<PAGE>
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(c)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant / /
Check the appropriate box:
[x] Preliminary Information Statement
/ / Confidential, for use of the Commission only (as permitted by Rule
14a-6 (e) (2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to (S)240.14a-11 (c) or (S)240.14a-12
LEADING EDGE PACKAGING, INC.
-------------------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------
(Name of Person(s) Filing Information Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
of the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
Notes:
<PAGE>
PRELIMINARY INFORMATION STATEMENT
[LOGO]
350 FIFTH AVENUE
SUITE 3922
NEW YORK, NEW YORK 10118
PRELIMINARY INFORMATION STATEMENT
This information statement is being mailed to the stockholders of record on
February 27, 1998 of Leading Edge Packaging, Inc. (the "Company"), commencing on
or about June , 1998, in connection with the prior approval, on March 9, 1998,
by the Board of Directors of the Company, of the corporate action referred to
below and its subsequent adoption, also on March 9, 1998, by the majority
stockholder of the Company, Chung Hwa Development Holdings Limited (the
"Majority Stockholder"). Accordingly, all necessary corporate approvals in
connection with the matter discussed herein have been obtained, and this
Information Statement is furnished solely for the purpose of informing
stockholders, in the manner required under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), of the matter before it takes effect. The total
number of shares of the Common Stock outstanding on February 27, 1998 is
3,312,500.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
The Company, as authorized by the necessary approvals of the Board of
Directors and the Majority Stockholder, has approved the adoption of an
amendment (the "Amendment") to the Company's Certificate of Incorporation (the
"Certificate") to increase the Company's authorized common stock, par value $.01
per share (the "Common Stock"), from 5,000,000 shares to 8,000,000 shares.
Specifically, the first sentence of Article FOURTH of the Certificate will be
amended to read as follows: "The total number of shares of common stock which
this corporation is authorized to issue is eight million (8,000,000) shares, par
value $.01 per share." The Amendment is scheduled to take place, on or about
July , 1998, but no earlier than 20 days from the date this information
statement is first sent to the Company's stockholders.
PURPOSE OF THE AMENDMENT
The Amendment was adopted to facilitate the issuance of 2,250,000 shares of
Common Stock to the Majority Stockholder in exchange for the transfer to the
Company by the Majority Stockholder of all of the outstanding share capital of
Justrite Investments Limited ("Justrite"), pursuant to a Share Exchange
Agreement, dated January 23, 1998 (the "Agreement"), by and between the Company
and the Majority Stockholder. Prior to the Exchange, as contemplated in the
Agreement, Justrite was a wholly-owned subsidiary of the Majority Stockholder.
Justrite is the parent company of various subsidiaries described herein.
Justrite is the parent corporation of Leading Edge Packaging Limited (f/k/a
Rich City International Packaging Limited) ("LEP-Hong Kong"), the Company's
supplier of packaging products which the Company distributes in North America.
LEP-Hong Kong distributes its packaging products directly in other parts of the
world, including Europe and Asia. Justrite also owns 100% of Breakspear Limited,
a British Virgin Islands company, which in turn holds a 60% interest in a joint
venture in the People's Republic of China. LEP-Hong Kong also has a 50% interest
in another joint venture in China. The
<PAGE>
Company believes that the acquisition will enable it to consolidate the
manufacture and distribution of its packaging products and to expand its sales
into additional territories.
The Company believes that the share exchange will provide it with direct
control over Justrite's management team, subsidiaries and production facilities
in China as well as access to a greater market share for the Company's packaging
products in Europe and Asia, formerly marketing territories of LEP-Hong Kong.
There can be no assurance, however, that the Exchange will produce the
anticipated results for the Company. In addition, under a certain Assignment and
Distribution Agreement, dated September 23, 1996, by and between the Company and
LEP-Hong Kong, the Company would have been required to pay to LEP-Hong Kong a
royalty in the amount of $2,000,000 by September 23, 1998. Consummation of the
Exchange will eliminate the royalty requirement specified in the Assignment and
Distribution Agreement.
BACKGROUND
Prior to the Company's initial public offering (the "IPO") on December 5,
1996, LEP-Hong Kong owned all of the Company's outstanding Common Stock. From
the IPO until November 3, 1997, LEP-Hong Kong owned 1,875,000 shares of the
Company's Common Stock, constituting approximately 57% of the issued and
outstanding shares of Common Stock. On November 3, 1997, as part of an internal
corporate restructuring, LEP-Hong Kong transferred all of its shares in the
Company to the Majority Stockholder, making it the Company's direct, rather than
indirect, parent corporation. As a result of the share exchange, the Company
will become the 100% owner of Justrite, the indirect 100% owner of Breakspear
Limited, LEP-Hong Kong, Smart Investments Limited and Circle Round Limited
(wholly-owned subsidiaries of Justrite), the indirect majority owner of one
China joint venture and the indirect 50% owner of another. Messrs. Lip-Boon Saw
and Richard Fung-Gea Wong are both directors of Justrite, Breakspear and
LEP-Hong Kong.
The Amendment was approved by the Unanimous Written Consent of the Board of
Directors, dated March 9, 1998. The Amendment was also approved by the Written
Consent of the Majority Stockholder, also dated March 9, 1998, pursuant to
Section 228 of the Delaware General Corporation Law. Delaware law requires
approval of the Amendment by a simple majority of the shares of Common Stock
issued and outstanding. The 57% of Common Stock held by the Majority Stockholder
constitutes the simple majority required to pass the Amendment.
The share exchange transaction itself was approved by the Company's Board of
Directors and did not require submission to the stockholders under Delaware law.
The Company received a waiver from the Nasdaq National Market of its stockholder
approval requirement with respect to the share exchange transaction.
THE SHARE EXCHANGE AGREEMENT
The Agreement provides that the Company is to acquire all of the outstanding
capital stock of Justrite in exchange for the issuance to the Majority
Stockholder of 2,250,000 shares of the Common Stock, par value $.01 per share.
On June 10, 1998, the Company issued to the Majority Stockholder 1,250,000
shares of the 2,250,000 shares of Common Stock. Aside from the Amendment and the
issuance of the remaining 1,000,000 shares to the Majority Stockholder, all
other conditions to closing under the Agreement have been satisfied or waived.
The Amendment and the issuance of the 1,000,000 shares of Common Stock to the
Majority Stockholder will take place on or about July , 1998, or 20 days from
the date of mailing of this Information Statement to the Company's stockholders.
Prior to the issuance of the shares to the Majority Stockholder, it holds 57% of
the Common Stock. Upon issuance of the shares, it will hold 74% of the Common
Stock.
2
<PAGE>
The Agreement contains certain warranties by the Majority Stockholder with
respect to Justrite and the subsidiaries. The Agreement limits the liability of
the Majority Stockholder arising under the Agreement to no more than
US$13,500,000. The Agreement also provides for the assumption by the Company of
any guarantees and letters of undertaking by the Majority Stockholder for the
benefit of Justrite or the subsidiaries.
The 2,250,000 shares of Common Stock issuable to the Majority Stockholder
under the Agreement have been valued by the Company and the Majority Stockholder
at $6.00 per share, as specified in the Agreement, or US$13,500,000 in the
aggregate. The Majority Stockholder undertakes, pursuant to the Agreement, that
in the event the audited net asset value of Justrite for the year ended March
31, 1998 as reflected in its audited report and financial statements is less
than US$4,500,000, the Majority Stockholder will pay to the Company, on a
US-dollar for US-dollar basis, the amount of any shortfall. The US$13,500,000
valuation was reached by negotiations between the parties and takes account of
the $4.5 million net asset value undertaking referred to above, profits
generated by Justrite and its subsidiaries in prior years and an adjustment for
estimated downtime during the setup of new facilities.
The foregoing discussion contains forward-looking statements which are
inherently subject to risks and uncertainties.
JUSTRITE AND THE SUBSIDIARIES
The following is a summary description of each of Justrite and its
subsidiaries. A table of corporate information for each of them appears as
Appendix I to this Information Statement. Audited Financial Statements for
Justrite and the subsidiaries, for each of the three years ended March 31, 1997,
appear elsewhere in this Information Statement.
JUSTRITE
Justrite is an investment holding company for its operating subsidiaries
which are engaged in the manufacture and distribution of packaging products.
Justrite is incorporated in the British Virgin Islands and has its headquarters
in Hong Kong. Prior to the share exchange, 100% of the outstanding share capital
of Justrite was held by the Majority Stockholder and is being transferred to the
Company in the share exchange.
LEP-HONG KONG
LEP-Hong Kong is the primary operating subsidiary of Justrite. LEP-Hong Kong
is a Hong Kong registered company. Of the 2,000,000 shares of LEP-Hong Kong
outstanding, 1,999,999 are held by Justrite, and one share is held by a third
party. LEP-Hong Kong coordinates the distribution of packaging products produced
by Justrite's other subsidiaries to its customers throughout Europe, Asia and,
through the Company, to North America. LEP-Hong Kong has a sales force in Hong
Kong to deal directly with its Asian and European customers. The packaging
products distributed by LEP-Hong Kong are essentially the same types of products
distributed by the Company in North America. LEP-Hong Kong owns a 50% interest
in Circle Round Limited and Dongguan Shilong Wah Rich Packaging.
BREAKSPEAR LIMITED
Breakspear Limited is a wholly-owned subsidiary of Justrite. It is
incorporated in the British Virgin Islands. Breakspear serves as a holding
company for a 60% interest in Dongguan Walford Ornaments Packaging Limited, a
manufacturing joint venture in China. Breakspear also performs administrative
services in connection with the distribution of the packaging products. It
serves as the contractual management company for the factories in China. It
purchases all of the products from the China joint ventures and sells them to
LEP-Hong Kong. For tax planning purposes, it retains most of the profits from
these sales.
3
<PAGE>
CIRCLE ROUND LIMITED
Circle Round Limited is a 50% owned subsidiary of LEP-Hong Kong. It is a
property holding company and holds title to the office/showroom/warehouse
premises in Hong Kong, which are used by LEP-Hong Kong.
CHINA JOINT VENTURES
Dongguan Shilong Wah Rich Packaging Limited ("Dongguan Shilong") is a
manufacturing joint venture in China which is 50% owned by LEP-Hong Kong and 50%
owned by a China party, Dongguan City Shek Long Wah Nam Enterprises Company.
This is one of two joint ventures involved in the manufacture of packaging
products for distribution by the other subsidiaries. Dongguan Shilong operates
pursuant to a management agreement between Breakspear Limited and the China
party. Under the management agreement, Breakspear Limited is responsible for all
of the assets and liabilities of the joint venture and is entitled to all of the
net profits from its operations after the payment of a fixed amount as a
management fee to the China party each year. LEP-Hong Kong leases property from
the China party for use by the joint venture. Although the actual production of
the packaging products has been transferred from Dongguan Shilong to Dongguan
Walford, this entity is maintained in existence for tax planning purposes.
Dongguan Walford Ornaments Packaging Company Limited ("Dongguan Walford") is
the primary manufacturing joint venture in China, which is 60% owned by
Breakspear and 40% owned by Dongguan City Shek Long Wah Nam Enterprises Company.
Breakspear has a management agreement and profit sharing arrangement with the
China party similar to that of Dongguan Shilong. Dongguan Walford has assumed
the actual production of the packaging products from Dongguan Shilong.
Both of the joint ventures are managed by Breakspear Limited. They produce
packaging products exclusively for Breakspear Limited and are prohibited from
selling to third parties. The two factories in which the products are
manufactured are approximately 450,000 square feet in the aggregate and employ
between 2,850 and 3,100 workers, depending upon worker turnover, production
demands and the local employment market. The two factories are under one
management team. All workers in both factories are employed by Dongguan Walford.
MATERIAL INCORPORATED BY REFERENCE
The audited balance sheets of the Company as of March 31, 1997 and 1996 and
the related statements of income, shareholders' equity and cash flows for the
three years ended March 31, 1997, are incorporated herein by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997
(the "Annual Report"). The Company's unaudited balance sheets as of June 30,
September 30 and December 31, 1997 and the related statements of income,
stockholders' equity and cash flows for each of the three month periods ended
June 30, September 30 and December 31, 1997, are incorporated herein by
reference to the Company's Quarterly Reports on Form 10-Q (the "Quarterly
Reports") for those respective periods.
Information required pursuant to Item 13(a) of Schedule 14A and specified in
Items 302 and 303 of Regulation S-K is hereby incorporated by reference to the
Annual Report and each of the Quarterly Reports listed above.
June , 1998
By Order of the Board of Directors
CASEY K. TJANG, Secretary
4
<PAGE>
APPENDIX I
Details of Justrite and its subsidiaries as at March 31, 1998 are as
follows:
<TABLE>
<CAPTION>
PLACE OF ISSUED AND FULLY ATTRIBUTABLE EQUITY
INCORPORATION/ PAID ORDINARY INTEREST HELD
REGISTRATION SHARE CAPITAL/ BY THE COMPANY
NAME AND OPERATION REGISTERED CAPITAL DIRECTLY INDIRECTLY PRINCIPAL ACTIVITIES
- --------------------------- --------------------- --------------------- --------- --------- ---------------------------
<S> <C> <C> <C> <C> <C>
Justrite Investments British Virgin US$100 100% -- Investment holding
Limited Islands
Rich City Internatinal Hong Kong HK$2,000,000 -- 100% Sale and distribution of
Packaging Limited packaging products
Breakspear Limited British Virgin US$1 -- 100% Investment holding and
Islands provision of group
services
Smart Investments Limited Hong Kong HK$2 -- 100% Property holding
Circle Round Limited Hong Kong HK$2 -- 100% Property holding
Dongguan Shilong Wah Rich People's Republic of RMB1,410,000 -- 50% Manufacture and sale of
Packaging Limited China registered capital packaging products
Dongguan Walford Ornaments People's Republic of HK$26,250,000 -- 60% Manufacture and sale of
Packaging Company Limited China registered capital packaging products
</TABLE>
<PAGE>
LEADING EDGE PACKAGING, INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report.......................................................... F-1
Combined Balance Sheets............................................................... F-2
Combined Statements of Income......................................................... F-3
Combined Statements of Shareholders' Equity........................................... F-4
Combined Statements of Cash Flow...................................................... F-5
Notes to Combined Financial Statements................................................ F-6
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and The Board of Directors
Leading Edge Packaging, Inc.
We have audited the accompanying combined balance sheets of Leading Edge
Packaging, Inc. and Justrite Investments Limited (hereinafter collectively
referred to as the "Company") as of March 31, 1998 and 1997, and the related
combined statements of income, shareholders' equity and cash flows for each of
the three years in the period ended March 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also inlcudes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of Leading Edge Packaging,
Inc. and Justrite Investments Limited as of March 31, 1998 and 1997 and the
combined results of their operations and their cash flows for each of the three
years in the period ended March 31, 1998 in conformity with accounting
principles generally accepted in the United States of America.
Deloitte Touche Tohmatsu
Hong Kong
June 5, 1998
F-2
<PAGE>
LEADING EDGE PACKAGING, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 951,167 $ 5,099,726
Accounts receivable, net of allowance for doubtful accounts--1998, $218,560; 1997,
$218,560........................................................................ 2,295,719 8,934,236
Bills receivable (Note 3)......................................................... 935,564 1,894,140
Inventories (Note 4).............................................................. 6,589,704 5,838,995
Receivable from Chung Hwa Group (Note 12)......................................... 12,746,138 15,417,834
Prepaid expenses and other current assets......................................... 505,353 371,597
------------- -------------
Total current assets......................................................... 24,023,645 37,556,528
Property, plant and equipment, net of accumulated depreciation--1998, $3,160,360;
1997, $2,516,419 (Note 5)....................................................... 5,588,272 6,050,158
------------- -------------
Total assets................................................................. $ 29,611,917 $ 43,606,686
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 2,424,570 $ 2,373,315
Bills payable (Note 3)............................................................ 1,250,727 262,490
Payable to Chung Hwa Group (Note 12).............................................. -- 7,221,501
Accrued liabilities............................................................... 2,154,250 1,827,698
Income taxes payable (Note 6)..................................................... 547,253 2,043,098
Short-term borrowings (Note 7).................................................... 5,865,232 1,270,756
Current portion of long-term debt (Note 8)........................................ 273,395 248,993
------------- -------------
Total current liabilities.................................................... 12,515,427 15,247,851
------------- -------------
Long-term liabilities:
Deferred income taxes............................................................. 51,095 65,049
Long-term debt (Note 8)........................................................... 656,784 929,285
------------- -------------
Total long-term liabilities.................................................. 707,879 994,334
------------- -------------
Minority interests........................................................... 1,550,387 1,552,393
------------- -------------
Commitments and contingencies (Note 14)
Shareholders' equity:
Leading Edge:
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; none issued and
outstanding..................................................................... -- --
Common stock, $0.01 par value. Authorized 5,000,000 shares; 3,312,500 shares
issued and outstanding.......................................................... 33,125 33,125
Justrite:
Common stock $1.00 par value. Authorized 50,000 shares; 100 shares issued and
outstanding..................................................................... 100 100
------------- -------------
33,225 33,225
Additional paid-in capital........................................................ 7,320,688 7,320,688
Retained earnings................................................................. 7,493,689 18,479,795
Foreign currency translation adjustment........................................... (9,378) (21,600)
------------- -------------
Total shareholder's equity................................................... 14,838,224 25,812,108
------------- -------------
Total liabilities and shareholders' equity................................... $ 29,611,917 $ 43,606,686
------------- -------------
</TABLE>
See accompanying Notes to Combined Financial Statements
F-3
<PAGE>
LEADING EDGE PACKAGING INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales........................................................... $ 22,267,966 $ 23,879,823 $ 21,971,568
Cost of sales....................................................... 11,666,712 12,736,217 12,103,245
------------- ------------- -------------
Gross profit........................................................ 10,601,254 11,143,606 9,868,323
Selling, general and administrative expenses........................ 6,574,704 5,982,605 5,076,739
Non-recurring expense (Note 11)..................................... 373,928 -- --
------------- ------------- -------------
Operating income.................................................... 3,652,622 5,161,001 4,791,584
Interest expense.................................................... (530,946) (353,468) (355,112)
Interest income..................................................... 102,305 37,675 45,002
Other income........................................................ 163,200 233,324 211,485
------------- ------------- -------------
Income before income taxes.......................................... 3,387,181 5,078,532 4,692,959
Income taxes (Note 6)............................................... 124,582 1,328,628 191,657
------------- ------------- -------------
Net income.......................................................... $ 3,262,599 $ 3,749,904 $ 4,501,302
------------- ------------- -------------
Basic and diluted earnings per share................................ $ 0.59 $ 0.82 $ 2.00
------------- ------------- -------------
</TABLE>
See accompanying Notes to Combined Financial Statements
F-4
<PAGE>
LEADING EDGE PACKAGING, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
LEADING
EDGE JUSTRITE FOREIGN
PACKAGING, INVESTMENTS ADDITIONAL CURRENCY TOTAL
INC. LIMITED PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
SHARES SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS EQUITY
------------ --------------- --------- ------------ -------------- ----------- --------------
Balance at April 1, 1995--
Leading Edge................ -- -- $ -- $ -- $ -- $ -- $ --
Justrite.................... -- 100 100 258,988 10,228,589 -- 10,487,677
Net income for the year....... -- -- -- -- 4,501,302 -- 4,501,302
Issuance of common stock...... 1,500 -- 1,500 -- -- -- 1,500
------------ --- --------- ------------ -------------- ----------- --------------
Balance at March 31, 1996 1,500 100 1,600 258,988 14,729,891 -- 14,990,479
Issuance of common stock and
share split................. 1,873,500 -- 17,250 -- -- -- 17,250
Contribution by Rich City of
part of accounts payable to
Rich City*.................. -- -- -- 481,250 -- -- 481,250
Issuance of common stock in a
public offering............. 1,437,500 -- 14,375 6,580,450 -- -- 6,594,825
Net income for the year....... -- -- -- -- 3,749,904 -- 3,749,904
Translation adjustments....... -- -- -- -- -- (21,600) (21,600)
------------ --- --------- ------------ -------------- ----------- --------------
Balance at March 31, 1997..... 3,312,500 100 33,225 7,320,688 18,479,795 (21,600) 25,812,108
Net income for the year....... -- -- -- -- 3,262,599 -- 3,262,599
Translation adjustments....... -- -- -- -- -- 12,222 12,222
Dividend paid by Justrite to
Chung Hwa................... -- -- -- -- (14,248,705) -- (14,248,705)
------------ --- --------- ------------ -------------- ----------- --------------
Balance at March 31, 1998..... 3,312,500 100 $ 33,225 $ 7,320,688 $ 7,493,689 $ (9,378) $ 14,838,224
------------ --- --------- ------------ -------------- ----------- --------------
------------ --- --------- ------------ -------------- ----------- --------------
</TABLE>
* Rich City International Packaging Limited ("Rich City") was the former
holding company of Leading Edge Packaging, Inc.
See accompanying Notes to Combined Financial Statements
F-5
<PAGE>
LEADING EDGE PACKING, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------
1998 1997 1996
-------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 3,262,599 $ 3,749,904 $ 4,501,302
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Deferred income taxes............................................ (13,954) (13,596) (6,623)
Depreciation..................................................... 643,941 619,169 686,628
Loss on sale of property, plant and equipment.................... -- -- 15,224
Changes in operating assets and liabilities:
Long-term receivable........................................... -- 566,000 165,000
Accounts receivable............................................ 6,638,517 (5,568,105) 211,810
Bills receivable............................................... 958,576 (1,516,988) 289,386
Inventories.................................................... (750,709) (81,204) 1,220,173
Prepaid expenses and other current assets...................... (133,756) 143,749 685,006
Accounts payable............................................... 51,255 701,753 717,976
Bills payable.................................................. 988,237 110,470 (79,871)
Accrued liabilities............................................ 326,552 335,841 (185,122)
Income taxes payable........................................... (1,495,845) 1,339,309 196,308
-------------- ------------- ------------
Net cash provided by operating activities.......................... 10,475,413 386,302 8,417,197
-------------- ------------- ------------
Cash flows from investing activities:
Purchase of property, plant and equipment.......................... (182,055) (583,061) (549,448)
Proceeds from sale of property, plant and equipment................ -- -- 1,655
-------------- ------------- ------------
Net cash used in investing activities.............................. (182,055) (583,061) (547,793)
-------------- ------------- ------------
Cash flows from financing activities:
Bank loan raised................................................... 4,594,476 143,376 392,896
Repayments of long-term borrowings................................. (246,541) (458,476) (193,093)
Net proceeds from issuance of common stock......................... -- 7,093,325 1,500
Payment of capital lease obligations............................... (1,057) (28,679) (145,101)
Repayments from Chung Hwa Group.................................... 15,716,978 3,219,763 1,064,587
Advances to Chung Hwa Group........................................ (34,515,488) (4,923,208) (9,570,525)
-------------- ------------- ------------
Net cash (used in) provided by financing activities................ (14,451,632) 5,046,101 (8,449,736)
-------------- ------------- ------------
Effect of exchange rate changes on cash and cash equivalents....... 9,715 (24,114) --
-------------- ------------- ------------
Net (decrease) increase in cash and cash equivalents................. (4,148,559) 4,825,228 (580,332)
Cash and cash equivalents at beginning of year....................... 5,099,726 274,498 854,830
-------------- ------------- ------------
Cash and cash equivalents at end of year............................. $ 951,167 $ 5,099,726 $ 274,498
-------------- ------------- ------------
Supplemental disclosures of cash flow information:
Interest paid...................................................... $ 530,946 $ 352,421 $ 355,112
Income taxes paid.................................................. 1,634,381 2,915 1,972
</TABLE>
In the year ended March 31, 1998, Justrite declared a dividend of $14,248,705
which was credited to the account of its shareholder, Chung Hwa.
See accompanying Notes to Combined Financial Statements
F-6
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Leading Edge is a corporation incorporated in Delaware and is engaged in the
sale and distribution of packaging products in North America. On December 2,
1996, Leading Edge issued 1,437,500 shares in a public offering and its shares
were listed on Nasdaq National Market since that day.
On January 23, 1998, Leading Edge entered into a Share Exchange Agreement
(the "Agreement") with its ultimate holding company, Chung Hwa Development
Holdings Limited (Chung Hwa"). Chung Hwa is a Bermuda company and its shares are
listed on The Stock Exchange of Hong Kong Limited. Pursuant to the Agreement,
Leading Edge received all of the issued and outstanding shares of Justrite, a
wholly owned subsidiary of Chung Hwa incorporated in the British Virgin Islands,
in exchange for 2,250,000 shares of Leading Edge's common stock valued at $6.00
per share. Justrite is engaged in the manufacturing, sale and distribution
products. Leading Edge and Chung Hwa completed the transaction on March 13,
1998, subject to the issuance of 2,250,000 shares of Leading Edge's common stock
of Chung Hwa.
Because Leading Edge and Justrite are under common control, the financial
statements have been prepared to reflect the combined financial position,
results of operations and cash flows of Leading Edge and Justrite for all the
periods presented at historical cost as if the structure of the Company
resulting form the above transactions had been in existence for each of the
three years ended March 31, 1996, 1997 and 1998 using the pooling-of-interests
method.
At March 31, 1998, the balances on additional paid-in capital, retained
profits, foreign currency translation adjustments are as follows:
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
PAID-IN RETAINED TRANSLATION
NAME OF COMPANY CAPITAL EARNINGS ADJUSTMENTS
- ------------------------------------------------------------------------ ------------ ------------ -----------
<S> <C> <C> <C>
Leading Edge............................................................ $ 7,061,700 $ 2,942,563 $ --
Justrite................................................................ 258,988 4,551,126 (9,378)
------------ ------------ -----------
$ 7,320,688 $ 7,493,689 $ (9,378)
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
At March 31, 1998, the Company had the following principal subsidiaries, all
of which are subsidiaries of Justrite:
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME OF SUBSIDIARY SHAREHOLDING PLACE OF INCORPORATION
- ------------------------------------------------------------- ------------------------- ------------------------
<S> <C> <C>
Justrite Investments Limited................................. 100% British Virgin Islands
Leading Edge Packaging Limited............................... 100% Hong Kong
Breakspear Limited........................................... 100% British Virgin Islands
Other region of the
People's Republic of
Dongguan Shilong Wah Rich Packaging Limited.................. 50% China ("PRC")
Dongguan Walford Ornaments Packaging Company Limited......... 60% PRC
</TABLE>
Dongguan Shilong Wah Rich Packaging Limited and Dongguan Walford Ornaments
Packaging Company Limited were established by the Company with an independent
Chinese party in the PRC. Under the management agreements with the PRC party,
the Company is responsible for all of the assets and liabilities of these joint
ventures and is entitled to all of the net profits of their operations after the
payment of a fixed amount as management fee to the PRC party each year during
the terms of the
F-7
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
management agreements. The Company therefore effectively has a 100 per cent
attributable economic interest in these joint ventures. Accordingly, the joint
ventures are accounted for as wholly-owned subsidiaries of the Company. On
cessation of these joint ventures, which have a remaining life of 7 years, the
Company will be entitled to all assets other than those contributed by the PRC
party and any immovable building improvements, which are not significant.
All significant intra-group transactions and balances have been eliminated
on combination.
The accompanying combined financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and are presented in U.S. dollars as the Company's sales are
predominantly denominated in U.S. dollars.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash on hand,
demand deposits, interest bearing savings accounts, and time certificate of
deposits with an original maturity of three months or less.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment is stated at
cost. Depreciation is provided to write off the cost of property, plant and
equipment over their estimated useful lives using the straight line method, at
the following rates per annum:
<TABLE>
<S> <C>
Land held on long term leases................ Over the terms of the leases
Land held on medium term leases.............. 2.5% or over the terms of the respective
leases whichever is shorter
Buildings.................................... 2.5% or over the terms of the respective
leases whichever is shorter
Property under development................... Nil
Leasehold improvements....................... 10% - 20% or over the terms of the respective
leases whichever is shorter
Furniture, fixtures and equipment............ 10% - 33 1/3%
Plant and machinery.......................... 10%
Motor vehicles............................... 20%
</TABLE>
LEASED ASSETS--Leases that transfer substantially all the rewards and risks
of ownership of assets to the Company are accounted for as capital leases. At
the inception of a capital lease, the cost of the leased asset is capitalized at
the present value of the minimum lease payments and recorded together with the
obligation, excluding the interest element, to reflect the purchase and
financing. Assets held under capital leases are included in property, plant and
equipment and are depreciated over their estimated useful lives.
INVENTORIES--Inventories held for resale are stated at the lower of cost,
determined by the first-in, first-out method, or value determined by the market.
Finished goods inventories consist of raw materials, direct labour, and overhead
associated with the manufacturing process.
VALUATION OF LONG-LIVED ASSETS--The Company periodically evaluates the
carrying value of long-lived assets to be held and use, including goodwill and
other intangible assets, when events and circumstances warrant such a review.
The carrying value of a long-lived asset is considered impaired when the
anticipated undiscounted cash flow from such asset is separately identifiable
and is less than its carrying value. In that event, a loss is recognized based
on the amount by which the carrying value exceeds the fair market value
F-8
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of the long-lived asset. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of are determined in a similar
manner, except that fair market values are reduced for the cost to dispose.
NET SALES--Net sales represent the invoiced value of products sold less
discounts and returns. Sales are recognized when products are shipped to
customers or when title passes, if later.
INCOME TAXES--The Company has adopted the liability method of accounting for
income taxes, as set forth in Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). Under the liability method,
deferred taxes are determined based upon the difference between the financial
statement and tax bases of assets and liabilities at enacted tax rates in effect
in the years in which the differences are expected to reverse. Deferred tax
expense (benefit) represents the change in the deferred tax balances.
FOREIGN CURRENCY TRANSLATION--Assets and liabilities of foreign operations
are translated using period-end exchange rates. Revenues and expenses of foreign
operations are translated using average monthly exchange rates. The impact of
exchange rate changes is shown as "Foreign Currency Translation Adjustment" in
shareholders' equity. Gains or losses from foreign currency transactions, which
are immaterial for all periods presented, are included in net income.
EMPLOYEE BENEFITS--The Company does not provide any post retirement benefits
other than the defined contribution plan, and post employment benefits, if any,
are not material.
EARNINGS PER SHARE--Earnings per common share based on the weighted average
number of shares of common stock outstanding as if the shares pursuant to the
Agreement in note 1 had been issued on April 1, 1995. The weighted average
number of shares of common stock outstanding including 2,250,000 shares to be
issued under the Agreement during each of the three years ended March 31, 1998,
1997 and 1996 was 5,562,500, 4,597,603 and 2,250,000 respectively. On March 3,
1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128,
"Earnings Per Share". This pronouncement provides for the calculation of basic
and diluted earnings per share which is different from the current calculation
of primary and fully diluted earnings per share. Common stock equivalents had no
material dilutive effect on earnings per share and, accordingly, no diluted
earnings per share is shown. The adoption of this new standard had no impact on
the Company.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED--The FASB has issued three new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognised under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS NO. 131, "Disclosures about Segments of an Enterprise and Related
Information", which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise", establishes standards for the way that public
enterprises report information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as
F-9
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement
Benefits", amends the disclosure requirements relating to pensions and other
postretirement benefits.
Each of these new standards is effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of estimates. Actual
results could differ from those estimates.
3. BILLS RECEIVABLE AND PAYABLE
Bills receivable and payable represent accounts receivable and payable in
the form of bills of exchange, whose acceptances and settlements are handled by
banks.
During each of the years ended March 31, 1998, 1997 and 1996, the Company
had factored gross bills receivable of $5,475,381, $7,671,466 and $11,174,262,
respectively, with financial institutions with recourse to the Company. The net
proceeds after discounts during each of these years amounted to $5,319,333,
$7,452,829 and $10,855,795. There were no repurchase terms except for the
recourse under the terms of the factoring agreement in the event of customer
default.
4. INVENTORIES
Inventories by major categories are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 2,647,834 $ 4,240,407
Finished goods.................................................... 3,941,870 1,598,588
------------ ------------
$ 6,589,704 $ 5,838,995
------------ ------------
------------ ------------
</TABLE>
F-10
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Property, plant and equipment consists of the following:
Leasehold land and buildings.......................................................... $ 3,271,049 $ 3,275,280
Leasehold improvements................................................................ 1,078,705 1,066,555
Furniture fixtures and equipment...................................................... 1,113,802 994,392
Plant and machinery................................................................... 3,237,710 3,182,923
Motor vehicles........................................................................ 47,366 47,427
------------ ------------
------------ ------------
Total............................................................................. 8,748,632 8,566,577
Less: Accumulated depreciation........................................................ 3,160,360 2,516,419
------------ ------------
Net book value........................................................................ $ 5,588,272 $ 6,050,158
------------ ------------
------------ ------------
</TABLE>
Included in property, plant and equipment of the Company are assets acquired
under capital leases with the following net book value:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
At cost:
Furniture, fixtures and equipment............................................................ $ 7,599 $ 7,599
Less: Accumulated depreciation............................................................... (1,900) (380)
--------- ---------
$ 5,699 $ 7,219
--------- ---------
--------- ---------
</TABLE>
Depreciation of capital lease assets included in depreciation expense in the
accompanying combined statements of income were $1,520, $380 and $1,454 for the
years ended March 31, 1998, 1997 and 1996, respectively.
6. INCOME TAXES
The components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
United States........................................................... $ 1,556,450 $ 3,433,307 $ --
Foreign subsidiaries operating in:
Hong Kong............................................................. (186,033) (1,003,243) (181,215)
Others................................................................ 2,016,764 2,648,468 4,874,174
------------ ------------ ------------
------------ ------------ ------------
$ 3,387,181 $ 5,078,532 $ 4,692,959
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company is subject to Hong Kong taxation on its activities conducted in
Hong Kong. During the three years ended March 31, 1998, the Company's
manufacturing operations were outside Hong Kong and the majority of income was
not subject to tax in Hong Kong or in other jurisdictions. During the year ended
March 31, 1997, the Company established operations in the United States and
revenue derived from
F-11
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
the Company's U.S. operations were subject to income tax in the United States
and income tax expense has been computed using a rate of 38% for U.S. Federal
and State income taxes.
The provision for income taxes expense (credit) attributable to the Company
consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
------------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ------------ ----------
Current
Hong Kong................................................................ $ -- $ -- $ 198,280
U.S. Federal............................................................. 549,000 1,130,324 --
U.S. State............................................................... 107,000 211,900 --
Overseas................................................................. (517,464) -- --
Deferred
Hong Kong................................................................ (13,954) (13,596) (6,623)
---------- ------------ ----------
$ 124,582 $ 1,328,628 $ 191,657
---------- ------------ ----------
---------- ------------ ----------
</TABLE>
A reconciliation between the provision for income taxes computed by applying
the statutory tax rates in the United States for 1998, 1997 and 1996 to income
before income taxes and the actual provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
US statutory rate....................................................... 34% 34% 34%
------------ ------------ ------------
------------ ------------ ------------
Provision for income taxes at statutory rate
on income for the period.............................................. $ 1,151,641 $ 1,726,701 $ 1,595,606
State income taxes...................................................... 107,000 211,900 --
International rate differences.......................................... 32,556 175,568 31,713
Income not subject to taxation.......................................... (685,700) (900,479) (1,657,219)
Prior years' overprovision.............................................. (517,464) -- --
Other................................................................... 36,549 114,938 221,557
------------ ------------ ------------
------------ ------------ ------------
Income tax provision.................................................... $ 124,582 $ 1,328,628 $ 191,657
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities for income tax purposes compared with the
respective amounts for financial statements purposes and at the balance sheet
dates represented excess tax depreciation over financial reporting depreciation.
F-12
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. SHORT TERM BORROWINGS
These include borrowings in the form of trade acceptances, loans and
overdrafts with various banks:
<TABLE>
<CAPTION>
MARCH 31
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
Credit facilities available at end of year............................................ $ 8,389,516 $ 7,099,194
Utilized at end of year............................................................... 5,865,232 1,270,756
Weighted average interest rate on borrowings
at end of year...................................................................... 12% 12%
</TABLE>
The Company maintains short-term bank credit lines in the countries in which
it operates. Interest rates are generally based on the banks' prime lending
rates and the credit lines are normally subject to annual review. As at March
31, 1998, the credit lines are secured by an unlimited corporate guarantee from
Chung Hwa and the Company's leasehold land and buildings with aggregrate net
book value of US$1,059,764.
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1998 1997
---------- ------------
<S> <C> <C>
Long-term debt consists of:
Mortgage loan bearing interest at March 31, 1998 ranging from 10.75% to 12.5% repayable
over 6 years in monthly instalments and secured on leasehold land and buildings with
an aggregate net book value of $2,008,932............................................. $ 537,793 $ 784,334
Capital lease obligation, interest at 7.861%............................................ 4,789 5,846
Other long-term borrowing............................................................... 387,597 388,098
---------- ------------
Total............................................................................... 930,179 1,178,278
Current portion of long-term debt....................................................... (273,395) (248,993)
---------- ------------
Long-term debt, less current portion.................................................... $ 656,784 $ 929,285
---------- ------------
</TABLE>
Long-term borrowing represents working capital contributed by the PRC party
to a subsidiary of the Company pursuant to the joint venture agreement. The
amount is unsecured, non interest-bearing and will be repaid on termination of
the joint venture.
Maturities of long-term debt as of March 31, 1998 are as follows:
<TABLE>
<S> <C>
Year ending March 31,
1999.............................................................................. $273,395
2000.............................................................................. 23,734
2001.............................................................................. 26,881
2002.............................................................................. 30,100
2003 and thereafter............................................................... 576,069
---------
Total......................................................................... $930,179
---------
---------
</TABLE>
F-13
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. COMMON STOCK
In connection with the public offering on December 2, 1996, the Company
agreed to issue and sell to the Underwriter and/or its designees, at the closing
of the underwriting, for nominal consideration, five year Underwriter's Warrants
(the "Underwriter's Warrants") to purchase 125,000 shares of common stock. The
Underwriter's Warrants are exercisable at a price of $8.40 per share of common
stock at any time during a period of four years from December 2, 1997 and are
restricted from sale, transfer, assignment or hypothecation for a period of
twelve months from the date of the offering, except to officers of the
Underwriter. The Underwriter's Warrants contain anti-dilution provisions
providing for adjusting of the number of shares of common stock and exercise
price under certain circumstances. The Underwriter's Warrants grant to the
holder thereof and to the holders of the underlying securities certain rights of
registration of the securities underlying the Underwriter's Warrants. The fair
value of the Underwriter's Warrants is not material.
10. INCENTIVE STOCK OPTION PLAN
In 1997, the Company established the 1997 Incentive Stock Option Plan (the
"1997 Plan") in addition to the 1996 Incentive Stock Option Plan ("1996 Plan").
The 1997 Plan contains terms substantially the same as the 1996 Plan. Options
under both Plans may be granted to directors and officers of the Company
permitting the purchase in the aggregate of not more than 400,000 shares of the
Company's common stock, par value, $0.01 per share provided that until December
5, 1998 the number of share issuable pursuant to options granted under the 1997
Plan shall not, when aggregated with the shares issuable pursuant to options
granted under the Company's 1996 Plan, exceed 312,500 shares. On December 11,
1996, options (the "1996 Options") to purchase up to 250,000 shares of Common
Stock in the aggregate were granted to officers and directors of the Company and
100,000 options were cancelled in 1997. One-third of the 1996 Options become
exercisable after each of 12 months, 30 months and 60 months, respectively. The
stock options granted under the 1996 Plan are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended. The per share option price of the Common Stock subject to each
of the 1996 options was $7.15, which was equal to one hundred ten percent (110%)
of the fair market value of a share of Common Stock on the date that the options
were granted. Shares of Common Stock issued in exchange for options under the
Plan will be restricted against resale as necessary to qualify for exemption
from registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless and until the Company deems it appropriate to register such shares
under the Securities Act. No further options have been granted and none have
been exercised save as mentioned above.
The Company has elected to continue to apply Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" to account for stock
options granted under the plans. If the fair value method specified in Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" had been used, net income and earnings per share for the year
ended March 31, 1998 would have been as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net income............................................................................ $ 3,241,533 $ 3,714,794
------------ ------------
Basic and diluted earnings per share.................................................. $ 0.58 $ 0.81
------------ ------------
</TABLE>
F-14
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. INCENTIVE STOCK OPTION PLAN (CONTINUED)
The fair value of options granted during the year was estimated as $118,500
using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate--5.87%; expected life of options--3 years;
expected volatility--15.5%; expected dividend yield--Nil.
11. NON-RECURRING EXPENSE
The amount represents misappropriation of cash by a manager of the Company's
factory established in the PRC. The manager has agreed to repay the Company by
instalments over 3 years, however, full provision of the amount has been made in
the financial statements and any recoveries will be accounted for on a cash
basis.
F-15
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
12. RELATED PARTY TRANSACTIONS
Chung Hwa is the Company's ultimate holding company and, prior to giving
effect to the acqisition of Justrite by the Company, Rich City Investments
Limited is a wholly owned subsidiary of Chung Hwa. Advances from/to Chung Hwa
and its subsidiaries ("Chung Hwa Group") were made on an interest-free basis
during the years.
The following table summarizes the balances and movements between the
Company and the Chung Hwa Group:
<TABLE>
<CAPTION>
MARCH 31
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Receivables (Payables)
Chung Hwa Development Holdings Limited........................................... $ 12,746,138 $ (7,221,501)
Rich City Investments Limited...................................................... -- 15,417,834
------------- -------------
Net amount receivable from Chung Hwa Group......................................... $ 12,746,138 $ 8,196,333
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<S> <C>
Balance as of April 1, 1995.................................................... (2,013,050)
Advances to Chung Hwa Group.................................................... 9,570,525
Repayments from Chung Hwa Group................................................ (1,064,587)
-----------
Balance as of March 31, 1996................................................... 6,492,888
Repayments from Chung Hwa Group................................................ (3,219,763)
Advances to Chung Hwa Group.................................................... 4,923,208
-----------
Balance as of March 31, 1997................................................... 8,196,333
Repayments from Chung Hwa Group................................................ (15,716,978)
Advances to Chung Hwa Group.................................................... 34,515,488
Dividend paid to Chung Hwa Group............................................... (14,248,705)
-----------
Balance as of March 31, 1998................................................... $12,746,138
-----------
-----------
</TABLE>
The net amounts due from Chung Hwa Group are unsecured, non-interest bearing
and repayable on demand.
At March 31, 1998 Chung Hwa Group has guaranteed the Company's credit
facilities (Note 7). No charges have been made in respect of these guarantees.
13. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Customers accounting for 10% or more of the total net sales for each of the
three years in the period ended March 31, 1996, 1997 and 1998 are detailed as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Customer A................................................................................. 10% 23% 13%
Customer B................................................................................. 5% 20% 7%
Customer C................................................................................. 10% -- --
</TABLE>
F-16
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Details of the accounts receivable from the five customers with the largest
receivable balances at March 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF ACCOUNTS
RECEIVABLE AS AT MARCH 31,
-------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ----------- -----------
Five largest receivable balances....................................................... 54% 34% 32%
</TABLE>
Bad debt expense was nil, $218,560 and $5,944 for the years ended March 31,
1998, 1997 and 1996, respectively.
14. COMMITMENTS AND CONTINGENCIES
At March 31, 1998, the Company factored gross bills receivable of $946,212
at a discount of $26,967 with banks with recourse.
The Company leases premises and equipment under various operating leases
which do not contain any renewal and escalation clauses. Rental expense under
operating leases was $1,113,769, $796,290 and $575,330, for the years ended
March 31, 1998, 1997 and 1996, respectively.
At March 31, 1998, the Company was obligated under operating leases
requiring minimum rentals as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 873,394
1999............................................................................ 794,008
2000............................................................................ 582,915
2001............................................................................ 242,740
2002............................................................................ 13,161
------------
Total minimum lease payments.................................................... $ 2,506,218
------------
------------
</TABLE>
15. RETIREMENT PLAN
The Company has a defined contribution retirement plan covering
substantially all employees in Hong Kong. Under this plan, eligible employees
may contribute amounts through payroll deductions which are equal to 5% of
individual salary, supplemented by employer contributions at 5% of individual
salary, for investment in various funds established by the plan. The expense
related to this plan was $34,781, $29,668 and $32,632, for the years ended March
31, 1998, 1997 and 1996.
16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments". The estimated fair value amounts have been determined by
the Company, using available market information and appropriate valuation
methodologies. The estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange. The
carrying amounts of cash, accounts receivable, bills receivable, receivable from
a related party, receivable form ultimate holding company accounts payable,
bills payable and payable to ultimate holding company are short term in nature
and therefore reflect their fair value. All the financial instruments are for
trade purposes.
F-17
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT INFORMATION
The Company is engaged in one business segment which is the manufacture,
sale and distribution of packaging products. An analysis of sales by geographic
destinations for the relevant years is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales:
North America..................................................... $ 11,308,861 $ 12,987,263 $ 10,711,411
Europe............................................................ 5,176,973 5,908,333 4,835,891
Asia and others................................................... 5,782,132 4,984,227 6,424,266
------------- ------------- -------------
$ 22,267,966 $ 23,879,823 $ 21,971,568
------------- ------------- -------------
The following are the Company's operating information by geographic area:
Net sales:
North America..................................................... $ 11,308,861 $ 12,987,263 $ 10,711,411
Hong Kong and other parts of PRC.................................. 10,959,105 10,892,560 11,260,157
------------- ------------- -------------
$ 22,267,966 $ 23,879,823 $ 21,971,568
------------- ------------- -------------
Operating income:
North America..................................................... $ 1,610,870 $ 3,358,866 $ --
Hong Kong and other parts of PRC.................................. 2,041,752 1,802,135 4,791,584
------------- ------------- -------------
$ 3,652,622 $ 5,161,001 $ 4,791,584
------------- ------------- -------------
Assets at end of year:
North America..................................................... $ 8,568,218 $ 13,866,879 $ --
Hong Kong and other parts of PRC.................................. 21,043,699 29,739,807 28,595,120
------------- ------------- -------------
$ 29,611,917 $ 43,606,686 $ 28,595,120
</TABLE>
F-18
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1998
----------------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
--------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
$'000 $'000 $'000 $'000
NET SALES:
Balance as per 10Q or 10K
-Leading Edge................................................. $ 2,751 $ 3,029 $ 3,262 $ --
Adjustment on combination with Justrite......................... 1,535 1,731 4,071 5,889
--------- ------ ------ -----------
Combined amount................................................. 4,286 4,760 7,333 5,889
--------- ------ ------ -----------
GROSS PROFIT:
Balance as per 10Q or 10K
-Leading Edge................................................. 1,141 996 1,056 --
Adjustment on combination with Justrite......................... 766 1,168 2,258 3,216
--------- ------ ------ -----------
Combined amount................................................. 1,907 2,164 3,314 3,216
--------- ------ ------ -----------
NET INCOME:
Balance as per 10Q or 10K
-Leading Edge................................................. 465 262 229 --
Adjustment on combination with Justrite......................... 46 79 679 1,503
--------- ------ ------ -----------
Combined amount................................................. 511 341 908 1,503
--------- ------ ------ -----------
EARNINGS PER SHARE:
Balance as per 10Q or 10K
-Leading Edge................................................. 0.14 0.08 0.07 --
Adjustment on combination with Justrite......................... (0.05) (0.02) 0.09 0.28
--------- ------ ------ -----------
Combined amount................................................. $ 0.09 $ 0.06 $ 0.16 $ 0.28
--------- ------ ------ -----------
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997
----------------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
--------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
$'000 $'000 $'000 $'000
NET SALES:
Balance as per 10Q or 10K
-Leading Edge................................................. $ 2,505 $ 3,047 $ 3,696 $ 3,740
Adjustment on combination with Justrite......................... 2,261 3,957 2,803 1,871
--------- ------ ------ -----------
Combined amount................................................. 4,766 7,004 6,499 5,611
--------- ------ ------ -----------
GROSS PROFIT:
Balance as per 10Q or 10K
-Leading Edge................................................. 808 1,007 1,151 1,615
Adjustment on combination with Justrite......................... 1,418 2,205 1,947 993
--------- ------ ------ -----------
Combined amount................................................. 2,226 3,212 3,098 2,608
--------- ------ ------ -----------
NET INCOME:
Balance as per 10Q or 10K
-Leading Edge................................................. 451 504 510 626
Adjustment on combination with Justrite......................... 489 1,279 777 (886)
--------- ------ ------ -----------
Combined amount................................................. 940 1,783 1,287 (260)
--------- ------ ------ -----------
EARNINGS PER SHARE:
Balance as per 10Q or 10K
-Leading Edge................................................. 0.24 0.26 0.21 0.18
Adjustments on combination with Justrite........................ (0.04) 0.15 0.05 (0.23)
--------- ------ ------ -----------
Combined amount................................................. $ 0.20 $ 0.41 $ 0.26 $ (0.05)
--------- ------ ------ -----------
</TABLE>
F-19
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
18. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Common Stock Price
- -------------------------------------------------------------
<S> <C> <C>
HIGH LOW
----- ---
1998 QUARTER
- -------------------------------------------------------------
Fourth....................................................... 67/8 51/4
Third........................................................ 67/16 61/4
Second....................................................... 67/16 5
First........................................................ 61/2 51/8
<CAPTION>
1997 QUARTER
- -------------------------------------------------------------
<S> <C> <C>
Fourth....................................................... 7 5
Third........................................................ 7 61/4
</TABLE>
Prior to the Leading Edge's initial public offering of common stock, which
commenced on December 2, 1996, there was no public market for the Company's
common stock. The initial offering price was $6. On March 31, 1998, the closing
price was $6 1/8. Leading Edge has not declared any dividends.
F-20
<PAGE>
NOTICE TO STOCKHOLDERS
OF LEADING EDGE PACKAGING, INC.
(as required to be delivered by The Nasdaq Stock Market, Inc.)
You are hereby notified that Leading Edge Packaging, Inc. (the "Company")
has contracted to acquire, from its parent company, Chung Hwa Development
Holdings Limited ("Chung Hwa"), Justrite Investments Limited, a British Virgin
Islands company, and its subsidiaries, Leading Edge Packaging Limited (formerly
known as Rich City International Packaging Limited), a Hong Kong registered
company, Breakspear Limited, a British Virgin Islands company, Circle Round
Limited, Dongguan Shilong Wah Rich Packaging Limited, a China joint venture, and
Dongguan Walford Ornaments Packaging Limited, also a China joint venture.
The acquisition was approved by the Unanimous Written Consent of the
Company's Board of Directors on February 9, 1998. The Nasdaq Stock Market, Inc.
("Nasdaq") normally requires that an acquisition be approved by the Company's
stockholders. However, Nasdaq has received written confirmation from Chung Hwa
that, as the holder of 57% of the Company's issued and outstanding common stock
(before taking account of stock to be issued to Chung Hwa as consideration for
the companies acquired in the acquisition) it would vote all of its shares in
favor of the Share Exchange Agreement if the agreement were put to a vote. Based
upon its receipt of such confirmation from Chung Hwa, Nasdaq has determined to
allow the Company to satisfy its obligation to obtain stockholder approval by
sending this notice to the stockholders.
The enclosed Information Statement relates to the increase in the Company's
authorized share capital required to issue a portion of the shares to Chung Hwa
and contains a description of the transaction and audited financial statements
of the companies acquired.
