2004 of $2,635,236. The favorable variance in net income was mainly due to increases in gross profit by $5,181,040 or 56% period-on-period to $14,373,274 for the six months ended June 30, 2005, in excess of increases in general expenses. (4) Liquidity and Capital Resources The Company anticipates that it will have adequate working capital in the foreseeable future. However, the Company may wish to borrow additional amounts or sell its common stock to realize additional funds in order to expand and grow its operations. Effective April 27, 2005, the Company closed an unregistered offering of a convertible note in the principal amount of $3,000,000 that bears interest at 6 1/2 % per annum for a term of one year, which is convertible into the Common Stock of the Company at $8.00 per share at any time during the term of the note. The sale was made to one accredited institutional investor, as defined by Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Act"). The offering was made in reliance upon an exemption from registration under Section 4 (2) of the Act. The proceeds will be used primarily towards the payment of the costs of acquisitions by the Company, and for working capital. Effective May 27, 2005, the Company issued 314,285 shares of common stock , pursuant to the exercise of 314,285 warrants for common stock and the receipt of proceeds of $550,000 in May. Effective June 30, 2005, the Company closed an unregistered offering of two of its Series B Convertible Notes in the principal amount of $5,000,000 that bears interest at 7 1/2 % per annum for a term of two years, which are convertible into the Common Stock of the Company at $10.00 per share at any time during the two-year term of the note. The Company has received payment of $2,500,000, and expects to receive the second payment of $2,500,000 on or before August 14, 2005. The sale was made to one accredited institutional investor, as defined by Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Act"). The offering was made in reliance upon an exemption from registration under Section 4 (2) of the Act. The proceeds will be used primarily towards the payment of the costs of acquisitions by the Company, and for working capital. (5) Contractual Obligations The following table is a summary of the Company's contractual obligations as of June 30, 2005: Less Than One
Total Year 1-3 Years Thereafter ------------- ------------- ------------- ------------- Operating Leases $ 269,872 $ 2,542 $ 17,724 $ 249,606 Unconditional Purchase Obligations 8,692,472 8,692,472 -- -- Long Term Debt 3,428,201 2,843,358 269,928 314,915 Total Contractual Cash Obligations $ 12,390,545 $ 11,538,372 $ 287,652 $ 564,521
19 When used in this report, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding events, conditions, and financial trends that may affect the Company's future plans of operations, business strategy, operating results, and financial position. Persons reviewing this report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. These risks and uncertainties, many of which are beyond our control, include (i) the sufficiency of existing capital resources and the Company's ability to raise additional capital to fund cash requirements for future operations; (ii) volatility of the stock market; and (iii) general economic conditions. Although the Company believes the expectations reflected in these forward-looking statements are reasonable, such expectations may prove to be incorrect. (2) Plan of Operations The predecessor of American Dairy, Inc. (the "Company") had been inactive for a number of years, and has had no revenue from operations during the quarter ended June 30, 2005 or the quarter ended June 30, 2004. The Company entered into a Stock Exchange Agreement (the "Exchange Agreement") with American Dairy Holdings, Inc. ("American Dairy"), a Delaware corporation, and the shareholders of American Dairy. This transaction closed May 7, 2003. Following the completion of this transaction, the Company changed its name to "American Dairy, Inc.," new management was appointed, and the milk processing operations of American Dairy became the principal operations of the Company. The operations of the Company are conducted primarily through its wholly-owned subsidiary, Feihe Dairy, and Feihe Dairy's subsidiaries, Sanhao Dairy and Baiquan Feihe, all of which are enterprises organized and operating in The People's Republic of China ("PRC"). Feihe Dairy engages in the production and distribution of milk powder, soybean milk powder and other dairy products in the PRC. The principal activities of Sanhao Dairy and Baiquan Feihe are the production and supply of processed milk to Feihe Dairy. The products are sold primarily under the registered trademark "Feihe". The Company and its subsidiaries believe that they have sufficient capital to meet their cash requirements at the present level of operations over the next twelve months. However, it is management's plan to expand the operations of American Dairy as quickly as reasonably practicable. Under these circumstances, the Company will need substantial additional capital to fund such expansion efforts. There can be no assurance that the Company will be able to raise capital when desired, or on terms favorable to the Company. American Dairy and its subsidiaries anticipate an increase in the number of the employees over the next twelve months because of its recent acquisitions and the planned completion of two new production plants. The Company's plan of operation will depend on its ability to continue its current operations and to gain greater market share in the PRC. There is no assurance that the operations of the Company will be successful. PART II - OTHER INFORMATION Item 1 Legal Proceedings N/A Item 2 Unregistered Sales of Equity Securities and Use of Proceeds The following sets forth a description of all sales and issuances of the Company's restricted securities during the three month period ended June 30, 2004, covered by this report. The Company relied upon one or more exemptions from registration under the Securities Act of 1933, including Section 4(2) of the Securities Act of 1933 and Regulation S with respect to certain sales to non-US persons, as defined by Regulation S. Effective April 27, 2005, the Company closed an unregistered offering of a Series A Convertible Note in the principal amount of $3,000,000 that bear interest at 6 1/2% per annum for a term of one year, which is convertible into the Common Stock of the Company at $8.00 per shares at any time during the term of the note. The sale was made tone accredited institutional investors, as defined by Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended. The offering was made in reliance upon an exemption from registration under Section 4(2) of the Act. Effective June 30, 2005, the Company closed an unregistered offering of two of its Series B Convertible Notes in the total principal amount of $5,000,000 that bear interest at 7 1/2% per annum for a term of two years, which are convertible into the Common Stock of the Company at $10.00 per share at any time during the two-year term of the note. The Company has received payment of $2,500,000, and expects to receive the second payment of $2,500,000 on or before August 14, 2005. The sale was made to one accredited institutional investor, as defined by Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended. The offering was made in reliance upon an exemption from registration under Section 4(2) of the Act. On May 27, 2005, the Company issued 314,285 shares of restricted Common Stock to three individuals for services in reliance upon Section 4(2) under the Securities Act of 1933, as amended. Item 3 Defaults Upon Senior Securities N/A Item 4 Submission of Matters to a Vote of Security Holders N/A 20 Item 5 Other Information The common stock of the Company has been listed on the Pacific Exchange/ARCA EX, and its trading symbol is ADY. Item 6 Exhibits and Reports on Form 8-K (a) Exhibits . 10.1 Series A Convertible Note that matures on April 25, 2006. 10.2 Series B Convertible Note that matures on June 30, 2007. 31.1 Certification of Leng You-Bin 31.2 Certification of Liu Hua 32.1 Certification of Leng You-Bin and Liu Hua (b) Reports of Form 8-K On May 26, 2005, a Form 8-K current report (Item 1.01) was filed concerning an asset purchase agreement with Nutricia Nutritionals Co., Ltd. of Hei Long Jiang. On July 11, 2005, a Form 8-K current report (Item 3.02) was filed concerning the sale of unregistered securities to an accredited institutional investor in the amount of $5,000,000. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. American Dairy, Inc. Date: August 12, 2005 By: /s/ Leng You-Bin --------------------------------------- Leng You-Bin Chief Executive Officer and President 21