<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended: June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTON 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File No.: 333-12911
--------------------------------
LEADING EDGE PACKAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3432883
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Empire State Building, Suite 3922, 350 Fifth Avenue, New York, New York 10018
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(212) 239-1865
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports 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 / /
State the number of shares outstanding of each of the issuer's classes of common
stock: As of August 1, 1997, the issuer had 3,312,500 shares of its common
stock, par value $.01 per share, outstanding.
<PAGE>
LEADING EDGE PACKAGING, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------------------- --------
Item 1. Financial Statements
Condensed Balance Sheets 1
June 30, 1997 and March 31, 1997
Condensed Statement of Income 2
Three Months Ended
June 30, 1997 and 1996
Condensed Statement of Cash Flows 3
Three Months Ended
June 30, 1997 and 1996
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of 5-6
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
-----------------
Item 2. None 6
Item 5. Other Information 7
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
<PAGE>
LEADING EDGE PACKAGING, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
(In thousands, except per share data)
June 30, March 31,
1997 1997
-------- ---------
ASSETS
CURRENT ASSETS
Cash & cash equivalents $ 2,986 $ 4,734
Accounts receivable 1,283 4,749
Bills receivable (Note 2) 1,772 1,245
Inventories (Note 3) 1,523 749
Deposits to related party/holding co. 1,224 2,112
Receivables from a related party/holding co. 2,080 -
Prepaid expenses 51 53
-------- --------
Total Current Assets $ 10,919 $ 13,642
Property and equipment
Net of accumulation depreciation 264 274
-------- --------
TOTAL ASSETS $ 11,183 $ 13,916
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable to related party/holding co. $ - 2,996
Bills payable 240 221
Income taxes payable 1,263 1,342
Accrued liabilities 24 165
-------- --------
Total Current Liabilities $ 1,527 $ 4,724
-------- --------
LONG TERM LIABILITIES
Capital lease obligations 5 6
-------- --------
SHAREHOLDERS' EQUITY
Common Stock, par value $0.01 per share,
Authorized 5,000,000 shares,
Issued and outstanding
3,312,500 shares in 1997 33 33
and 1,875,000 shares in 1996.
Additional paid in capital 7,062 7,062
Retained earnings 2,556 2,091
-------- --------
Total Shareholders' Equity $ 9,651 $ 9,186
-------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 11,183 $ 13,916
-------- --------
-------- --------
See Accompanying Notes to (Unaudited) Financial Statements
1
<PAGE>
LEADING EDGE PACKAGING, INC.
CONDENSED STATEMENT OF INCOME
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended
June 30,
--------------------------
1997 1996
---- ----
Net Sales $2,751 $2,505
Cost of goods sold 1,610 1,697
--------- ---------
Gross profit 1,141 808
Selling, general and administrative
expenses 429 81
--------- ---------
Operating income 712 727
Other income
Interest, net of interest expense 38 -
--------- ---------
Income before income taxes 750 727
Provision for income taxes 285 276
--------- ---------
Net income $ 465 $ 451
--------- ---------
--------- ---------
Net income per share primary
and fully diluted $0.14 $0.24
--------- ---------
--------- ---------
Weighted average of
shares outstanding 3,312,500 1,875,000
--------- ---------
--------- ---------
Net income per share
fully diluted $0.14 $0.14
--------- ---------
--------- ---------
Total shares outstanding 3,312,500 3,312,500
--------- ---------
--------- ---------
See accompanying Notes to (Unaudited) Financial statements
2
<PAGE>
LEADING EDGE PACKAGING, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
June 30,
--------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 465 $ 451
Adjustment to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 18 -
Net (decrease) in cash due to
Changes in current assets and
liabilities (2,223) (412)
-------- --------
Net cash provided by (used in) operating
activities $ (1,740) $ 39
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (8) -
-------- --------
Net cash (used in) investing activities (8) -
-------- --------
Net increase (decrease) in cash and cash
equivalents $ (1,748) $ 39
Cash and cash equivalents at beginning of
period 4,734 1
-------- --------
Cash and cash equivalents at end of period $ 2,986 $ 40
-------- --------
-------- --------
Supplemental disclosure of cash flow
information:
Interest paid $ 4 $ -
-------- --------
-------- --------
Taxes paid $ 364 $ -
-------- --------
-------- --------
Supplemental disclosure of non-cash financing
activities
Contribution of additional
paid in capital by a reduction of
account payables $ - $ 481
-------- --------
-------- --------
See Accompanying Notes to (Unaudited) Financial Statement
3
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
(UNAUDITED)
Note 1. Basis of Presentation
---------------------
The accompanying unaudited financial statements of Leading Edge
Packaging, Inc. (the "Company") as of March 31, 1997 and June 30, 1996 for
the three-month period then ended, have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Certain information and footnote disclosures required under
generally accepted accounting principles have been condensed or omitted
pursuant to the Securities Exchange Act of 1934, as amended, and regulations
thereunder, although the Company believes that the disclosures are adequate
to make the information presented not misleading. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation have been included.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The results of operations for the three-month period ended June 30, 1997
and 1996 are not necessarily indicative of the results to be expected for the
entire year or for any other period. The accompanying financial statements
should be read in conjunction with the financial statements and notes thereto
included in the company's annual report on Form 10-K for the year ended March
31, 1997.
Note 2 Bills Receivable
----------------
Bills receivable represent accounts receivable on FOB sales in the form of
bills of exchange, whose acceptances and settlements are handled by banks.
At June 30, 1997, the Company had not factored any bills receivable or
accounts receivable with financial institutions.
Note 3. Inventories
-----------
Effective April 1, 1996, the Company maintains inventories for distribution
to customers in the United States. These inventories represent finished goods
and semi-finished goods for customization and resale.
4
<PAGE>
LEADING EDGE PACKAGING, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
Certain statements under this item constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). See "Part II. Item 5(a). Other Information."
General
-------
The Company sells and distributes, in North America, packaging products
used primarily in the sale of luxury consumer goods. Its packaging products
include metal, plastic and paper based jewelry, optical and watch cases,
pouches and bags, and paper gift boxes and bags, and, to a lesser extent,
premium and novelty items. The Company has a 2,000 square-foot office and
showroom in the Empire State Building, 350 Fifth Avenue, New York City and a
33,000 square-foot office and warehouse facility in Raritan Center Industrial
Park, Edison, New Jersey.
Results of Operations
---------------------
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997 TO THE THREE MONTHS
ENDED JUNE 30, 1996.
Net sales for the three months ended June 30, 1997 were approximately
$2,751,255, an increase of $245,804 or 9.8% from approximately $2,505,451 for
the three months ended June 30, 1996. The increase was primarily due to the
new U.S. domestic sales and the addition of new customers.
Cost of goods sold for the three months ended June 30, 1997 was
approximately $1,609,691, a decrease of $87,638 or 5.2% from approximately
$1,697,329 for the three months ended June 30, 1996. As a percentage of net
sales, cost of goods sold decreased from 67.7% of net sales for the three
months ended June 30, 1996 to 58.5% for the three months ended June 30, 1997.
The decrease in cost of sales as a percentage of net sales was primarily due
to the payment to Rich City International Packaging Limited, the Company's
parent and supplier, ("Rich City") of a lower average mark-up of 6.5% of its
manufacturing costs. Pursuant to the Distribution Agreement between Rich City
and the Company, the Company pays to Rich City a mark-up over the wholesale
price of between 6% and 8%, which covers all of Rich City's general and
administrative costs to process orders for the Company, including salaries,
office space and use of equipment. This decrease in cost of goods sold as a
percentage of net sales resulted in the increase in gross profits over the
same periods.
Selling, general and administrative expenses for the three months ended
June 30, 1997 were approximately $429,390, an increase of $348,832 from
approximately $80,558 for the three months ended June 30, 1996. For the
three months ended June 30, 1997, these expenses primarily consisted of
salaries, miscellaneous office expenses, additional office equipment, and
other expenses in connection with the Company's U.S. domestic operations. In
contrast, these expenses for the three months ended
5
<PAGE>
LEADING EDGE PACKAGING, INC.
June 30, 1996 reflect the costs incurred to establish facilities in the U.S.,
which at that time were not fully staffed and operational.
The Company had net income of approximately $465,392 (or $0.14 per share)
for the three months ended June 30, 1997, compared to net income of
approximately $451,090 for the three months ended June 30, 1996.
Liquidity and Capital Resources
- -------------------------------
During the three months ended June 30, 1997, the Company used
approximately $1,747,676 in net cash for its operating activities. This
amount primarily consisted of purchases of inventory, salaries, office
equipment and operations of warehouse facilities. The Company's working
capital increased to approximately $9,392,000 at June 30, 1997 from
approximately $951,090 at June 30, 1996, reflecting the major part of cash
from the proceeds from the initial public offering. The Company anticipates
that the proceeds from the offering, together with cash flows from operating
activities and obtaining one or more bank lines of credit will be sufficient
to meet its operating expenses into fiscal 1998, including amounts needed to
purchase inventory. There can be no assurance, however, that such amounts
will be sufficient to cover any unanticipated operating expenses.
$2,891,450 of the proceeds from the Company's initial public offering are
currently invested in money market funds which allow for liquidity with an
emphasis on preservation of principal amounts invested. The Company has
accepted offers of bank lines of credit totaling $5,500,000 from two banks,
First Union National Bank, New Jersey, and Bank Central Asia, New York for
trade finance and working capital.
PART II. OTHER INFORMATION
Item 1. None.
Item 2. None.
Item 3. None.
Item 4. None.
6
<PAGE>
LEADING EDGE PACKAGING, INC.
Item 5. Other Information
-----------------
(a) Forward-Looking Statements
Certain statements in this Form 10-Q and in the future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases, and in oral statements made by or with the approval of an
authorized executive officer constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors, which may cause the actual results, performance, or
achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the
following: general economic and business conditions which may impact demand
for the Company's packaging products; changes in tax laws and regulations;
the ability of the Company to implement its market consolidation strategy and
to expand its business in the North American market; and changes in laws and
government regulations applicable to the Company.
(b) Related Party Transaction
The Company, through its newly-formed wholly owned subsidiary, LEP
Products, Inc, ("LEP Products") has executed a Distribution Agreement, dated
July 28, 1997, with HBL, Limited, a Hong Kong Company, to distribute in North
America its licensed watches and clocks under the "Hang Ten" trademark. Mr.
L.B. Saw, Chairman and Chief Executive Officer of the Company, has a 20%
interest in International Distribution Concept, Ltd., a Hong Kong based
company, which is a subsidiary of HBL, Limited. Pursuant to the agreement,
which has an initial term of two years, LEP Products will be obligated to
purchase a minimum of $350,000 worth of products in the first year and
$600,000 in the second year. In exchange, HBL will grant LEP Products the
exclusive right to distribute watches and clocks manufactured by HBL under
the "Hang Ten" brand name in the Territory specified in the Agreement.
7
<PAGE>
LEADING EDGE PACKAGING, INC.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
10.1 Form of Distribution Agreement, dated July 28, 1997, by and
between the Company and HBL, Limited.
27. Financial Data Schedule.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which
this report is being filed.
8
<PAGE>
LEADING EDGE PACKAGING, INC.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEADING EDGE PACKAGING, INC.
----------------------------
Dated: August 8, 1997 By: /s/ Casey K. Tjang
-------------------------
Casey K. Tjang
Director, Chief Financial Officer and
Secretary
Signing on behalf of the registrant as principal
accounting officer.
9
<PAGE>
Exhibit 10.1
DISTRIBUTION AGREEMENT
PARTIES:
1. The "grantor": HBL Limited, a company incorporated in Hong Kong, whose
registered office is at 6th Floor, China Insurance Building, 48 Cameron Road,
T.S.T., Hong Kong.
2. The "distributor" LEP Products Inc, a company incorporated in Delaware,
United States of America.
WHEREAS, the GRANTOR has obtained the right to distribute the PRODUCTS, AND
WHEREAS, the DISTRIBUTOR wishes to ditribute the PRODUCTS in the TERRITORY,
the PARTIES have agreed to as follows,
DEFINITIONS:
1. The PRODUCTS means the goods as specified in Schedule I hereto.
2. The TERRITORY means the territory (ies) as specified in Schedule II
hereto.
3. The Minimum Guarantee as specified in Schedule III
DURATION OF AGREEMENT:
This AGREEMENT shall commence on 1st August 1997 and shall last for a period
of 2 years unless earlier terminated.
DISTRIBUTOR'S OBLIGATION
1. The DISTRIBUTOR shall purchase all of its supply of the PRODUCTS from
the GRANTOR at prices and conditions to be fixed by the GRANTOR. The prices
will be fixed by the Grantor for a one year period.
2. The DISTRIBUTOR shall use its best endeavors to promote the sale of the
PRODUCTS at the TERRITORY specified. The DISTRIBUTOR will follow the
guidelines set in this AGREEMENT and as established by GRANTOR from time to
time, pertaining to the marketing of PRODUCTS. At all times the GRANTOR
reserves the right to visit, verify and cancel any POS (Points Of Sale)
developed by the DISTRIBUTOR, which is deemed unsuitable by the GRANTOR.
3. The DISTRIBUTOR will supply the GRANTOR with updated list of POS for
the TERRITORY and will provide the GRANTOR with a photograph of the POS
(Street view, floor view, actual display of PRODUCTS). Such photographs will
be the base for verification and confirmation of the POS and marketing of
PRODUCTS by the DISTRIBUTOR in the TERRITORY on a "best effort" basis.
4. All matters relating to marketing, the GRANTOR must approve promotion
and retail pricing of the PRODUCTS. Prior written approval must be obtained
from GRANTOR two weeks before any promotion, marketing and retail pricing.
Any deviation and change from the approved marketing, promotion and retail
pricing of the PRODUCTS is strictly prohibited.
The DISTRIBUTOR shall only market the PRODUCTS in the TERRITORY and shall not
sell the PRODUCTS
<PAGE>
directly or indirectly or to anyone he knows or has reason to know may sell
directly or indirectly outside the TERRITORY under any circumstances.
The DISTRIBUTOR will not sell the PRODUCTS in the TERRITORY for:
- - DUTY FREE ACCOUNTS
- - DISCOUNT STORES
- - MAIL OR CATALOGUE SALES
4. All purchases must be made by irrevocable Letter of Credit at sight 90
days or Telegraphic Transfer in US$ 60 days prior to shipment date, and
conditions stipulated in Grantor's sales contracts.
In case of disagreement over the definition of the above it should be made in
the sole discretion of the GRANTOR.
GRANTOR'S OBLIGATION
1. The GRANTOR will guarantee the exclusivity to the DISTRIBUTOR during
the duration of the AGREEMENT.
2. The GRANTOR certfies that PRODUCTS are free from any manufacturing
defect upon shipment and will replace one for one under such defects.
3. Each order/shipment will include 1% spare units of the PRODUCT and the
GRANTOR will provide spare parts for all models sold for at least two years
from the date of last shipment.
4. Spare parts will be charged according to the standard spare parts lists
and if desired by the DISTRIBUTOR it will replace the 1% spare units with a
credit note for 1% of spare part according to the invoice value.
AFTER SALES SERVICE
1. The DISTRIBUTOR shall maintain an after sales service capability during
the duration of this AGREEMENT. The location, address, person in charge of
the after sales capability will be informed to the GRANTOR. Any serice
required by the owner of a Product will be done free of charge during the
warranty period (conditional to the repair pertaining to the warranty clause)
and only part costs will be charged after the warranty period.
ADVERTISING/PROMOTIONAL ALLOWANCE
- - The GRANTOR will contribute 50% of all costs for advertising incurred by
the DISTRIBUTOR, upon submission of proper invoice thereof, on the following
conditions:
- - All advertising/promotion by the DISTRIBUTOR must receive prior approval
in writing from the GRANTOR.
- - Advertising must be equal to 5% of the total FOB purchases during the
specified calendar year during the duration of this AGREEMENT.
- - DISTRIBUTOR must provide proof of advertising, including invoice, to the
GRANTOR.
2. The DISTRIBUTOR will participate in the purchase of promotional gift
items or special marketing campaigns
<PAGE>
initiated by the GRANTOR.
TERMINATION
1. The GRANTOR shall be entitled to terminate this contact if and when the
minimum quantities set out in the SCHEDULE III are not acheived.
2. A written thirty (30) day notice can terminate this AGREEMENT by the
GRANTOR in the event of:
- - There is at any time a material change in the management, ownership or
control of the DISTRIBUTOR.
- - The DISTRIBUTOR engages in any marketing/advertising activity that is
prohibited under this AGREEMENT or any breach of this agreement i.e.
sale outside territory, sale to discounters.
3. In the event of termination of this AGREEMENT the GRANTOR has the
exclusve right to:
- - Purchase all or any portion of the remaining inventory at the GRANTOR'S
invoice value if less than six months old and at 50% invoice price for
over six months old, less any amounts due under this agreement.
- - Require the DISTRIBUTOR to sell all or any portion of the remaining
inventory to third party in the TERRITORY, designated by the GRANTOR at
GRANTOR'S invoice value adding the general import taxes required by the
government of the TERRITORY.
This AGREEMENT does not in any form whatsoever, grant the DISTRIBUTOR the
use of HANG TEN, in any form The PARTIES, to this AGREEMENT, recognizes that
ILC Licensing Corp. is the official licensor for all Hang Ten. The GRANTOR
manufactures and distributes Hang Ten brand watches under the agreement with
ILC Licensing Corp.
This AGREEMENT shall be governed by the laws Hong Kong.
In witness whereof this AGREEMENT has been executed on the date first written.
For GRANTOR For DISTRIBUTOR
- ------------------------- -------------------------
HBL Limited LEP Products Inc.
<PAGE>
SCHEDULE I PRODUCTS
The PRODUCTS will mean Wrist Watches and Clocks manufactured under license
agreement with ILC Licensing Corp. of the HANG TEN brands.
SCHEDULE II TERRITORY
The TERRITORY will mean the domestic market of the United States and Canada.
Besides the below schedule a US$10,000 deposit to be made to HBL on signing
of the above contract which will be refundable upon completion of the
duration of this agreement providing all GRANTOR's money have been paid as in
accordance with the agreement.
SCHEDULE III MINIMUM PURCHASES
- ----------------------------------------------------
YR FOB H.K. IN U.S.$
- ----------------------------------------------------
97/98 US$350,000.00
98/99 US$600,000.00
- ----------------------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,986,463
<SECURITIES> 0
<RECEIVABLES> 5,134,671
<ALLOWANCES> 0
<INVENTORY> 1,523,452
<CURRENT-ASSETS> 10,919,178
<PP&E> 304,308
<DEPRECIATION> 40,361
<TOTAL-ASSETS> 11,183,125
<CURRENT-LIABILITIES> 1,527,037
<BONDS> 0
0
0
<COMMON> 33,125
<OTHER-SE> 9,618,175
<TOTAL-LIABILITY-AND-EQUITY> 11,183,125
<SALES> 2,751,255
<TOTAL-REVENUES> 0
<CGS> 1,609,692
<TOTAL-COSTS> 179,960
<OTHER-EXPENSES> 249,430
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,451
<INCOME-PRETAX> 750,632
<INCOME-TAX> 285,240
<INCOME-CONTINUING> 750,632
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 465,392
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0
</TABLE>
