<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):
/ / No fee required.
[x] 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):
$13,500,000 purchase price (2,250,000 shares X $6.00 per share)
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
$2,700
------------------------------------------------------------------------
/ / 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:
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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 September , 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 Common Stock outstanding on February 27, 1998 was 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
October , 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 share exchange, as contemplated in
the Agreement (the "Exchange"), 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 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. 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. 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 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. Both Messrs. Lip-Boon Saw and
Richard Fung-Gea Wong are 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 Exchange itself was approved by the Company's Board of Directors and did
not require submission to the stockholders under Delaware law. The Company
received an exception from the Nasdaq National Market from its stockholder
approval requirement with respect to the Exchange.
The Exchange is being accounted for as a pooling-of-interests. However,
financial statements contained elsewhere in this Information Statement are
presented separately for each of the Company and Justrite as well as on a pro
forma basis giving effect to the Exchange in order to provide a basis for
comparison of the two companies. The information contained in this Information
Statement should have been provided prior to the closing of the Exchange which
occurred on March 13, 1998.
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 October , 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 outstanding Common Stock. Upon issuance of all of the shares
under the Agreement, it will hold 74% of the outstanding 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 $4,500,000 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.
TAX AND ACCOUNTING TREATMENT OF THE EXCHANGE
The Company's board considered that the Exchange was expected to be tax-free
to the Company and its stockholders for federal income tax purposes and has been
accounted for under the pooling-of interests method of accounting.
The foregoing discussion contains forward-looking statements which are
inherently subject to risks and uncertainties. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation" elsewhere in this
Information Statement."
3
<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth selected comparative unaudited per share data
for the Company on a historical and pro forma basis, giving effect to the
Exchange on a pooling-of-interests basis, and for Justrite on a historical
basis. The pro forma comparative unaudited per share data assumes the Exchange
had been consummated at the beginning of the periods presented. The information
set forth below is based on and derived from the historical financial statements
of the Company and of Justrite and the unaudited pro forma consolidated
financial information, including the respective notes thereto, appearing
elsewhere in this Information Statement. This information should be read in
conjunction with such historical financial statements and pro forma financial
information and the related notes thereto.
The per share data set forth herein are presented for comparative purposes
only and are not necessarily indicative of the future consolidated financial
position, the results of the future operations or the actual results or
consolidated financial position of the Company as the parent of Justrite that
would have been achieved had the Exchange been consummated as of the dates or
for the periods indicated.
<TABLE>
<CAPTION>
LEADING EDGE PACKAGING, JUSTRITE
INC. INVESTMENTS
------------------------- LIMITED
PRO FORMA ------------------
HISTORICAL CONSOLIDATED HISTORICAL
----------- ------------ ------------------
<S> <C> <C> <C>
NET BOOK VALUE PER SHARE:
December 31, 1997........................................... $ 3.06 $ 2.36 $ 30,927
March 31, 1997.............................................. 3.91 5.61 166,967
DIVIDENDS DECLARED PER SHARE:
Nine months ended:
December 31, 1997........................................... -- 142,487 142,487
Year ended:
March 31, 1997.............................................. -- -- --
March 31, 1996.............................................. -- -- --
March 31, 1995.............................................. -- -- --
NET INCOME FROM CONTINUING OPERATIONS PER SHARE:
Nine months ended:
December 31, 1997........................................... 0.29 0.28 6,446
Year Ended:
March 31, 1997.............................................. 0.89 0.82 17,078
March 31, 1996.............................................. N/A 2.00 45,013
March 31, 1995.............................................. N/A 0.97 21,863
</TABLE>
For Justrite, the total number of shares outstanding throughout the
respective periods is 100 shares. For the Company, the total number of shares is
based on the weighted average common shares outstanding, as follows:
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL CONSOLIDATED
------------------ ------------
<S> <C> <C>
March 31, 1995.............................................. N/A 2,250,000
March 31, 1996.............................................. N/A 2,250,000
March 31, 1997.............................................. 2,347,603 4,597,603
December 31, 1997........................................... 3,312,500 5,562,500
</TABLE>
4
<PAGE>
SELECTED FINANCIAL DATA
LEADING EDGE PACKAGING, INC.
The selected financial data set forth below has been derived from the
financial statements of the North American Distribution Business (the "N.A.
Distribution Business") of LEP-Hong Kong (then known as Rich City International
Packaging, Limited) for the years ended March 31, 1994, 1995 and 1996. The
Company took over the N.A. Distribution Business as of April 1, 1996. The
financial statements of the N.A. Distribution Business for each of the four
years ended March 31, 1996 were prepared on a "carved-out" basis as if the N.A.
Distribution Business had been operating independently. Assets and liabilities
of the N.A. Distribution Business as at March 31, 1996 were not transferred to
the Company. The financial statements of the Company for the year ended March
31, 1997 and for the nine months ended December 31, 1997 were prepared on an
actual basis as the Company was operating as a separate entity during each of
those periods. The selected financial data should be read in conjunction with,
and are qualified in their entirety by reference to, the financial statements,
the unaudited interim financial information and the unaudited pro forma
statements of income, including the respective notes thereto, included elsewhere
in this Information Statement. The historical financial data may not be
indicative of the Company's future performance as a consolidated company.
The interim financial data for the year ended March 31, 1993, the nine
months ended December 31, 1996 and 1997, and the pro forma statements of income
were derived from unaudited financial data which include, in the opinion of
management, all adjustments, which are of a normal recurring nature including
those to conform with generally accepted accounting principles, necessary to
present fairly the data for such periods. Results for the nine months ended
December 31, 1996 and 1997 are not necessarily indicative of the results to be
expected for the full year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
FISCAL YEAR ENDED MARCH 31, --------------------------
------------------------------------------------------ PRO FORMA
1993 1994 1995 1996 1997 1997 1997
--------- --------- --------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPTED SELECTED OPERATING DATA)
INCOME STATEMENT DATA
Net sales.......................... $ 8,768 $ 13,725 $ 6,311 $ 10,987 $12,987 $ 9,043 $ 16,283
Gross profit....................... 1,782 4,296 2,289 4,352 4,581 3,194 7,385
Operating income................... 1,187 3,073 1,482 3,248 3,359 1,519 2,353
Income before income taxes......... 1,178 3,052 1,473 3,201 3,433 1,521 2,096
Income taxes....................... -- 33 -- -- 1,342 565 555
Net income......................... 1,178 3,019 1,473 3,201 2,091 956 1,541
Net income per common share........ -- -- -- -- $ 0.89 $ 0.29 $ 0.28
Weighted average common shares
outstanding...................... -- -- -- -- 2,347,603 3,312,500 5,562,500
BALANCE SHEET DATA
Working capital.................... $ 1,183 $ (116) $ (220) $ (194) $ 8,917 $ 9,896 $ 9,801
Total assets....................... 2,496 4,559 1,044 1,797 13,916 11,187 26,213
Total liabilities.................. 1,274 4,549 1,044 1,797 4,730 1,045 11,533
Minority interests................. -- -- -- -- -- -- 1,554
Stockholders' equity............... 1,222 10 -- -- 9,186 10,142 13,126
</TABLE>
5
<PAGE>
JUSTRITE INVESTMENTS LIMITED
The selected financial data set forth below has been derived from the
financial statements of Justrite for the years ended March 31, 1994, 1995, 1996
and 1997. The financial data for the year ended March 31, 1993 and the nine
months ended December 31, 1997 were derived from unaudited financial data which
include in the opinion of management, all adjustments, which are of a normal
recurring nature necessary to present fairly the data for such periods.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED
----------------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
INCOME STATEMENT DATA
Net sales................................. $ 12,567 $ 19,709 $ 16,692 $ 21,972 $ 19,299 $ 14,001
Gross profit.............................. 5,542 7,446 7,038 9,868 6,612 4,251
Operating income.......................... 2,515 4,871 2,139 4,792 1,851 1,267
Income before income taxes................ 2,499 4,832 2,076 4,693 1,694 635
Income taxes credit (charge).............. (305) (414) 110 (192) 14 10
Net income................................ 2,194 4,418 2,186 4,501 1,708 645
BALANCE SHEET DATA
Working capital........................... $ 3,051 $ 5,888 $ 6,443 $ 11,011 $ 13,458 $ 16
Total assets.............................. 7,981 18,601 22,516 28,596 32,393 18,650
Total liabilities......................... 3,903 8,745 10,085 11,664 13,753 13,614
Minority interests........................ 194 1,554 1,943 1,943 1,943 1,943
Stockholders' equity...................... 3,884 8,302 10,488 14,989 16,697 3,093
</TABLE>
** Justrite conducts most of its operations in Hong Kong dollars (HK$).
Translation of amounts from HK$ into United States dollars (US$) for the
convenience of the reader has been made at US$1.00=HK$7.72. The Company
makes no representation, nor can it assure investors, that the HK$ amounts
could have been, or could be, converted into US$ at that rate on December
31, 1997 or on any other date.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED ELSEWHERE HEREIN. ALL
STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION CONTAINED IN THIS REPORT
RELATIVE TO MARKETS FOR THE COMPANY'S PRODUCTS AND TRENDS IN THE COMPANY'S
OPERATIONS OR FINANCIAL RESULTS, AS WELL AS OTHER STATEMENTS INCLUDING WORDS
SUCH AS "ANTICIPATE", "BELIEVE", "PLAN", "ESTIMATE", "INTEND", AND OTHER SIMILAR
EXPRESSIONS, CONSTITUTE FORWARD-LOOKING STATEMENTS UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, AND SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES.
LEADING EDGE PACKAGING, INC.
The following discussion and analysis takes account of the financial
statements of Leading Edge Packaging, Inc., on a stand-alone basis, prior to
giving effect to the Exchange.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1997 TO NINE MONTHS ENDED DECEMBER
31, 1996
NET SALES decreased approximately $204,000 (2.2%) from approximately
$9,247,000 for the nine months ended December 31, 1996 to $9,043,000 for the
nine months ended December 31, 1997. This decrease resulted from fewer sales.
Certain of the Company's competitors reduced their prices to maintain liquidity
in the wake of the Asian economic crisis. Management decided not to react to
pressure from customers to compete by lowering the Company's prices without an
acceptable profit. The Company intends to gauge the developments in Asia as it
considers strategically repricing its products.
6
<PAGE>
COST OF SALES decreased approximately $432,000 (6.9%) from approximately
$6,281,000 during the nine months ended December 31, 1996 to approximately
$5,849,000 during the nine months ended December 31, 1997. This decrease is due
to the decrease in net sales and the mix of products sold.
GROSS PROFIT increased approximately $228,000 (7.7%) from approximately
$2,966,000 for the nine months ended December 31, 1996 to approximately
$3,194,000 for the nine months ended December 31, 1997. This increase resulted
from a greater decrease in cost of sales than the decrease in net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased approximately
$1,059,000 (171.9%) from approximately $616,000 for the nine months ended
December 31, 1996 to approximately $1,675,000 for the nine months ended December
31, 1997. This increase resulted from the impact of the fully realized costs of
maintaining the Company's U.S. operations for the full period and higher
marketing expenses, the benefit of which may not be realized during the current
fiscal year.
OPERATING INCOME decreased approximately $831,000 (35.4%) from approximately
$2,350,000 for the nine months ended December 31, 1996 to approximately
$1,519,000 for the nine months ended December 31, 1997. This decrease resulted
from lower net sales and higher selling, general and administrative expenses.
INCOME BEFORE TAXES decreased approximately $842,000 (35.6%) from
approximately $2,363,000 for the nine months ended December 31, 1996 to
approximately $1,521,000 for the nine months ended December 31, 1997. This
decrease resulted from lower operating income.
PROVISION FOR INCOME TAXES decreased approximately $333,000 (37.1%) from
approximately $898,000 for the nine months ended December 31, 1996 to
approximately $565,000 for the nine months ended December 31, 1997. This
decrease resulted from lower income before taxes.
NET INCOME, as a result of the above, decreased approximately $509,000
(34.7%) from approximately $1,465,000 for the nine months ended December 31,
1996 to approximately $956,000 for the nine months ended December 31, 1997.
YEAR ENDED MARCH 31, 1997 COMPARED WITH YEAR ENDED MARCH 31, 1996
NET SALES in fiscal 1997 increased $2 million, or 18.2%, to approximately
$13 million from approximately $11 million in fiscal 1996. The bulk of the
Company's net sales for the year were conducted in Hong Kong based on FOB prices
of Rich City, and net sales based on U.S. delivery which commenced in the middle
of January, 1997 were insignificant for the year ($518,785). The Company expects
its New York and New Jersey operations to contribute to its sales in the coming
Fiscal year. Gross profit increased $228,563 to $4,580,715 in fiscal 1997. The
gross profit percentage decreased to 35.3% in fiscal year 1997 from 39.6% in
fiscal 1996, due primarily to the mix of product lines sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $117,239, or 10.6%,
to $1,221,849 in fiscal 1997 from $1,104,610 in fiscal 1996. As a percentage of
net sales, selling, general and administrative expenses decreased to 9.4% in
fiscal 1997 from 10% in fiscal 1996. The increase in expenses is primarily
related to higher payroll expenses ($271,175), commencing in the third quarter
of the year, rental expenses, higher professional fees and other expenses
($226,015).
As a result of the factors discussed above, income from operations slightly
increased 3.4% to $3,358,866 in fiscal 1997 from $3,247,542 in fiscal 1996. As a
percentage of net sales, income from operations decreased to 25.9% in fiscal
1997 from 29.6% in fiscal 1996.
Income taxes of $1.3 million in fiscal 1997 were based upon an annual
effective tax rate of 38%, which included state taxes.
YEAR ENDED MARCH 31, 1996 COMPARED WITH YEAR ENDED MARCH 31, 1995
For fiscal years 1995 and 1996, net sales were $6,310,879 and $10,987,470,
respectively. Net sales in fiscal 1996 increased by 74.1% or $4,676,591 from
fiscal 1995, as Rich City captured sales from the client base of its former
competitor and customer, Jewelpak Corporation, and simultaneously increased
orders
7
<PAGE>
derived from its other distributor/customers and from new customers. Sales in
1995 were abnormally low because of the cessation of business with Jewelpak.
In fiscal 1995 and 1996, selling expenses were $263,778 and $451,327,
respectively, representing an increase of 71.1%. The change reflected the impact
of increased sales in 1996 after the downturn in 1995 resulting from the
cessation of business with Jewelpak.
In fiscal 1995 and 1996, general and administrative expenses were $543,644
and $653,283, respectively, representing an increase of 20.2%. However, for
fiscal years 1995 and 1996, general and administrative expenses, as a percentage
of net sales, were 8.6% and 5.9%, respectively. The decline in expenses as a
percentage of net sales was the result of efficiencies created during the period
by LEP-Hong Kong's management.
In fiscal 1995 and 1996, operating income was $1,481,549 and $3,247,542,
respectively, representing an increase of 119.2%. As a percentage of sales,
operating income for fiscal 1995 and 1996 was 23.5% and 29.6%, respectively. The
increase correlated to increase in sales, although expenses also increased
during the period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flows from
operations and borrowing under its credit facilities. During the fiscal year
ended March 31, 1997, the Company's operating activities consumed $2.1 million
in cash. The uses of funds as stated in the initial public offering prospectus
were primarily for the purchase of inventory from LEP-Hong Kong and the set-up
of the New Jersey warehouse distribution center and for working capital. As part
of working capital, the Company set aside $1.25 million for income taxes due on
June 15, 1997. At March 31, 1997, the Company's debt to equity ratio was 2.4%.
At March 31, 1997, the Company's debt included $220,906 borrowed against a
bankers' acceptances line of credit, which was a self-liquidating loan.
Management expects that cash flows from operating activities and funds
available should be sufficient to support the Company's current business program
and seasonal working capital needs for the foreseeable future.
JUSTRITE INVESTMENTS LIMITED
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1997 TO NINE MONTHS ENDED DECEMBER
31, 1996
NET SALES decreased $1,914,872 (12.0%) from $15,916,046 for the nine months
ended December 31, 1996 to $14,001,174 for the nine months ended December 31,
1997. This decrease resulted from fewer sales. Certain of the companies
competitors reduced their prices to maintain liquidity in the wake of the Asian
economic crisis. Management decided not to react to pressure from customers to
compete by lowering the Company's prices without an acceptable profit. The
Company intends to gauge the developments in Asia before strategically repricing
its products.
COST OF SALES decreased $521,071 (5.1%) from $10,271,653 for the nine months
ended December 31, 1996 to $9,750,582 for the nine months ended December 31,
1997. This decrease corresponded to the decrease in net sales.
GROSS PROFIT decreased $1,393,801 (24.7%) from $5,644,393 for the nine
months ended December 31, 1996 to $4,250,592 for the nine months ended December
31, 1997. This decrease resulted from a decrease in net sales and lower gross
margins due to the mix of products sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $24,950 (0.8%) from
$2,958,305 for the nine months ended December 31, 1996 to $2,983,255 for the
nine months ended December 31, 1997. This was due to a marginal increase in
expenses.
8
<PAGE>
In addition, Justrite had a non-recurring expense of $373,928 resulting from
the misappropriation of cash by a manager of its China factory. The manager has
agreed to re-pay the amount over three years. The company has fully provided for
the amount in the financial statements and intends to account for any recoveries
on a cash basis. The Company has since reviewed its security system and
implemented more stringent control to avoid the recurrence of such a
misappropriation.
OPERATING PROFIT decreased $1,418,751 (52.8%) from $2,686,088 for the nine
months ended December 31, 1996 to $1,267,337 for the nine months ended December
31, 1997. This decrease resulted from lower net sales and lower gross margins.
PROFIT BEFORE TAXATION decreased $1,941,509 (75.3%) from $2,576,434 for the
nine months ended December 31, 1996 to $634,925 for the nine months ended
December 31, 1997. This decrease resulted from lower operating income.
TAXATION CREDIT increased $534 (5.8%) from $9,197 for the nine months ended
December 31, 1996 to $9,731 for the nine months ended December 31, 1997. This
increase resulted from lower operating income coupled with a write-back of an
over provision for taxes in previous years.
PROFIT, as a result of the above, decreased $1,940,976 (75.1%) from
$2,585,632 for the nine months ended December 31, 1996 to $644,656 for the nine
months ended December 31, 1997.
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 1997 TO FISCAL YEAR ENDED MARCH 31,
1996
NET SALES decreased $2,672,460 (12.2%) from $21,971,568 in fiscal 1996 to
$19,299,108 in fiscal 1997. This decrease resulted from fewer sales.
COST OF SALES increased $584,003 (4.8%) from $12,103,245 in fiscal 1996 to
$12,687,248 in fiscal 1997. This increase is due to the mix of products sold.
GROSS PROFIT decreased $3,256,463 (33%) from $9,868,323 in fiscal 1996 to
$6,611,860 in fiscal 1997. This decrease resulted from a decrease in net sales
and the corresponding increase in cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased $315,982 (6.2%) from
$5,076,738 in fiscal 1996 to $4,760,756 in fiscal 1997. This decrease resulted
from tighter management control in general and administrative expenses.
OPERATING PROFIT decreased $2,940,480 (61.4%) from $4,791,584 in fiscal 1996
to $1,851,104 in fiscal 1997. This decrease resulted from lower net sales and
higher cost of sales, offset partly by lower selling, general and administrative
expenses.
PROFIT BEFORE TAXATION decreased $2,998,765 (63.9%) from $4,692,959 in
fiscal 1996 to $1,694,194 in fiscal 1997. This decrease resulted from lower
operating income.
TAXATION decreased $205,253 (107.1%) from a $191,657 charge in fiscal 1996
to a $13,596 credit in fiscal 1997. This decrease resulted from lower operating
income coupled with a write-back of an over provision for taxes in previous
years.
PROFIT FOR THE YEAR, as a result of the above, decreased $2,793,512 (62.1%)
from $4,501,302 in fiscal 1996 to $1,707,790 in fiscal 1997.
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 1996 TO FISCAL YEAR ENDED MARCH 31,
1995
NET SALES increased $5,279,421 (31.6%) from $16,692,147 in fiscal 1995 to
$21,971,568 in fiscal 1996. This increase resulted from higher sales.
COST OF SALES increased $2,448,756 (25.4%) from $9,654,489 in fiscal 1995 to
$12,103,245 in fiscal 1996. This increase corresponded to the increase in net
sales.
GROSS PROFIT increased $2,830,666 (40.2%) from $7,037,657 in fiscal 1995 to
$9,868,323 in fiscal 1996. This increase resulted from higher net sales with
corresponding higher cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $177,976 (3.6%) from
$4,898,763 in fiscal 1995 to $5,076,739 in fiscal 1996. This increase resulted
from additional marketing expenses.
9
<PAGE>
OPERATING PROFIT increased $2,652,689 (124%) from $2,138,895 in fiscal 1995
to $4,791,584 in fiscal 1996. This increase was the result of higher net sales
with a corresponding higher cost of sales.
PROFIT BEFORE TAXATION increased $2,616,714 (126%) from a $2,076,245 credit
in fiscal 1995 to $4,692,959 in fiscal 1996. This increase resulted from higher
operating income.
TAXATION increased $301,753 (274.1%) from a $110,096 credit in fiscal 1995
to a charge of $191,657 in fiscal 1996. This increase resulted from under
provision for taxes for previous years.
NET INCOME, as a result of the above, increased $2,314,960 (105.9%) from
$2,186,342 in fiscal 1995 to $4,501,302 in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Justrite's primary sources of working capital are cash flows from operations
and borrowing under its credit facilities. Justrite had working capital of
approximately $13,458,000 at fiscal year end 1997 and $16,000 at December 31,
1997. During fiscal 1997 the Company's operating activities provided $1,543,896
in net cash. The Company's debt to equity ratio at March 31, 1997 was 12%. At
March 31, 1997, the Company's debt included $1,520,659 in short-term borrowing,
including loans and overdrafts with various banks. The Company's debt also
included long-term debt of $537,093 in fiscal 1997. The combined credit
facilities available and used by the Company as at March 31, 1997 were
$7,099,194 (available) and $2,742,247 (used), respectively.
Management expects that cash flows from operating activities and funds
available should be sufficient to support the Company's current business program
and seasonal working capital needs for the foreseeable future.
SEASONALITY
The Company's business depends on the buying seasons of the luxury goods
which use its packaging products, with a significant portion of its sales and
most of its income generated during the second and third fiscal quarters ending
March 31. The Company has historically experienced lower net sales in each of
its first and fourth quarters. Until the full business impact of New Jersey
warehouse distribution center and light assembly facility, the Company expects
this trend to continue in the fiscal year 1998. A variety of other factors may
also affect the revenue results of the Company, including U.S. and international
economic conditions, the retail sales environment and the Company's ability to
otherwise execute its business and marketing strategy.
MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market.
The range of the high and low sales prices per share of the Company's Common
Stock during the last fiscal year, as reported by Nasdaq, is set forth below:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal 1997
3rd Quarter................................................................ 7 6.25
4th Quarter................................................................ 7 5
Fiscal 1998
1st Quarter................................................................ 6.5 5.125
2nd Quarter................................................................ 6 438 5
3rd Quarter................................................................ 6 438 6.25
4th Quarter................................................................ 6 875 5.25
</TABLE>
As of June 18, 1998, there were approximately 363 holders of record of the
Company's Common Stock.
10
<PAGE>
The Company has never paid cash dividends on its Common Stock. Payment of
dividends, if any, will be within the discretion of the Company's Board of
Directors and will depend, among other factors, on earnings, capital
requirements and the operating and financial condition of the Company. At the
present time, the Company's anticipated capital requirements are such that it
intends to follow a policy of retaining earnings, if any, in order to finance
the development of its business.
The Company first announced its intent to enter into the Agreement in a
press release on December 9, 1997. The high and low sale prices for the
Company's Common Stock on December 8, 1997 were 5 3/4 and 5 1/4, respectively.
BUSINESS OF JUSTRITE AND THE SUBSIDIARIES
GENERAL
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,
as well as unaudited financial statements for the nine months ended December 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.
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.
The address and telephone number for Justrite and each of the above listed
subsidiaries is 402-3, Join-in Hang Sing Centre, 71-75 Container Port Road, Kwai
Chung, N.T., Hong Kong, (852) 2419-1818.
11
<PAGE>
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.
The address and telephone number for the China Joint Ventures is Block 2, Da
Zhou Industrial District, Shilong Town, Dongguan, Guangdong Province, Peoples
Republic of China. (86) 769-6623006
MANUFACTURING AND DISTRIBUTION
The packaging products manufactured by Dongguan Walford are primarily
marketed internationally by the Company in North America and by LEP-Hong Kong in
the global market other than North America. All sales are made on F.O.B. Hong
Kong terms or C.I.F. customers' ports with the exception of the North American
market, where sales are made locally and delivered to the buyers in the
respective states. The Company maintains inventories in its New Jersey
distribution center for sales to the North American market.
The marketing of the products is conducted by two marketing and sales teams,
one based in the United States under the Company to cover the North American
market and one based in Hong Kong under LEP-Hong Kong to cover the global market
excluding North America.
The Company and LEP-Hong Kong each place advertisements in various trade
magazines in the United States, Europe and Hong Kong. The companies also
participate in trade shows in Europe and Hong Kong and are considering
participation in various North American trade shows. The companies' fully
integrated manufacturing facilities and distribution system enable them to cater
to the different needs of their customers. The group works closely with its
customers to provide new packaging designs and ideas on a regular basis.
The raw materials for the packaging products are mainly imported from the
United States, Korea, Japan, Europe and Asia. The group has access to
alternative sources for each of the materials used. For example, styrene, velour
and ecosuede can each be sourced from either the United States, Europe or
Taiwan, and plastic resins can be sourced from either Taiwan, Thailand or Japan.
Steel can be sourced from Korea, Japan or China. The group has never experienced
a shortage of materials for its manufacturing operations because of the
availability of alternative sources of materials.
12
<PAGE>
EMPLOYEES
Justrite has approximately 3,000 employees, including 10 employees at the
management level, nine marketing and sales personnel, 136 administrative,
accounting and supervisory employees and approximately 2,800 workers who make
and distribute the packaging products.
COMPETITION
The packaging products industry is highly competitive. The Company is aware
of approximately 10 competitors in North America and approximately 20
competitors in Asia which directly compete with its products. There are numerous
distributors in the packaging products industry which are not also
manufacturers.
LEGAL PROCEEDINGS
In February 1998, LEP-Hong Kong received a writ seeking injunctive relief
filed by Cartier International B.V. The writ did not specify the amount of
damages sought. LEP-Hong Kong produced jewelry boxes for a customer who
confirmed in writing that it was an authorized dealer of Cartier from 1994 to
1996. Cartier has since determined that the customer was unauthorized to
distribute Cartier products. Since 1996, the Company has ceased doing business
with this customer and, at present, does not make or distribute packaging
products to any customer using the Cartier name. LEP-Hong Kong has given an
undertaking to Cartier that it is no longer producing such packaging products
and that all films/bromides were returned to the then-customer in 1996. Cartier
has demanded a permanent injunction and an accounting of profits made on the
transactions using its name. The Company maintains that it actually incurred a
loss on these products.
A writ was filed by U-Freight Limited, a forwarding company, against
LEP-Hong Kong for unpaid bills in the amount of $24,333 plus interests and costs
arising out of the shipment of goods to the United States last year. LEP-Hong
Kong has filed a counterclaim alleging damages from loss of business due to
U-Freight's breach of contract. U-Freight has not yet submitted a defense to
LEP-Hong Kong's counterclaim.
LEP-Hong Kong has issued a writ against Lansa Diffusion SARL, Lansa S.A.
(the parent company) and Mr. and Mrs. Brentini, its directors/shareholders,
seeking damages of $759,469. LEP-Hong Kong has applied for leave to serve the
writ outside of the Hong Kong jurisdiction and it is expected to be served
shortly. The Company believes that Lansa Diffusion SARL has filed a proceeding
to wind up its business in France. The Company is preparing to file a claim in
the proceeding in France. The claim against Mr. and Mrs. Bremini is based on a
guaranty of the amount owed by Lansa Diffusion.
DEVELOPMENT OF THE BUSINESS OF JUSTRITE
The business of Justrite began in 1983 as an independent family-owned
business under the name of Rich City Trading, which sold plastic jewelry cases.
Rich City Trading established the China manufacturing operation in early 1986,
producing bags and pouches out of flock velvet and artificial suede and leather.
Over the next several years, Rich City Trading expanded the variety of items
which it manufactured and distributed. In early 1991, all of the business of
Rich City Trading was transferred to an entity known as Rich City International,
which in a later restructuring became LEP-Hong Kong. Justrite was established as
a limited company in the British Virgin Islands on March 2, 1993, to serve as an
intermediary holding company of all of the shares of the other subsidiaries and
to be wholly-owned by Chung Hwa.
13
<PAGE>
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Justrite is engaged in one business segment which is the manufacture, sale
and distribution of packaging products. An analysis of sales by geographic
destination for the relevant years follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales:
North America............................................................ $ 12,987 $ 10,712 $ 6,376
Europe................................................................... 5,908 4,836 4,521
Asia and others.......................................................... 4,985 6,424 5,795
---------- ---------- ----------
23,880 21,972 16,692
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following are the Company's operating data by geographic area:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net sales:
North America............................................................ $ 12,987 $ 10,712 $ 6,376
Hong Kong and other parts of China....................................... 10,893 11,260 10,316
---------- ---------- ----------
23,880 21,972 16,692
---------- ---------- ----------
Operating income:
North America............................................................ 3,359 -- --
Hong Kong and other parts of China....................................... 1,802 4,792 2,076
---------- ---------- ----------
5,161 4,792 2,076
---------- ---------- ----------
Assets at end of year:
North America............................................................ 13,867 -- --
Hong Kong and other parts of China....................................... 29,740 28,597 10,488
---------- ---------- ----------
43,607 28,597 10,488
---------- ---------- ----------
</TABLE>
BUSINESS OF THE COMPANY
Leading Edge Packaging, Inc. manufactures, sells and distributes, in North
America (and with the addition of Justrite, Europe, Asia and the Middle East),
packaging products used primarily in the sale of luxury consumer goods. Its
packaging products include metal and plastic cases, optical cases, pouches and
bags, and paper gift boxes. The Company also sells display units for retail
merchandising of jewelry, watches, eyeglasses, pens, cosmetics and gold coins
(the packaging products and display units are collectively referred to herein as
"Packaging Products"). The Company's customers are mainly wholesalers and
distributors of Packaging Products and consumer product manufacturers. Leading
Edge purchases substantially all of its inventory from LEP-Hong Kong.
As part of its marketing strategy, the Company's goal is to consolidate the
process by which high-end packaging products are distributed in North America
and, through Justrite and its subsidiaries, Europe, Asia and the Middle East.
The Company intends to accomplish this by purchasing and customizing high
quality Packaging Products from the Company's low-cost Asian producer
subsidiaries and distributing the products in North America and, through its
distribution subsidiaries, in Europe, Asia and the Middle East.
To effect this strategy, in North America, the Company leases a 2,000
square-foot office and showroom in the Empire State Building in New York City,
and a 65,000 square-foot warehouse and distribution center in Raritan Center,
Edison, New Jersey, for the Company's warehousing, customization and
distribution operations. The Company believes that its warehousing and
customizing capabilities
14
<PAGE>
located in the United States, coupled with its Asian low-cost manufacturing
facilities supply, give it an advantage over its competitors in the North
American market by enabling the Company to fill orders and customize products on
a "just in time" basis. The Company's manufacturing facilities of supply allow
it to capitalize on lower production cost obtainable overseas, while maintaining
the high quality of its products.
The Company follows industry practice regarding its general working capital.
The company maintains an inventory of finished goods in its New Jersey warehouse
of between $2,000,000 and $3,000,000 to cover an adequate inventory level for
the respective packaging products it intends to distribute to the retail market.
This will be adjusted upwards or downwards and the composition revised in
accordance with market demand. Its inventory level of raw materials and
components will be kept at a minimum of $6M and will increase as its turnover
increases with management's objective to keep a 3-4 times turnaround on its
inventory. The company maintains trade terms in line with the industry and sells
on COD terms, letter-of-credit terms and 30-90 days credit terms based on the
financial standing and history of each customer. Where the Company is promoting
a certain category of packaging products or when it is promoting the sale of a
certain type of material, the company will consider extended payment terms on a
case by case basis.
In addition to the subsidiaries of Justrite, the Company has three
wholly-owned subsidiaries in the United States, each of which is incorporated in
Delaware. These are LEP Products, Inc., LEP Marketing & Sales, Inc. and LEP
Distributors, Inc. To-date, neither LEP Marketing & Sales, Inc. nor LEP
Distributors, Inc. has commenced operations. LEP Products, Inc. is engaged in
the sale and distribution of watches and plastic gift bags and is the exclusive
distributor of Hang Ten brand watches in the United States.
COMPETITION
The Company is aware of 20 substantial foreign-based manufacturers and of
ten North American distributors whose products are in direct competition with
various of its Packaging Products. The cost of manufacturing Packaging Products
in North America and Europe is relatively high, causing manufacturers to seek
out overseas suppliers to fill their orders.
The Company believes that it will be able to compete by having the
flexibility to respond quickly to orders and catering to changes in customers'
design specifications; by endeavoring to offer a wider range of products than
its competitors; and by capitalizing on lower production costs obtainable in
Asia, while maintaining the high quality of its products. The Company believes
it can offer its North American customers a quick response time on short orders
because of its customization facilities in the United States.
There is substantial competition in the Packaging Products industry. The
Company competes with distributors and manufacturers of Packaging Products based
in the U.S. and overseas. Many of the Company's competitors have name
recognition in the market and longer operating histories and in many cases are
substantially larger and better financed than the Company. Such competitors may
use their economic strength to influence the market to continue to buy their
existing or newly developed products. New competitors may arise and may market
products which compete with the Company's products. The Company believes that
several companies currently distribute products in North America in direct
competition with the Company's Packaging Products, including International
Packaging Inc., Gem Case Inc., Fuller Corporation, Rocket Jewelry Box Inc.,
Noble Inc., Jewel Case Factory, Unique Packaging Inc. and Gunther Mele Inc. Some
of the Company's current customers presently, or at some future point may,
compete with the Company.
SIGNIFICANT CUSTOMERS
Two customers, Rocket Jewelry Box Inc. and Talbot's (Birmingham) Limited,
each accounted for 10% of the Company's revenues (on a combined basis with
Justrite) for the year ended March 31, 1998. For the year ended March 31, 1997,
two customers, Rocket Jewelry Box Inc. and Astucci US Inc., accounted for 20.7%
and 17.8% of the Company's revenues on a stand-alone basis.
15
<PAGE>
GOVERNMENT REGULATION: IMPORT/EXPORT
The Peoples Republic of China ("PRC") currently enjoys Most-Favored Nation
("MFN") status granted by the United States, which results in imports into the
United States from the PRC being subject to the lowest applicable tariffs. The
United States annually reconsiders the renewal of MFN trading status for the
PRC. There can be no assurance, however, that the PRC's MFN status will be
renewed in future years. The Company believes that the non-renewal of MFN
trading status would adversely affect the pricing of any inventory of the
Company consisting of products manufactured within the PRC. Failure by the
United States to renew the PRC's MFN status, could cause an increase in the cost
to import Packaging Products from the PRC and Hong Kong to the United States.
At current rates an import duty of between 5% and 20% will be payable by the
Company on the import price of metal and plastic cases imported into the U.S.
and Canada. For the year ended March 31, 1996, metal cases accounted for
approximately 29.2% of total exports of LEP-Hong Kong to North America; plastic
cases accounted for approximately 38.2%. If the PRC were to lose MFN status,
then the Company's products may be subject to higher tariffs and import duties
in the U.S. Although it is not possible to quantify the potential impact of
higher tariffs and duties, the Company believes that, due to the comparatively
low cost of production in the PRC, it would be able to withstand an increase in
tariffs while still being able to compete profitably in the U.S. market.
EMPLOYEES
As of March 31, 1998, the Company (exclusive of Justrite and the
subsidiaries) employed approximately 23 employees. The Company has five
management level employees, four marketing and sales personnel, seven
accounting, administrative and supervisory personnel and seven light assembly
and distribution workers.
PROPERTIES
LEASES
The Company leases a 2,000 square-foot space for its offices and showroom in
the Empire State Building, 350 Fifth Avenue, Suite 3922, New York, New York for
a five-year period commencing July 1, 1996 at an annual rent of $42,096. The
Company also leases for the warehousing and customization of its products a
65,000 square-foot facility in Raritan, New Jersey, for a period a five years
commencing November 1, 1996, at an annual rent of $179,963 plus 30% of certain
common charges for the building in which the facility is located.
LEGAL PROCEEDINGS
The Company has filed a complaint against Boxco Ltd. for non-payment of
invoices for goods sold in the amount of $97,666 plus interest and consequential
damages. The Company has not made any provision for non-recoverability of this
debt in its financial statements.
OTHER MATTERS
Certain holders of record of the Common Stock (such as brokers, custodians
and nominees) are being requested to distribute copies of this Information
Statement to beneficial holders of the Common Stock. Such holders will be
reimbursed for expenses they incur in so doing and will be compensated.
September , 1998
16
<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
Leading Edge Packaging Hong Kong HK$2,000,000 -- 100% Sale and distribution of
Limited (f/k/a Rich City packaging products
Internatinal Packaging
Limited)
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>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
LEADING EDGE PACKAGING, INC.
Report of independent auditors................................................. F-2
Balance sheets of Rich City International Packaging Limited - North American
Distribution Business as of March 31, 1996 and of Leading Edge Packaging,
Inc. as of March 31, 1997.................................................... F-3
Statements of income of Rich City International Packaging Limited - North
American Distribution Business for the years ended March 31, 1995 and 1996
and of Leading Edge Packaging, Inc. for the year ended March 31, 1997........ F-4
Statements of Equity of Rich City International Packaging Limited - North
American Distribution Business for the years ended March 31, 1995 and 1996
and of Leading Edge Packaging, Inc. for the year ended March 31, 1997........ F-5
Statements of Cash Flows of Rich City International Packaging Limited - North
American Distribution Business for the years ended March 31, 1995 and 1996
and of Leading Edge Packaging, Inc. for the year ended March 31, 1997........ F-6
Notes to the financial statements.............................................. F-7 - F-17
Unaudited balance sheet as of December 31, 1996 and December 31, 1997.......... F-18
Unaudited statements of income for the nine months ended December 31, 1996 and
December 31, 1997............................................................ F-19
Unaudited statements of cash flows for the nine months ended December 31, 1996
and December 31, 1997........................................................ F-20
Notes to unaudited financial statements........................................ F-21
JUSTRITE INVESTMENTS LIMITED
Auditors' report............................................................... F-22
Consolidated profit and loss accounts for the years ended March 31, 1995, 1996
and 1997 and for the nine months ended December 31, 1996 (unaudited) and 1997
(unaudited).................................................................. F-23
Consolidated balance sheets as at March 31, 1995, 1996 and 1997 and December
31, 1996 (unaudited) and 1997 (unaudited).................................... F-24
Consolidated cash flow statements for the years ended March 31, 1995, 1996 and
1997 and for the nine months ended December 31, 1996 (unaudited) and 1997
(unaudited).................................................................. F-25
Notes to financial statements.................................................. F-26
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION FOR LEADING EDGE
PACKAGING, INC.
Introduction to unaudited pro forma financial information...................... F-38
Unaudited pro forma consolidated statements of income for the years ended
March 31, 1995 and 1996...................................................... F-39
Unaudited pro forma consolidated statement of income for the year ended
March 31, 1997............................................................... F-40
Unaudited pro forma interim consolidated statement of income for the nine
months ended December 31, 1996............................................... F-41
Unaudited pro forma interim consolidated statement of income for the nine
months ended December 31, 1997............................................... F-42
Unaudited pro forma interim consolidated balance sheet at December 31, 1997.... F-43
Notes to unaudited pro forma consolidated financial statements................. F-44
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Shareholders and The Board of Directors
Leading Edge Packaging, Inc.
We have audited the accompanying balance sheet of Rich City International
Packaging Limited ("Rich City")'s North American Distribution Business ("N.A.
Distribution Business") as of March 31, 1996 and of Leading Edge Packaging, Inc.
(the "Company") as of March 31, 1997 and the related statements of income,
equity and cash flows of Rich City's N.A. Distribution Business for each of the
two years in the period ended March 31, 1996 and of the Company for the year
ended March 31, 1997. The Company was formed on December 15, 1995 and is the
successor to Rich City's N.A. Distribution Business. 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 includes 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.
The accompanying financial statements of the N.A. Distribution Business have
been prepared from the separate records maintained by it and may not necessarily
be indicative of the condition that would have existed or the results of
operations if the N.A. Distribution Business had been operated as an
unaffiliated company. Portions of certain income and expenses represent
allocations made from head office items applicable to Rich City as a whole.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Rich City's N.A. Distribution Business as of
March 31, 1996 and the Company as of March 31, 1997 and the results of the
operations and cash flows of Rich City's N.A. Distribution Business for each of
two years in the period ended March 31, 1996 and of the Company for the year
ended March 31, 1997 in conformity with accounting principles generally accepted
in the United States of America.
Deloitte Touche Tohmatsu
Hong Kong
May 27, 1997
F-2
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
BALANCE SHEETS
<TABLE>
<CAPTION>
RICH CITY'S
N.A.
DISTRIBUTION
BUSINESS LEADING EDGE
MARCH 31, 1996 MARCH 31, 1997
CARVED OUT* ACTUAL
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 35,002 $ 4,734,139
Accounts receivable, net of allowance for doubtful accounts--
1996, $5,944; 1997, $Nil..................................................... 192,199 4,749,130
Bills receivable (Note 5)...................................................... 169,516 1,245,449
Inventories (Note 6)........................................................... -- 748,524
Advances to head office (Note 7)............................................... 1,151,836 --
Deposits paid to holding company (Note 8)...................................... -- 2,111,506
Prepaid expenses and other current assets...................................... 54,832 53,366
-------------- --------------
Total current assets......................................................... $ 1,603,385 $ 13,642,114
Property, plant and equipment, net of accumulated depreciation-- 1996, $56,978;
1997, $22,490 (Note 9)....................................................... 193,295 273,734
-------------- --------------
Total assets................................................................. $ 1,796,680 $ 13,915,848
-------------- --------------
-------------- --------------
LIABILITIES AND DIVISION/SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable to a related party/holding company (Note 15a)................. $ 1,655,308 $ 2,995,690
Bills payable (Note 5)......................................................... -- 220,906
Accrued liabilities............................................................ 141,372 165,274
Capital lease obligations (Note 10)............................................ -- 1,057
Income taxes payable (Note 11)................................................. -- 1,342,224
-------------- --------------
Total current liabilities.................................................... 1,796,680 4,725,151
-------------- --------------
Long term liabilities:
Capital lease obligations (Note 10)............................................ -- 4,789
-------------- --------------
Total long term liabilities.................................................. -- 4,789
-------------- --------------
Commitments and contingencies (Note 17)
Division/shareholders' equity:
Preferred stock, $0.01 par value
--authorized 5,000,000 shares, no shares issued or outstanding................. -- --
Common stock, 1997, $0.01 par value
--authorized 5,000,000 shares, issued and outstanding 3,312,500 shares......... -- 33,125
Additional paid-in capital..................................................... -- 7,061,700
Retained earnings.............................................................. -- 2,091,083
-------------- --------------
Total division/shareholders' equity.......................................... -- 9,185,908
-------------- --------------
Total liabilities and division/shareholders' equity.......................... $ 1,796,680 $ 13,915,848
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to financial statements
* Assets and liabilities of the N.A. Distribution Business as at March 31,
1996 were not transferred to Leading Edge.
F-3
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
RICH CITY'S N.A.
DISTRIBUTION BUSINESS
YEAR ENDED MARCH 31, LEADING EDGE
--------------------------- YEAR ENDED
1995 1996 MARCH 31,1997
CARVED OUT CARVED OUT ACTUAL
------------ ------------- -------------
<S> <C> <C> <C>
Net sales............................................................ $ 6,310,879 $ 10,987,470 $12,987,263
Cost of sales from a related party/holding company................... 4,021,908 6,635,318 8,406,548
------------ ------------- -------------
Gross profit......................................................... 2,288,971 4,352,152 4,580,715
------------ ------------- -------------
Selling expenses..................................................... 263,778 451,327 412,919
General and administrative expenses.................................. 543,644 653,283 808,930
------------ ------------- -------------
Selling, general and administrative expenses......................... 807,422 1,104,610 1,221,849
------------ ------------- -------------
Operating income..................................................... 1,481,549 3,247,542 3,358,866
Interest expense..................................................... (65,057) (53,961) (7,165)
Other income......................................................... 56,416 7,014 81,606
------------ ------------- -------------
Income before income taxes........................................... 1,472,908 3,200,595 3,433,307
Income taxes (Note 11)............................................... -- -- 1,342,224
------------ ------------- -------------
Net income........................................................... $ 1,472,908 $ 3,200,595 $ 2,091,083
------------ ------------- -------------
Net income per share (Note 14)....................................... N/A N/A $ 0.89
------------ ------------- -------------
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL DIVISION/
--------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARE AMOUNT CAPITAL EARNINGS EQUITY
---------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Rick City's N.A. Distribution Business:
Balance as of April 1, 1994................... -- $ -- $ -- $ 9,799 $ 9,799
Net income.................................... -- -- -- 1,472,908 1,472,908
Distribution to Head Office................... -- -- -- (1,482,707) (1,482,707)
---------- --------- ------------ ------------- -------------
Balance as of March 31, 1995.................. -- -- -- -- --
Net income.................................... -- -- -- 3,200,595 3,200,595
Distribution to Head Office................... -- -- -- (3,200,595) (3,200,595)
---------- --------- ------------ ------------- -------------
Balance as of March 31, 1996.................. -- $ -- $ -- $ -- $ --
---------- --------- ------------ ------------- -------------
Leading Edge:
Balance as of April 1, 1996 (note 12)......... 1,875,000 $ 18,750 $ -- $ -- $ 18,750
Contribution by Rich City of part of accounts
payable to Rich City........................ -- -- 481,250 -- 481,250
Issuance of common stock...................... 1,437,500 14,375 6,580,450 -- 6,594,825
Net income.................................... -- -- -- 2,091,083 2,091,083
---------- --------- ------------ ------------- -------------
Balance as of March 31, 1997.................. 3,312,500 $ 33,125 $ 7,061,700 $ 2,091,083 $ 9,185,908
---------- --------- ------------ ------------- -------------
---------- --------- ------------ ------------- -------------
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
RICH CITY'S N.A.
DISTRIBUTION BUSINESS
YEAR ENDED MARCH 31, LEADING EDGE
---------------------------- YEAR ENDED
1995 1996 MARCH 31,1997
CARVED OUT CARVED OUT ACTUAL
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 1,472,908 $ 3,200,595 $ 2,091,083
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation.................................................... 26,690 31,328 22,490
Loss on sale of property, plant and equipment................... 16,937 -- --
Changes in operating assets and liabilities:
Accounts receivable........................................... 3,450,600 (29,877) (4,749,130)
Bills receivable.............................................. (354,748) 185,232 (1,245,449)
Inventories................................................... -- -- (748,524)
Deposits paid to holding company.............................. -- -- (2,111,506)
Prepaid expenses and other current assets..................... 30,068 (38,109) (53,366)
Accounts payable to a related party/holding company........... (768,623) 1,054,181 2,995,690
Bills payable................................................. -- -- 220,906
Accrued liabilities........................................... 4,193 60,738 165,274
Income taxes payable.......................................... (33,043) -- 1,342,224
------------- ------------- -------------
Net cash provided by (used in) operating activities............... 3,844,982 4,464,088 (2,070,308)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property, plant and equipment....................... (228,240) (4,401) (290,126)
Proceeds from sale of property, plant and equipment............. 90,831 -- --
------------- ------------- -------------
Net cash used in investing activities............................... (137,409) (4,401) (290,126)
------------- ------------- -------------
Cash flows from financing activities:
Distribution to Head Office....................................... (1,482,707) (3,200,595) --
Net repayments to Head Office..................................... (2,707,824) (1,514,220) --
Net proceeds from issuance of common stock........................ -- -- 7,093,325
Payment of capital lease obligations.............................. -- -- (252)
------------- ------------- -------------
Net cash (used in) provided by financing activities................. (4,190,531) (4,714,815) 7,093,073
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents................ (482,958) (255,128) 4,732,639
Cash and cash equivalents at beginning of year...................... 773,088 290,130 1,500
------------- ------------- -------------
Cash and cash equivalents at end of year............................ $ 290,130 $ 35,002 $ 4,734,139
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Interest paid..................................................... $ 65,057 $ 53,961 $ 6,566
Income taxes paid................................................. 33,043 -- --
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Leading Edge Packaging, Inc. (the "Company") was incorporated in Delaware on
December 15, 1995. The Company is a subsidiary of Rich City International
Packaging Limited ("Rich City") and became the successor to Rich City's North
American distribution business effective from April 1, 1996, under an Assignment
and Distribution agreement signed on September 23, 1996.
2. ASSIGNMENT AND DISTRIBUTION AGREEMENT
On September 23, 1996, an Assignment and Distribution agreement
("Agreement") was signed between Rich City and the Company. Under the Agreement,
the Company is designated as an exclusive distributor for Rich City to market,
distribute, sell, warehouse and subassemble, where necessary, Rich City's
packaging products in North America. The term of the agreement is for 10 years
from the date of agreement and is automatically renewed for successive
additional one year periods except upon early termination by both parties. The
Company will purchase packaging products from Rich City at a 6% to 8% mark up
over the manufacturing costs, which comprise material costs, labor cost and
overheads. As a condition to Rich City's acceptance of any product order from
the Company, the Company shall advance to Rich City an amount equal to the
estimated average costs of materials for the products that the Company has
ordered.
Under the term of the Agreement, for the year ending December 31, 1998, and
for each subsequent year thereafter the exclusive distribution basis will be
converted to a non-exclusive basis if the Company's annual gross sales rate of
increase is less than the cost of living increase computed from the Consumer
Price Index. In addition, the Company is also obligated to pay to Rich City a
royalty of $2,000,000 in one or more installments. The amount of each
installment is calculated using a formula which relates to the Company's net
sales and earnings before taxes, commencing from the year ending March 31, 1999.
No installment will need to be paid if both the Company's earnings before taxes
is lower than $3,000,000 and net sales for the fiscal year are less than
$25,000,000. In the event that the Company fails to make the installment
payments in accordance with terms under the Agreement, the exclusive
distribution basis will be converted to a non-exclusive basis.
3. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
Rich City International Packaging Limited ("Rich City" or "Head Office") is
a wholly owned subsidiary of Chung Hwa Development Holdings Limited ("Chung
Hwa"), a Hong Kong listed company. Rich City is engaged in the sale and
distribution, design and warehousing of packaging products. Effective April 1,
1996, Rich City assigned all its North American sales and the exclusive rights
to carry on the North American distribution business of Rich City ("N.A.
Distribution Business") to the Company.
During the two years ended March 31, 1996, it has been the policy of the
N.A. Distribution Business to transfer its cash earned to Rich City to finance
the operations and working capital requirements of the manufacturing and other
activities of Chung Hwa and its subsidiaries ("Chung Hwa Group").
The N.A. Distribution Business, which operates in a single industry segment,
is engaged in the sale and distribution of packaging products in North America.
The financial statements of the N.A. Distribution Business for each of the
two years in the period ended March 31, 1996, have been prepared on the "Carved
Out Basis" as if the N.A. Distribution Business had been in existence and
operating independently prior to the Assignment and Distribution agreement
F-7
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (CONTINUED)
referred to in Note 2 to the financial statements between Rich City and the
Company, which became effective on April 1, 1996. The financial statements have
been prepared in accordance with generally accepted accounting principles in the
United States of America ("U.S. GAAP"), which do not differ significantly from
those used in the statutory accounts of Rich City.
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
disclosures 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 Carved Out Basis is as follows:
(A) ASSETS:
Property, plant and equipment, accounts receivable, bills receivable,
prepaid expenses and other current assets specifically relating to the N.A.
Distribution Business have been identified and presented in the financial
statements.
Cash and cash equivalents presented in the financial statements represent
the balance of the cash not transferred to Rich City's account.
The N. A. Distribution Business did not maintain any inventory during the
two years ended March 31, 1996 as purchases were made against specific customer
orders and title passed to customers at the same time as the N.A. Distribution
Business acquired the product.
(B) CURRENT LIABILITIES:
Accounts payable to a related party represents the trade payable to
Breakspear Limited, a fellow subsidiary of Rich City and its sole supplier.
Breakspear Limited is part of the Chung Hwa Group. The trade payable balance at
each year end date represents outstanding invoices for the 60 days prior to each
year end in accordance with Rich City's payment terms to Breakspear Limited of
net 60 days.
Accrued liabilities specifically relating to the N.A. Distribution Business
have been identified and presented in the financial statements.
(C) INCOME AND EXPENSES
Sales and cost of sales for the N.A. Distribution Business have been
identified and presented in the financial statements. The financial effect of
the Assignment and Distribution agreement referred to in Note 2 has not been
included in the carved out results.
Selling, general and administrative, interest and taxation expenses relating
to the N.A. Distribution Business are accounted for either on an actual basis or
estimated with reference to the circumstances of the business based on methods
that management of Rich City believes to be reasonable. Common expenses which
amounted to $148,282 and $172,751 in the years ended March 31, 1995 and 1996,
respectively, were allocated with reference to the ratio of transactions made or
the floor area used as appropriate.
F-8
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (CONTINUED)
(D) DISTRIBUTION TO HEAD OFFICE
Distributions made to Rich City for the years ended March 31, 1995 and 1996
were $1,482,707 and $3,200,595, respectively, and resulted in the distribution
of the entire equity balance each year.
4. 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.
FACTORED RECEIVABLES--Transfers of receivables with recourse are recognized
as sales when the future economic benefits embodied in the receivable are
surrendered because the N.A. Distribution Business' future obligation under the
recourse provisions can be reasonably estimated and there are no repurchase
terms except under the recourse provisions.
The difference between the receivable transferred and the cash received is
recognized as a loss in the period it occurs.
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>
Furniture, fixtures and equipment 10%--33 1/3%
Leasehold improvements 10%--20% or over the terms of the respective
leases whichever is shorter
</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.
Cost represents supplier cost for delivery at the designated location and duty.
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--The financial statements of the N.A.
Distribution Business and the Company have been presented in U.S. dollars.
F-9
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The functional currency of the N.A. Distribution Business was the Hong Kong
dollar. Transactions and assets and liabilities denominated in Hong Kong dollars
were translated to the U.S. dollar at HK$7.80 to $1.00, which approximated the
market rate at all periods presented.
All transactions in currencies other than the functional currency during the
two years in the period ended March 31, 1996 were translated at the exchange
rates prevailing on the transaction dates. Related accounts payable or
receivable existing at such balance sheet dates denominated in currencies other
than the functional currencies were translated at period end rates. Gains and
losses, which were immaterial for all periods presented, resulting from the
translation of foreign currency transactions and balances were included in the
income statements.
The financial statements of the Company are prepared in United States
dollars because this is the currency of the primary economic environment in
which the Company operates. Monetary assets and liabilities denominated in
foreign currencies are translated at year end exchange rates, while foreign
currency transactions are translated at average exchange rates during the year.
Gains or losses from foreign currency transactions are included in other income.
EMPLOYEE BENEFITS--Contributions payable to the N.A. Distribution Business
defined contribution retirement benefit scheme are expensed as incurred. The
N.A. Distribution Business did not provide any other post retirement benefits
and post employment benefits, if any, are not material. The Company does not
provide any post retirement benefits and post employment benefits, if any, are
not material.
5. 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, 1995 and 1996, the N.A.
Distribution Business had factored gross bills receivable of $3,811,936 and
$3,250,463, respectively, with financial institutions with recourse to the N.A.
Distribution Business. The net proceeds after discounts during each of these
years amounted to $3,748,403 and $3,197,771, respectively. There were no
repurchase terms except for the recourse under the terms of the factoring
agreement in the event of customer default.
The amount of the factored bills receivable of the N.A. Distribution
Business which remained outstanding at March 31, 1996 was $1,074,008. These
receivables were all collected by the financial institutions in the following
year. At March 31, 1997, bills receivable of $836,552 were provided as
collateral for banking facilities providing to Rich City.
For the year ended March 31, 1997, the Company did not factor any bills
receivable with financial institutions.
6. INVENTORIES
From April 1, 1996, the Company maintained inventories for distribution to
customers in the United States. The inventories represent finished goods held
for resale.
F-10
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. ADVANCES (FROM) TO HEAD OFFICE
<TABLE>
<CAPTION>
RICH CITY'S N.A.
DISTRIBUTION BUSINESS
MARCH 31, 1996
CARVED OUT
------------------------------
MONTHLY AVERAGE
BALANCE DURING
AMOUNT THE YEAR
------------- ---------------
<S> <C> <C>
Advances (from) to Rich City:
Balance as of April 1, 1994..................................................... $ (3,070,208)
Advances from Head Office....................................................... (1,067,921)
Repayments to Head Office ...................................................... 3,924,027
Common expense allocations...................................................... (148,282) $ (430,412)
------------- ---------------
---------------
Balance as of March 31, 1995.................................................... (362,384)
Advances from Head Office....................................................... (1,735,761)
Repayments to Head Office....................................................... 3,422,732
Common expenses allocations..................................................... (172,751)
-------------
Balance as of March 31, 1996.................................................... $ 1,151,836 $ 1,542,610
------------- ---------------
------------- ---------------
</TABLE>
Advances from and to Rich City were made on an interest free basis.
8. DEPOSITS PAID TO HOLDING COMPANY
The amount represents deposits paid to Rich City for purchase orders placed
by the Company.
9. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
RICH CITY'S
N.A.
DISTRIBUTION LEADING EDGE
BUSINESS MARCH 31,
MARCH 31, 1996 1997
CARVED OUT ACTUAL
-------------- ------------
<S> <C> <C>
Property, plant and equipment consists of the following:
Furniture, fixtures and equipment.................................................. $ 147,988 $ 279,886
Leasehold improvements............................................................. 102,285 16,338
-------------- ------------
Total.............................................................................. 250,273 296,224
Less: Accumulated depreciation..................................................... (56,978) (22,490)
-------------- ------------
Net book value..................................................................... $ 193,295 $ 273,734
-------------- ------------
-------------- ------------
</TABLE>
F-11
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Included in property, plant and equipment of the Company is an asset
acquired under a capital lease with the following net book value:
<TABLE>
<CAPTION>
LEADING EDGE
MARCH 31, 1997
---------------
<S> <C>
At cost:
Furniture, fixtures and equipment............................................. $ 7,599
Less: Accumulated depreciation................................................ (380)
------
$ 7,219
------
</TABLE>
Depreciation charges of the Company in respect of property, plant and
equipment held under a capital lease for the year ended March 31, 1997 amounted
to $380.
Rich City's N.A. Distribution Business did not have any assets held under
capital leases.
10. CAPITAL LEASE OBLIGATIONS
Capital lease obligations bear fixed interest of 7.861% per annum and are
payable monthly to 2001. As of March 31, 1997, the outstanding balance in
respect of capital lease obligations was $5,846.
The capital lease obligations maturing during each of the years in the
period subsequent to the balance sheet dates are:
<TABLE>
<S> <C>
Year ending March 31,
1998............................................................... $ 1,479
1999............................................................... 1,479
2000............................................................... 1,479
2001............................................................... 1,479
2002............................................................... 1,108
---------
Total minimum lease payments....................................... 7,024
Less: Amount representing interest................................. (1,178)
---------
Present value of minimum lease payments............................ 5,846
Less: current portion.............................................. (1,057)
---------
Long term portion.................................................. $ 4,789
---------
---------
</TABLE>
11. INCOME TAXES
Rich City is subject to Hong Kong taxation on its activities conducted in
Hong Kong. During the two years ended March 31, 1996, Rich City'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, all revenues were derived from the Company's U.S. operations and the
Company was subject to the 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.
F-12
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The provision for income taxes attributable to the N.A. Distribution
Business and the Company consists of the following:
<TABLE>
<CAPTION>
RICH CITY'S N.A.
DISTRIBUTION
BUSINESS
YEAR ENDED MARCH 31, LEADING EDGE
YEAR ENDED
-------------------- MARCH 31,
1995 1996 1997
--------- --------- ------------
<S> <C> <C> <C>
Current
Hong Kong..................................................... $ -- $ -- $ --
U.S. Federal.................................................. -- -- 1,130,324
U.S. State.................................................... -- -- 211,900
--------- --------- ------------
$ -- $ -- $1,342,224
--------- --------- ------------
</TABLE>
A reconciliation between the provision for income taxes computed by applying
statutory tax rate in Hong Kong for 1995 and 1996 and in United States for 1997
to income before taxes and the actual provision for income taxes is as follows:
<TABLE>
<CAPTION>
RICH CITY'S N.A.
DISTRIBUTION
BUSINESS
YEAR ENDED MARCH 31, LEADING EDGE
YEAR ENDED
-------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------------
<S> <C> <C> <C>
Statutory tax rate............................................. 16.5% 16.5% 38%
Income not subject to taxation................................. (16.5) (16.5) --
--
--------- ---------
Effective rate................................................. --% --% 38%
--
--
--------- ---------
--------- ---------
</TABLE>
There were no significant temporary differences during the years ended March
31, 1995, 1996 and 1997 and at the balance sheet dates.
12. CAPITAL STOCK
The Company was incorporated with an authorized capital of 1,500 common
shares of no par value which was increased on September 13, 1996 in
contemplation of the public offering to 5,000,000 common shares of $0.01 par
value per share and 5,000,000 preferred shares of $0.01 par value per share. In
addition, each issued ordinary share of common stock of no par value was split
into 1,250 ordinary shares of common stock of $0.01 par value per share. The new
capital structure is reflected in the Company's financial statements from April
1, 1996 and earnings per share has been computed using the revised equity
structure. On December 2, 1996, the Company issued 1,437,500 shares in a public
offering.
In connection with this offering, the Company has agreed to issue and sell
to the Underwriter and/or its designees, at the closing of the proposed
underwriting, for nominal consideration, five year Underwriter's Warrants (the
"Underwriter's Warrants") to purchase 125,000 shares of common stock. The
F-13
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. CAPITAL STOCK (CONTINUED)
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 commencing one year from the
date of December 2, 1996 and are restricted from sale, transfer, assignment or
hypothecation for a period of twelve months from the date hereof, 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 holders 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.
13. INCENTIVE STOCK OPTION PLAN
During the year, the Company established the 1996 Incentive Stock Option
Plan (the "Plan"). Options under the Plan may be granted to directors and
officers of the Company permitting the purchase in the aggregate of not more
than 312,500 shares of the Company's common stock, par value, $0.01 per share
("Common Stock"). 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. One-third of the 1996 Options become exercisable
after each of 12 months, 30 months and 60 months, respectively. The stock
options granted under this 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 options were exercised during the year.
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 plan. 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, 1997 would have been as follows:
<TABLE>
<S> <C>
Net income...................................................... $2,055,973
---------
---------
Earnings per share.............................................. $ 0.88
---------
---------
</TABLE>
The fair value of options granted during the year was estimated as $197,500
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.
14. EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the year. The weighted average number of shares of common
stock outstanding during the year ended March 31, 1997 was approximately
2,347,603.
F-14
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. EARNINGS PER COMMON SHARE (CONTINUED)
Common stock equivalents are the net additional number of shares which would
be issuable upon the exercise of the outstanding common stock options, assuming
that the Company reinvested the proceeds to purchase additional shares at market
value. Common stock equivalents had no material effect on the computation of
earnings per share for the year ended March 31, 1997.
15. RELATED PARTY TRANSACTIONS
(a) The Company purchases packaging products from Breakspear Limited, a
related party, through Rich City; previously Breakspear Limited was the sole
supplier for packaging products to Rich City.
Account payable to Breakspear Limited and Rich City at March 31, 1996 and
1997 were $1,655,308 and $2,995,690, respectively. Total purchases by the N.A.
Distribution Business from Breakspear Limited during the years ended March 31,
1995 and 1996 were $4,021,908 and $6,635,318, respectively. Total purchases by
the Company from Rich City during the year ended March 31, 1997 were $9,155,072.
(b) During the year ended March 31, 1996, the N.A. Distribution Business
paid rental expense of $36,377 to Circle Round Limited, a fellow subsidiary of
Rich City.
16. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Customers accounting for 10% or more of total net sales for each of the
three years in the period ended March 31, 1995, 1996 and 1997 are detailed as
follows:
<TABLE>
<CAPTION>
RICH CITY'S N.A.
DISTRIBUTION
BUSINESS
-------------------- LEADING EDGE
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
Customer A....................................................... 19.2% -- --
Customer B....................................................... 38.8% 26.6% 20.7%
Customer C....................................................... 4.4% 13.9% 17.8%
Customer D....................................................... 3.9% 12.1% 7.3%
</TABLE>
Details of the accounts receivable from the five customers with the largest
receivable balances at March 31, 1995 and 1996 for Rich City's N.A. Distribution
Business and at March 31, 1997 for Leading Edge are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF ACCOUNTS
RECEIVABLE AS AT MARCH 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Five largest receivable balances........................................ 88.8% 93.8% 63.4%
</TABLE>
Bad debt expense was $1,407 and $924 for Rich City's N.A. Distribution
Business for the year ended March 31, 1995 and 1996, respectively, and $Nil for
the Company for the year ended March 31, 1997.
F-15
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES
(a) At March 31, 1996, the N.A. Distribution Business had factored gross
bills receivable of $1,074,008 at a discount of $14,477 with banks with
recourse.
The N.A. Distribution Business leased premises under various operating
leases which did not contain any renewal and escalation clauses. Rental expense
under operating leases was $52,688 and $57,876 for the years ended March 31,
1995 and 1996, respectively.
(b) At March 31, 1997, bills receivable of $836,552 were provided by the
Company as collateral for banking facilities providing to Rich City.
Leading Edge leases premises and equipment under various operating leases
which do not contain any renewal and escalation clauses. Rental expense under
operating leases was $109,089 for the year ended March 31, 1997.
As at March 31, 1997, Leading Edge had no capital commitments but was
obligated under operating leases requiring minimum rentals as follows:
<TABLE>
<S> <C>
Year ending March 31,
1998............................................................ $ 268,525
1999............................................................ 262,026
2000............................................................ 254,342
2001............................................................ 245,274
2002............................................................ 127,733
---------
Total minimum lease payments.................................... $1,157,900
---------
---------
</TABLE>
18. RETIREMENT PLAN
The Company has not established any retirement plan and provides no
retirement benefits to its employees. Rich City had established 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, net of forfeited contributions, related to
this plan applicable to the carved out business was $3,653 and $3,178 for the
years ended March 31, 1995 and 1996, respectively.
19. 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, advances to
head office, accounts payable and bills payable are short term in nature and
therefore reflect their fair value. All the financial instruments are for trade
purposes.
F-16
<PAGE>
LEADING EDGE PACKAGING, INC. AND RICH CITY INTERNATIONAL
PACKAGING LIMITED--NORTH AMERICAN DISTRIBUTION BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
20. SEGMENT INFORMATION
The Company operates in a single industry segment which is the sale and
distribution of packaging products in North America.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
--------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
$'000 $'000 $'000 $'000
Fiscal 1997 (Leading Edge)
Net sales....................................................... 2,505 3,047 3,695 3,740
Gross profit.................................................... 808 1,007 1,151 1,615
Net income...................................................... 451 504 510 626
Net income per share............................................ 0.24 0.26 0.21 0.18
Fiscal 1996 (Rich City's N.A. Distribution Business)
Net sales....................................................... 2,239 2,971 3,112 2,665
Gross profit.................................................... 875 1,204 1,089 1,184
Net income...................................................... 616 901 794 889
Net income per share............................................ N/A N/A N/A N/A
</TABLE>
COMMON SHARE PRICE
<TABLE>
<CAPTION>
1997 QUARTER HIGH LOW
- ----------------------------------------------------------------------------------------------------- ----- ---
<S> <C> <C>
Fourth............................................................................................... 7 5
Third................................................................................................ 7 61/4
</TABLE>
Prior to the Company's initial public offering of common stock, which
commenced on December 2, 1996, there was no public market for the Company's
ordinary shares. The initial offering price was $6. On March 31, 1997, the
closing price was $5 13/32. The Company has not declared any dividends.
F-17
<PAGE>
LEADING EDGE PACKAGING, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash & cash equivalents................................................................... $ 672 $ 5,595
Accounts receivable....................................................................... 3,669 843
Bills receivable (Note 2)................................................................. 1,270 1,621
Investories (Note 3)...................................................................... 1,660 613
Deposits to related party/holding co...................................................... 816
Receivables from a related party/holding co............................................... 2,700
Prepaid expenses.......................................................................... 149 1,353
--------- ---------
Total Current Assets.................................................................. $ 10,936 10,025
Property and equipment
Net of accumulation depreciation........................................................ 251 193
--------- ---------
TOTAL ASSETS.............................................................................. $ 11,187 $ 10,218
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................................................... 110 168
Accounts payable to related party/holding co.............................................. 377
Bills payable............................................................................. 699
Accrued expenses.......................................................................... 72
Income Taxes payable...................................................................... 231 898
--------- ---------
Total Current Liabilities............................................................. $ 1,040 $ 1,515
--------- ---------
LONG TERM LIABILITIES
Capital Lease Obligations................................................................. 5 --
--------- ---------
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
Additional paid in capital................................................................ 7,062 7,205
Retained earnings......................................................................... 3,047 1,465
--------- ---------
Total Shareholders' Equity............................................................ 10,142 8,703
--------- ---------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY.................................................... $ 11,187 $ 10,218
--------- ---------
--------- ---------
</TABLE>
See Accompanying Notes to (Unaudited) Financial Statements
F-18
<PAGE>
LEADING EDGE PACKAGING, INC.
CONDENSED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Net Sales................................................................ $ 9,043 $ 9,247
Cost of goods sold....................................................... 5,849 6,281
--------- ---------
Gross profit............................................................. 3,194 2,966
Selling, general, and administrative expenses............................ 1,675 616
--------- ---------
Operating income......................................................... $ 1,519 $ 2,350
Other income:
Interest income net of interest expense................................ 2 13
--------- ---------
Income before income taxes............................................... 1,521 2,363
--------- ---------
Provision for income taxes............................................... 565 898
--------- ---------
Net income............................................................... $ 956 $ 1,465
--------- ---------
--------- ---------
Net income per share primary and fully diluted........................... $ .29 $ .72
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to (Unaudited) Financial Statements
F-19
<PAGE>
LEADING EDGE PACKAGING, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net Income............................................................. $ 956 $ 1,465
Adjustment to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 56 4
Net increase (decrease) in cash due to changes in current assets and
liabilities:......................................................... (5,518) (2,600)
Net cash provided by (used in) operating activities:................... (4,506) (1,131)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment..................................... (33) (164)
--------- ---------
Net cash (used in) investing activities.................................. (33) (164)
--------- ---------
--------- ---------
Cash flows from financing activities:
Proceeds from Initial public offering.................................. -- 6,738
Proceeds from Banker's acceptances..................................... 478 152
Repayment of capital lease obligations................................. (1) --
--------- ---------
Net cash provided by financing activities................................ 477 6,890
--------- ---------
Net increase (decrease) in cash and cash equivalents..................... (4,062) 5,595
Cash and cash equivalents at the beginning of period..................... 4,734 0
--------- ---------
$ 672 $ 5,595
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Interest paid.......................................................... 64 --
--------- ---------
--------- ---------
Taxes paid............................................................. $ 1,384 --
--------- ---------
--------- ---------
</TABLE>
See Accompanying Notes to (Unaudited) Financial Statement
F-20
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1997
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Leading Edge Packaging,
Inc. (the "Company") as of December 31, 1997 and December 31, 1996 and for the
nine 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 nine month period ended December 31, 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 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 December 31, 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.
F-21
<PAGE>
AUDITORS' REPORT
To the Board of Directors of
Justrite Investments Limited ("Company")
We have audited the accompanying consolidated financial statements
("financial statements") of the Company and its subsidiaries (collectively the
"Group") for each of the three years ended March 31, 1997 which have been
prepared in accordance with accounting principles generally accepted in Hong
Kong.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The Company's directors are responsible for the preparation of the financial
statements which give a true and fair view. In preparing financial statements
under generally accepted accounting principles in Hong Kong which give a true
and fair view it is fundamental that appropriate accounting policies are
selected and applied consistently.
It is our responsibility to form an independent opinion, based on our audit,
on those statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Statements of Auditing Standards
issued by the Hong Kong Society of Accountants (which do not differ in any
material respects from auditing standards generally accepted in the United
States of America). An audit includes examination, on a test basis, of evidence
relevant to the amounts and disclosures in the financial statements. It also
includes an assessment of the significant estimates and judgments made by the
directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the Group's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance as to whether the financial
statements are free from material misstatement. In forming our opinion we also
evaluated the overall adequacy of the presentation of information in the
financial statements. We believe that our audit provides a reasonable basis for
our opinion.
OPINION
In our opinion the financial statements give a true and fair view of the
state of the affairs of the Group as at March 31, 1995, 1996 and 1997 and of the
profit and cash flows of the Group for each of the three years ended March 31,
1997.
Accounting principles generally accepted in Hong Kong vary in certain
significant respects from accounting principles generally accepted in the United
States. The application of the latter would have affected the determination of
shareholders' funds and financial position at March 31, 1995, 1996 and 1997 to
the extent summarized in Note 24.
Our audits also comprehended the translation of Hong Kong dollar amounts
into U.S. dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 3. Such U.S. dollar amounts are
presented solely for the convenience of readers in the United States of America.
Deloitte Touche Tomahtsu
April 28, 1998
Hong Kong
F-22
<PAGE>
JUSTRITE INVESTMENTS LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 NINE MONTHS ENDED DECEMBER 31
------------------------------------------------ -------------------------------------
NOTES 1995 1996 1997 1997 1996 1997 1997
----- ---------- ----------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HK$ HK$ HK$ US$ HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Turnover................ 128,863,374 169,620,506 148,989,110 19,299,108 122,871,880 108,089,064 14,001,174
Cost of sales........... 74,532,656 93,437,055 97,945,554 12,687,248 79,297,162 75,270,758 9,750,582
---------- ----------- ----------- ---------- ----------- ----------- -----------
Gross profit............ 54,330,718 76,183,451 51,043,556 6,611,860 43,574,718 32,818,306 4,250,592
Selling, general and
administrative
expenses.............. 37,818,448 39,192,419 36,753,035 4,760,756 22,838,116 23,030,727 2,983,255
---------- ----------- ----------- ---------- ----------- ----------- -----------
Operating profit........ 16,512,270 36,991,032 14,290,521 1,851,104 20,736,602 9,787,579 1,267,337
Interest expense........ (2,690,018) (2,741,466) (2,673,460) (346,303) (1,740,774) (2,717,886) (352,058)
Interest income......... 1,089,652 347,413 290,853 37,675 44,458 38,196 4,948
Other income............ 1,116,710 1,632,665 1,171,922 151,718 849,791 684,195 88,626
---------- ----------- ----------- ---------- ----------- ----------- -----------
Profit before
exceptional item...... 4 16,028,614 36,229,644 13,079,836 1,694,194 19,890,077 7,792,084 1,008,853
Exceptional item........ 5 -- -- -- -- -- (2,890,460) (373,928)
---------- ----------- ----------- ---------- ----------- ----------- -----------
Profit before
taxation.............. 16,028,614 36,229,644 13,079,836 1,694,194 19,890,077 4,901,624 634,925
Taxation credit
(charge).............. 6 849,947 (1,479,592) 104,307 13,596 71,000 75,120 9,731
---------- ----------- ----------- ---------- ----------- ----------- -----------
Profit for the
year/period........... 16,878,561 34,750,052 13,184,143 1,707,790 19,961,077 4,976,744 644,656
---------- ----------- ----------- ---------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-23
<PAGE>
JUSTRITE INVESTMENTS LIMITED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS AT MARCH 31 AS AT DECEMBER 31
--------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NOTES 1995 1996 1997 1997 1997 1997
------------- ---------- ---------- ---------- --------- ----------- -----------
<CAPTION>
HK$ HK$ HK$ US$ HK$ US$
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
FIXED ASSETS......................... 7 48,128,232 46,938,897 44,651,757 5,783,906 41,775,833 5,411,377
LONG TERM RECEIVABLE................. 8 5,643,320 4,369,520 -- -- -- --
CURRENT ASSETS
Stocks............................... 9 53,869,880 44,450,150 39,727,870 5,146,097 38,898,841 5,038,710
Short-term investment................ 10 -- -- 3,860,000 500,000 -- --
Debtors, deposits and prepayments.... 36,888,420 29,965,000 34,810,797 4,509,171 30,413,551 3,939,579
Bills receivable..................... 5,145,673 2,911,616 5,014,384 649,532 1,156,564 149,814
Amount due from ultimate holding
company............................ -- -- -- -- 21,910,673 2,838,170
Amount due from a fellow
subsidiary......................... 17,545,577 90,015,461 119,179,859 15,437,805 9,179,859 1,189,101
Bank balances and cash............... 6,599,284 2,107,546 2,825,984 366,060 643,038 83,295
---------- ---------- ---------- --------- ----------- -----------
120,048,834 169,449,773 205,418,894 26,608,665 102,202,526 13,238,669
---------- ---------- ---------- --------- ----------- -----------
CURRENT LIABILITIES
Creditors and accrued charges........ 20,307,958 24,421,611 24,361,517 3,155,637 60,327,181 7,814,402
Bills payable........................ 1,790,198 1,173,594 321,448 41,638 287,736 37,271
Taxation............................. 3,917,756 5,433,253 5,417,756 701,782 5,417,756 701,782
Amount due to ultimate holding
company............................ 33,086,320 39,890,365 59,682,198 7,730,855 -- --
Obligations under finance leases and
hire purchase contracts............ 14 1,120,182 219,453 -- -- -- --
Bank borrowings repayable within one
year............................... 15 10,084,102 13,304,058 11,739,488 1,520,659 36,048,698 4,669,520
---------- ---------- ---------- --------- ----------- -----------
70,306,516 84,442,334 101,522,407 13,150,571 102,081,371 13,222,975
---------- ---------- ---------- --------- ----------- -----------
NET CURRENT ASSETS................... 49,742,318 85,007,439 103,896,487 13,458,094 121,155 15,694
---------- ---------- ---------- --------- ----------- -----------
103,513,870 136,315,856 148,548,244 19,242,000 41,896,988 5,427,071
---------- ---------- ---------- --------- ----------- -----------
Financed by:
SHARE CAPITAL........................ 11 780 780 780 100 780 100
RESERVES............................. 12 80,964,080 115,714,132 128,898,275 16,696,669 23,875,019 3,092,621
---------- ---------- ---------- --------- ----------- -----------
SHAREHOLDERS' FUNDS.................. 80,964,860 115,714,912 128,899,055 16,696,769 23,875,799 3,092,721
MINORITY INTERESTS................... 16 15,000,000 15,000,000 15,000,000 1,943,005 15,000,000 1,943,005
DEFERRED TAXATION.................... 13 658,270 607,139 502,832 65,133 427,712 55,402
OBLIGATIONS UNDER FINANCE LEASES AND
HIRE PURCHASE CONTRACTS REPAYABLE
AFTER ONE YEAR..................... 14 219,453 -- -- -- -- --
BANK BORROWINGS REPAYABLE AFTER ONE
YEAR............................... 15 6,671,287 4,993,805 4,146,357 537,093 2,593,477 335,943
---------- ---------- ---------- --------- ----------- -----------
103,513,870 136,315,856 148,548,244 19,242,000 41,896,988 5,427,071
---------- ---------- ---------- --------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE>
JUSTRITE INVESTMENTS LIMITED
CONSOLIDATED CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
NOTES 1995 1996 1997 1997
------------- ------------ ----------- ------------ -----------
<CAPTION>
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C>
NET CASH INFLOW (OUTFLOW) FROM OPERATING
ACTIVITIES....................................... 17 18,467,939 1,724,212 11,919,537 1,543,896
------------ ----------- ------------ -----------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received.................................. 1,089,652 347,413 290,853 37,675
Interest paid...................................... (2,331,047) (2,560,366) (2,641,279) (342,135)
Interest on obligations under finance leases and
hire purchase contracts.......................... (358,971) (181,100) (32,181) (4,168)
------------ ----------- ------------ -----------
NET CASH OUTFLOW FROM RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE............................. (1,600,366) (2,394,053) (2,382,607) (308,628)
------------ ----------- ------------ -----------
TAXATION
Hong Kong Profits Tax paid......................... (238,995) (15,226) (15,497) (1,922)
------------ ----------- ------------ -----------
INVESTING ACTIVITIES
Purchase of short-term investment.................. -- -- (3,860,000) (500,000)
Proceeds from disposals of short- term
investment....................................... -- -- -- --
Purchase of fixed assets........................... (9,798,639) (4,241,744) (2,311,524) (299,420)
Proceeds from disposals of fixed assets............ 2,012,260 12,781 -- --
------------ ----------- ------------ -----------
NET CASH INFLOW (OUTFLOW) FROM INVESTING
ACTIVITIES....................................... (7,786,379) (4,228,963) (6,171,524) (799,420)
------------ ----------- ------------ -----------
NET CASH INFLOW (OUTFLOW) BEFORE FINANCING......... 8,842,199 (4,914,030) 3,349,909 433,926
------------ ----------- ------------ -----------
FINANCING.......................................... 18
Bank loans raised.................................. -- -- 1,108,296 143,562
Repayment of bank loans............................ (4,195,506) (1,490,683) (1,539,783) (199,454)
Repayment of obligations under finance leases and
hire purchase contracts.......................... (2,305,028) (1,120,182) (219,453) (28,427)
------------ ----------- ------------ -----------
NET CASH INFLOW (OUTFLOW) FROM FINANCING........... (6,500,534) (2,610,865) (650,940) (84,319)
------------ ----------- ------------ -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 2,341,665 (7,524,895) 2,698,969 349,607
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR
/PERIOD.......................................... (4,340,953) (1,999,288) (9,524,183) (1,233,702)
------------ ----------- ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF THE
YEAR/PERIOD...................................... 19 (1,999,288) (9,524,183) (6,825,214) (884,095)
------------ ----------- ------------ -----------
<CAPTION>
NINE MONTHS ENDED DECEMBER 31
----------------------------------------
<S> <C> <C> <C>
1996 1997 1997
------------ ------------ ------------
HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
NET CASH INFLOW (OUTFLOW) FROM OPERATING
ACTIVITIES....................................... 91,628 (25,547,646) (3,309,281)
------------ ------------ ------------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received.................................. 44,458 38,196 4,948
Interest paid...................................... (1,708,593) (2,717,886) (352,058)
Interest on obligations under finance leases and
hire purchase contracts.......................... (32,181) -- --
------------ ------------ ------------
NET CASH OUTFLOW FROM RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE............................. (1,696,316) (2,679,690) (347,110)
------------ ------------ ------------
TAXATION
Hong Kong Profits Tax paid......................... (15,497) -- --
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of short-term investment.................. (3,860,000) -- --
Proceeds from disposals of short- term
investment....................................... -- 3,860,000 500,000
Purchase of fixed assets........................... (2,108,388) (571,940) (74,085)
Proceeds from disposals of fixed assets............ -- -- --
------------ ------------ ------------
NET CASH INFLOW (OUTFLOW) FROM INVESTING
ACTIVITIES....................................... (5,968,388) 3,288,060 425,915
------------ ------------ ------------
NET CASH INFLOW (OUTFLOW) BEFORE FINANCING......... (7,588,573) (24,939,276) (3,230,476)
------------ ------------ ------------
FINANCING..........................................
Bank loans raised.................................. 5,701,366 -- --
Repayment of bank loans............................ (1,374,605) (1,584,297) (205,220)
Repayment of obligations under finance leases and
hire purchase contracts.......................... (219,453) -- --
------------ ------------ ------------
NET CASH INFLOW (OUTFLOW) FROM FINANCING........... 4,107,308 (1,584,297) (205,220)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... (3,481,265) (26,523,573) (3,435,696)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR
/PERIOD.......................................... (9,524,183) (6,825,214) (884,095)
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THE
YEAR/PERIOD...................................... (13,005,448) (33,348,787) (4,319,791)
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE>
JUSTRITE INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1. GENERAL
The Company is a wholly owned private limited company incorporated in the
British Virgin Islands. Its ultimate holding company is Chung Hwa Development
Holdings Limited, a limited company incorporated in Bermuda and listed on The
Stock Exchange of Hong Kong Limited.
2. CASH FLOW STATEMENT COMPARATIVE FIGURES NOT PREPARED
The Company has not prepared comparative figures for the cash flow statement
for the year ended March 31, 1995, as in the opinion of the directors, the
comparative figures do not provide valuable information to the readers.
3. SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies which have been adopted in preparing these
financial statements and which conform with accounting principles generally
accepted in Hong Kong are as follows:
BASIS OF CONSOLIDATION
The consolidated financial statements incorporate the financial statements
of the Company and its subsidiaries made up to March 31 each year.
The results of the subsidiaries acquired or disposed of during the year are
included in the consolidated profit and loss account from the effective date of
acquisition or up to the effective date of disposal, as appropriate.
All significant intercompany transactions and balances within the Group have
been eliminated on consolidation.
TURNOVER
Turnover represents the net amounts received and receivable for goods sold
during the year.
REVENUE RECOGNITION
Sale of goods are recognised when goods are delivered and title has been
passed.
Interest income from bank deposits is accrued on a time basis by reference
to the principal outstanding and at the rate applicable.
FIXED ASSETS AND DEPRECIATION
Fixed assets are stated at cost less depreciation. The cost of an asset
comprises its purchase price and any directly attributable costs of bringing the
asset to its working condition and location for its intended use. Expenditure
incurred after the fixed assets has been put into operation, such as repairs and
maintenance and overhaul costs, is normally charged to the profit and loss
account in the period in which it is incurred. In situations where it can be
clearly demonstrated that the expenditure has resulted in an increase in the
future economic benefits expected to be obtained from the use of the fixed
asset, the expenditure is capitalised as an additional cost of the fixed asset.
When assets are sold or retired, their costs and accumulated depreciation are
removed from the accounts and any gain or loss resulting from their disposals is
included in the profit and loss account.
F-26
<PAGE>
JUSTRITE INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation is provided to write off the costs of fixed assets 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 leases
whichever is shorter
Buildings 2.5% or over the terms of the leases
whichever is shorter
Property under development Nil
Leasehold improvements 10% or over the terms of the leases
whichever is shorter
Furniture, fixtures and equipment 10--20%
Plant and machinery 10%
Motor vehicles 20%
</TABLE>
ASSETS HELD UNDER FINANCE LEASES AND HIRE PURCHASE CONTRACTS
Leases are classified as finance leases whenever the terms of the leases
transfer substantially all the risks and rewards of ownership to the Group.
Assets held under finance leases and hire purchase contracts are capitalised at
their fair value at the date of acquisition. The principal portion of the
corresponding contractual commitments are shown as obligations under finance
leases and hire purchase contracts. The finance costs, which represent the
difference between the total leasing commitments and their fair value of the
assets acquired, are charged to the profit and loss account over the period of
the respective leases so as to produce a constant periodic rate of charge on the
remaining obligations for each accounting period.
All other leases are classified as operating leases and their rentals are
charged to the profit and loss account on a straight line basis over the
respective lease terms.
SHORT-TERM INVESTMENT
Listed shares which are held for short term, are stated at the lower of cost
and market value.
FOREIGN CURRENCIES
Transactions in foreign currencies are translated at the rates ruling on the
dates of the transactions. Monetary assets and liabilities denominated in
foreign currencies are re-translated at the rates ruling on the balance sheet
date. Profits and losses arising on exchange are dealt with in the profit and
loss account.
On consolidation, the financial statements of the subsidiaries in the
People's Republic of China (the "PRC") are translated using the temporal method.
Exchange differences arising on translation are dealt with in the profit and
loss account. The functional currency of the PRC subsidiaries is Hong Kong
dollars.
Translation of amounts from Hong Kong dollars (HK$) into United States
dollars (US$) for the convenience of the reader has been made at US$1.00 =
HK$7.72. No representation is made that the HK$
F-27
<PAGE>
JUSTRITE INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts could have been, or could be, converted into US$ at that rate on
December 31, 1997 or on any other date.
TAXATION
The charge for taxation is based on the results for the year as adjusted for
items which are non-assessable or disallowed. Timing differences arise from the
recognition for tax purposes of certain items of income and expense in a
different accounting period from that in which they are recognised in the
financial statements. The tax effect of timing differences, computed under the
liability method, is recognised as deferred taxation in the financial statements
to the extent that it is probable a liability or asset will crystallise in the
foreseeable future.
CASH EQUIVALENTS
Cash equivalents represent short term, highly liquid investments which are
readily convertible into known amounts of cash and which were within three
months of maturity when acquired, less advances from banks repayable within
three months from the date of the advance.
4. PROFIT BEFORE EXCEPTIONAL ITEM
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 NINE MONTHS ENDED DECEMBER 31
------------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1996 1997 1997
--------- --------- --------- --------- ----------- ----------- -------------
<CAPTION>
HK$ HK$ HK$ US$ HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Profit before exceptional item has been
arrived at after charging:
Auditors' remuneration.................... 762,780 757,330 717,000 92,876 540,000 531,000 68,782
Depreciation
Owned assets............................ 4,227,320 4,921,023 4,230,145 547,946 3,123,206 3,171,475 410,813
Assets held under finance leases and
hire purchase contracts............... 524,784 379,743 368,519 47,736 287,612 276,389 35,802
Directors' remuneration
Fees.................................... -- -- -- -- -- -- --
Other emoluments........................ 348,000 2,348,000 1,266,667 164,076 950,000 967,572 125,333
Interest on
Finance leases and hire purchase
contracts............................. 358,971 181,100 32,181 4,168 32,181 -- --
Bank borrowings wholly repayable within
five years............................ 1,311,594 2,394,458 2,387,974 309,323 1,524,285 2,507,448 324,799
Bank borrowings wholly repayable after
five years............................ 1,019,453 165,908 253,305 32,812 184,308 210,439 27,259
Operating lease payments in respect of
rented premises......................... 4,116,792 4,816,294 4,472,063 579,283 3,518,637 3,616,701 468,485
Provision for doubtful debts and after
crediting:.............................. -- -- 1,689,470 218,843 -- -- --
Interest income........................... 1,089,652 347,413 290,853 6,587 44,458 38,196 4,958
--------- --------- --------- --------- ----------- ----------- -------------
</TABLE>
5. EXCEPTIONAL ITEM
The amount represents misappropriation of inventories and cash by a manager
of the Group's factory established in the People' Republic of China.
F-28
<PAGE>
JUSTRITE INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
6. TAXATION CREDIT (CHARGE)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 NINE MONTHS ENDED DECEMBER 31
------------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1996 1997 1997
--------- --------- --------- --------- ----------- ----------- -------------
<CAPTION>
HK$ HK$ HK$ US$ HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Profit for the year
Hong Kong.............................. -- (30,723) -- -- -- -- --
Overseas............................... 1,000,000 (1,500,000) -- -- -- -- --
Prior year underprovision for
Hong Kong Profits Tax.................. (28,995) -- -- -- -- -- --
Deferred taxation credit (charge) (note
13).................................. (121,058) 51,131 104,307 13,596 71,000 75,120 9,731
--------- --------- --------- --------- ----------- ----------- -------------
849,947 (1,479,592) 104,307 13,596 71,000 75,120 9,731
--------- --------- --------- --------- ----------- ----------- -------------
</TABLE>
A substantial portion of the Group's profit neither arises in, nor is
derived from, Hong Kong. Accordingly, that portion of the Group's profit is not
subject to Hong Kong Profits Tax.
Hong Kong Profits Tax is calculated at 16.5% of the estimated assessable
profit for the year. Overseas taxation is calculated at the rates prevailing in
the respective jurisdictions.
7. FIXED ASSETS
<TABLE>
<CAPTION>
AS AT MARCH 31 AS AT
---------------------------------------- DECEMBER 31
1995 1996 1997 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
HK$
HK$ HK$ HK$ (UNAUDITED)
COST
Leasehold land and buildings............................. 20,969,000 23,223,000 25,317,916 25,317,916
Property under development............................... 2,992,864 738,864 -- --
Leasehold improvements................................... 6,831,429 7,951,267 8,118,175 8,383,019
Furniture, fixtures and equipment........................ 4,978,888 5,364,588 5,523,132 5,702,878
Plant and machinery...................................... 22,163,279 23,973,973 24,603,993 25,389,808
Motor vehicles........................................... 366,613 366,613 366,613 366,613
------------ ------------ ------------ ------------
58,302,073 61,618,305 63,929,829 65,160,234
------------ ------------ ------------ ------------
DEPRECIATION
Leasehold land and buildings............................. 254,994 462,256 1,012,547 1,434,279
Property under development............................... -- -- -- --
Leasehold improvements................................... 3,060,002 4,357,708 5,223,823 6,068,613
Furniture, fixtures and equipment........................ 934,957 1,585,841 2,269,106 2,855,198
Plant and machinery...................................... 5,803,121 8,079,513 10,505,183 12,703,907
Motor vehicles........................................... 120,767 194,090 267,413 322,404
------------ ------------ ------------ ------------
10,173,841 14,679,408 19,278,072 23,384,401
------------ ------------ ------------ ------------
</TABLE>
F-29
<PAGE>
JUSTRITE INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
7. FIXED ASSETS (CONTINUED)
<TABLE>
<CAPTION>
AS AT MARCH 31 AS AT
---------------------------------------- DECEMBER 31
1995 1996 1997 1997
------------ ------------ ------------ ------------
HK$
HK$ HK$ HK$ (UNAUDITED)
<S> <C> <C> <C> <C>
NET BOOK VALUES
Leasehold land and buildings............................. 20,714,006 22,760,744 24,305,369 23,883,637
Property under development............................... 2,992,864 738,864 -- --
Leasehold improvements................................... 3,771,427 3,593,559 2,894,352 2,314,406
Furniture, fixtures and equipment........................ 4,043,931 3,778,747 3,254,026 2,847,680
Plant and machinery...................................... 16,360,158 15,894,460 14,098,810 12,685,901
Motor vehicles........................................... 245,846 172,523 99,200 44,209
------------ ------------ ------------ ------------
48,128,232 46,938,897 44,651,757 41,775,833
------------ ------------ ------------ ------------
The Group's property interest comprises:
Leasehold properties held in Hong Kong under long term
leases................................................. 20,714,006 20,506,744 20,040,063 19,683,565
Leasehold properties held in the PRC under a medium term
lease.................................................. -- 2,254,000 4,265,306 4,200,072
------------ ------------ ------------ ------------
20,714,006 22,760,744 24,305,369 23,883,637
Property under development held in the PRC under a medium
term lease............................................. 2,992,864 738,864 -- --
------------ ------------ ------------ ------------
23,706,870 23,499,608 24,305,369 23,883,637
------------ ------------ ------------ ------------
</TABLE>
The net book values of fixed assets held under finance leases and hire
purchase contracts as at March 31, 1995, 1996 and 1997 are HK$3,131,604,
HK$3,833,145 and HK$nil respectively.
8. LONG TERM RECEIVABLE
The amount represents long term portion of a trade receivable and is
unsecured, interest free and is expected to be fully repaid before August 15,
1997. The amount has been re-classified as a current asset in 1997 and provision
for doubtful debts has been made on the uncollectible amount.
9. STOCKS
<TABLE>
<CAPTION>
AS AT MARCH 31 AS AT DECEMBER 31
---------------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1997 1997
------------ ------------ ------------ ---------- ------------ -----------
<CAPTION>
HK$ HK$ HK$ US$ HK$ US$
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Raw materials........................... 47,770,827 37,835,578 32,778,343 4,245,899 32,605,301 4,223,485
Finished goods.......................... 6,099,053 6,614,572 6,949,527 900,198 6,293,540 815,225
------------ ------------ ------------ ---------- ------------ -----------
53,869,880 44,450,150 39,727,870 5,146,097 38,898,841 5,038,710
------------ ------------ ------------ ---------- ------------ -----------
</TABLE>
F-30
<PAGE>
JUSTRITE INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
10. SHORT-TERM INVESTMENT
<TABLE>
<CAPTION>
AS AT MARCH 31 AS AT DECEMBER 31
------------------------------------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1997 1997
------------ ------------ ------------ ------------ ------------ -----------
<CAPTION>
HK$ HK$ HK$ US$ HK$ US$
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Listed shares overseas at cost......... -- -- 3,860,000 500,000 -- --
------------ ------------ ------------ ------------ ------------ -----------
Market value of listed shares.......... -- -- 83,339,063 10,795,215 -- --
------------ ------------ ------------ ------------ ------------ -----------
</TABLE>
Details of the short-term investment as at March 31, 1997 are as follows:
<TABLE>
<CAPTION>
PLACE OF ISSUED AND
INCORPORATION/ FULLY ATTRIBUTABLE
REGISTRATION PAID ORDINARY EQUITY INTEREST
NAME AND OPERATION SHARE CAPITAL HELD BY THE GROUP PRINCIPAL ACTIVITY
- ------------------------ ------------------------ --------------- ------------------- ------------------------
<S> <C> <C> <C> <C>
Leading Edge Packaging, United States of America US$ 33,125 56.6% Distribution of
Inc. ("LEPI") ("U.S.") packaging products
</TABLE>
LEPI was incorporated on December 15, 1995 to take up the Group's North
American distribution business effective from April 1, 1996. On December 2,
1996, LEPI listed its shares on the Nasdaq National Market System, U.S..
Subsequent to March 31, 1997, the Group transferred the investment to its
ultimate holding company.
The results of LEPI not been consolidated with the Group as the control of
this investment is intended to be temporary and accordingly, the amount has been
included under current assets.
11. SHARE CAPITAL
<TABLE>
<CAPTION>
1997 & 1996 & 1995
--------------------
<S> <C> <C>
HK$ US$
Authorised:
Ordinary shares of US$1 each............................................................... 390,000 50,000
--------- ---------
Issued and fully paid:
Ordinary shares of US$1 each............................................................... 780 100
--------- ---------
</TABLE>
F-31
<PAGE>
JUSTRITE INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
12. RESERVES
<TABLE>
<CAPTION>
CAPITAL RETAINED
RESERVE PROFITS TOTAL
---------- -------------- --------------
<S> <C> <C> <C>
HK$ HK$ HK$
At April 1, 1994..................................................... 1,999,376 62,086,143 64,085,519
Profit for the year.................................................. -- 16,878,561 16,878,561
---------- -------------- --------------
At March 31, 1995.................................................... 1,999,376 78,964,704 80,964,080
Profit for the year.................................................. -- 34,750,052 34,750,052
---------- -------------- --------------
At March 31, 1996.................................................... 1,999,376 113,714,756 115,714,132
Profit for the year.................................................. -- 13,184,143 13,184,143
---------- -------------- --------------
At March 31, 1997.................................................... 1,999,376 126,898,899 128,898,275
Profit for the period (unaudited).................................... -- 4,976,744 4,976,744
Dividend (HK$1,100,000 per share).................................... -- (110,000,000) (110,000,000)
---------- -------------- --------------
At December 31, 1997 (unaudited)..................................... 1,999,376 21,875,643 23,875,019
---------- -------------- --------------
</TABLE>
13. DEFERRED TAXATION
<TABLE>
<CAPTION>
AS AT MARCH 31 AS AT DECEMBER 31
--------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1996 1997
---------- ---------- ---------- --------- ----------- -----------
<CAPTION>
HK$ HK$ HK$ US$ HK$ US$
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
At April 1................................... 537,212 658,270 607,139 78,729 502,832 65,133
Charge (credit) for the year /period (note
6)......................................... 121,058 (51,131) (104,307) (13,596) (75,120) (9,731)
---------- ---------- ---------- --------- ----------- -----------
At March 31/December 31...................... 658,270 607,139 502,832 65,133 427,712 55,402
---------- ---------- ---------- --------- ----------- -----------
</TABLE>
At the balance sheet dates, the deferred taxation liabilities provided
represent mainly the tax effect of timing differences between depreciation
allowances claimed on fixed assets for tax purposes and depreciation charged in
the financial statements.
There is no significant unprovided deferred tax for the year/period or at
the balance sheet dates.
F-32
<PAGE>
JUSTRITE INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
14. OBLIGATIONS UNDER FINANCE LEASES AND HIRE PURCHASE CONTRACTS
<TABLE>
<CAPTION>
AS AT MARCH 31 AS AT DECEMBER 31
--------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1997 1997
----------- ---------- --------- --------- ------------- -------------
<CAPTION>
HK$ US$
HK$ HK$ HK$ US$ (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
The maturity of obligations under finance leases and
hire purchase contracts is as follows:
Within one year...................................... 1,120,182 219,453 -- -- -- --
Between one to two year.............................. 219,453 -- -- -- -- --
----------- ---------- --------- --------- ----- -----
1,339,635 219,453 -- -- -- --
Less: Amount due within one year shown under current
liabilities........................................ (1,120,182) (219,453) -- -- -- --
----------- ---------- --------- --------- ----- -----
219,453 -- -- -- -- --
----------- ---------- --------- --------- ----- -----
</TABLE>
15. BANK BORROWINGS
<TABLE>
<CAPTION>
AS AT MARCH 31 AS AT DECEMBER 31
-------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1997 1997
------------- ------------- ------------- ----------- ------------- -----------
<CAPTION>
HK$ US$
HK$ HK$ HK$ US$ (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Bank borrowings comprise the
followings:
Trust receipt and packing loans.... 8,598,572 9,177,228 9,006,436 1,166,637 33,785,030 4,376,299
Bank loans......................... 8,156,817 6,666,134 6,234,647 807,597 4,650,350 602,377
Bank overdraft..................... -- 2,454,501 644,762 83,518 206,795 26,787
------------- ------------- ------------- ----------- ------------- -----------
16,755,389 18,297,863 15,885,845 2,057,752 38,642,175 5,005,463
------------- ------------- ------------- ----------- ------------- -----------
Analysed as:
Secured............................ 8,156,817 13,600,635 11,366,386 1,472,330 14,273,140 1,848,852
Unsecured.......................... 8,598,572 4,697,228 4,519,459 585,422 24,369,035 3,156,611
------------- ------------- ------------- ----------- ------------- -----------
16,755,389 18,297,863 15,885,845 2,057,752 38,642,175 5,005,463
------------- ------------- ------------- ----------- ------------- -----------
The maturity of bank borrowings is
as follows:
Within one year.................... 10,084,102 13,304,058 11,739,488 1,520,659 36,048,698 4,669,520
Between one to two years........... 1,658,047 1,857,383 2,134,789 276,527 678,784 87,925
Between two to five years.......... 4,035,943 2,334,289 704,094 91,204 658,474 85,295
More than five years............... 977,297 802,133 1,307,474 169,362 1,256,219 162,723
------------- ------------- ------------- ----------- ------------- -----------
16,755,389 18,297,863 15,885,845 2,057,752 38,642,175 5,005,463
Less: Amount due within one year
shown under current
liabilities...................... (10,084,102) (13,304,058) (11,739,488) (1,520,659) (36,048,698) (4,669,520)
------------- ------------- ------------- ----------- ------------- -----------
Amount due after one year.......... 6,671,287 4,993,805 4,146,357 537,093 2,593,477 335,943
------------- ------------- ------------- ----------- ------------- -----------
</TABLE>
F-33
<PAGE>
JUSTRITE INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
16. MINORITY INTEREST
The amount represents the minority shareholders' share of total investments.
It comprises HK$12,000,000 capital contribution and HK$3,000,000 shareholders'
loan pursuant to the joint venture agreement.
The loan is unsecured, non interest-bearing and is to be repaid upon
termination of the joint venture agreement.
17. RECONCILIATION OF PROFIT BEFORE TAXATION TO NET CASH INFLOW (OUTFLOW) FROM
OPERATING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 NINE MONTHS ENDED DECEMBER 31
---------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1996 1997 1997
---------- ---------- ---------- ---------- ----------- ----------- -----------
<CAPTION>
HK$ HK$ HK$ US$ HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Profit before taxation........... 16,028,614 36,229,644 13,079,836 1,694,194 19,890,077 4,901,624 634,925
Interest income.................. (1,089,652) (347,413) (290,853) (37,675) (44,458) (38,196) (4,948)
Interest expenses................ 2,331,047 2,560,366 2,641,279 342,135 1,708,593 2,717,886 352,058
Interest on obligations under
finance leases and hire
purchase contracts............. 358,971 181,100 32,181 4,168 32,181 -- --
Depreciation..................... 4,752,104 5,300,766 4,598,664 595,682 3,410,818 3,447,864 446,615
Loss on disposals of fixed
assets......................... 229,065 117,532 -- -- -- -- --
(Increase) decrease in long term
receivable..................... (5,643,320) 1,273,800 4,369,520 566,000 4,369,520 -- --
(Increase) decrease in stocks.... (8,691,631) 9,419,730 4,722,280 611,694 8,542,151 829,029 107,387
(Increase) decrease in debtors,
deposits and prepayments....... 7,517,113 6,923,420 (4,845,797) (627,694) (21,987,617) 4,397,246 569,591
(Increase) decrease in bills
receivable..................... (5,145,673) 2,234,057 (2,102,768) (272,379) 899,774 3,857,820 499,718
Decrease in amount due from
ultimate holding company....... -- -- -- -- -- (21,910,673) (2,838,170)
Increase in amount due from a
fellow subsidiary.............. (17,545,577) (72,469,884) (29,164,398) (3,777,772) (22,603,702) -- --
Increase (decrease) in creditors
and accrued charges............ (9,266,816) 4,113,653 (60,094) (7,784) 9,472,716 35,965,664 4,658,765
Increase (decrease) in bills
payable........................ 1,294,705 (616,604) (852,146) (110,382) (658,439) (33,712) (4,367)
Increase in amount due to
ultimate holding company....... 33,338,989 6,804,045 19,791,833 2,563,709 (2,939,986) (59,682,198) (7,730,855)
---------- ---------- ---------- ---------- ----------- ----------- -----------
NET CASH INFLOW (OUTFLOW) FROM
OPERATING ACTIVITIES........... 18,467,939 1,724,212 11,919,537 1,543,896 91,628 (25,547,646) (3,309,281)
---------- ---------- ---------- ---------- ----------- ----------- -----------
</TABLE>
F-34
<PAGE>
JUSTRITE INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
18. ANALYSIS OF CHANGES IN FINANCING DURING THE YEAR/PERIOD
<TABLE>
<CAPTION>
OBLIGATIONS
UNDER FINANCE
LEASES AND HIRE
PURCHASE
BANK LOANS CONTRACTS
------------ -----------------
<S> <C> <C>
HK$ HK$
At April 1, 1994................................................................. 12,352,323 3,644,663
Repayment of bank loans.......................................................... (4,195,506) --
Repayment of obligations under finance leases and hire purchase contracts........ -- (2,305,028)
------------ -----------------
At March 31, 1995................................................................ 8,156,817 1,339,635
Repayment of bank loans.......................................................... (1,490,683) --
Repayment of obligations under finance leases and hire purchase contracts........ -- (1,120,182)
------------ -----------------
At March 31, 1996................................................................ 6,666,134 219,453
Bank loans raised................................................................ 1,108,296 --
Repayment of bank loans.......................................................... (1,539,783) --
Repayment of obligations under finance leases and hire purchase contracts........ -- (219,453)
------------ -----------------
At March 31, 1997................................................................ 6,234,647 --
Repayment of bank loans (unaudited).............................................. (1,584,297) --
------------ -----------------
At December 31, 1997 (unaudited)................................................. 4,650,350 --
------------ -----------------
Analysis of changes in financing during the nine months ended December 31, 1996
(unaudited):
At April, 1996................................................................... 6,666,134 219,453
Bank loan raised................................................................. 5,701,366 --
Repayment of bank loans.......................................................... (1,374,605) --
Repayment of obligations under finances leases and hire purchase contracts....... -- (219,453)
------------ -----------------
At December 31, 1996............................................................. 10,992,895 --
------------ -----------------
</TABLE>
19. ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 NINE MONTHS ENDED DECEMBER 31
------------------------------------------ -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1996 1997 1997
--------- --------- --------- --------- ----------- ----------- -----------
<CAPTION>
HK$ HK$ HK$ US$ HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Bank balances and cash............... 6,599,284 2,107,546 2,825,984 366,060 3,169,078 643,038 83,295
Trust receipt and packing loans...... (8,598,572) (9,177,228) (9,006,436) (1,166,637) (13,057,992) (33,785,030) (4,376,299)
Bank overdraft....................... -- (2,454,501) (644,762) (83,518) (3,116,534) (206,795) (26,787)
--------- --------- --------- --------- ----------- ----------- -----------
(1,999,288) (9,524,183) (6,825,214) (884,095) (13,005,448) (33,348,787) (4,319,791)
--------- --------- --------- --------- ----------- ----------- -----------
</TABLE>
F-35
<PAGE>
JUSTRITE INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
20. OPERATING LEASE COMMITMENTS
At the balance sheet date, the Company had the following commitments payable
within the next year under non-cancellable operating leases in respect of rented
premises:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31 DECEMBER 31
----------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1997 1997
---------- ---------- ---------- ----------- ----------- -----------
<CAPTION>
HK$ HK$ HK$ US$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating leases which expire:
Within one year............................. 52,691 448,307 148,185 19,195 832,740 107,868
In the second to fifth years inclusive...... 2,653,759 3,191,423 5,227,721 677,166 2,734,167 354,167
---------- ---------- ---------- ----------- ----------- -----------
2,706,450 3,639,730 5,375,906 696,361 3,566,907 462,035
---------- ---------- ---------- ----------- ----------- -----------
</TABLE>
21. CAPITAL COMMITMENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31 DECEMBER 31
----------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1997 1997
---------- ---------- ---------- ----------- ----------- -----------
<CAPTION>
HK$ HK$ HK$ US$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Capital expenditure contracted for but not
provided in the financial statements...... -- -- 1,108,296 143,562 56,699 7,344
---------- ---------- ---------- ----------- ----------- -----------
</TABLE>
22. CONTINGENT LIABILITIES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31 DECEMBER 31
----------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1997 1997
---------- ---------- ---------- ----------- ----------- -----------
<CAPTION>
HK$ HK$ HK$ US$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Bills discounted with recourse.............. 6,066,843 11,528,574 9,775,826 1,266,299 4,863,138 629,940
---------- ---------- ---------- ----------- ----------- -----------
</TABLE>
23. PLEDGE OF ASSETS
As at March 31, 1995, 1996 and 1997, the Group had pledged its leasehold
land and buildings to banks to secure general banking facilities granted to the
Group. The net book values of leasehold land and buildings pledged as at March
31, 1995, 1996 and 1997 were HK$14,319,940, HK$22,760,744 and HK$24,305,369
(1997: US$3,148,364) respectively.
24. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in Hong Kong (HK GAAP) which differ in
certain significant respects from United
F-36
<PAGE>
JUSTRITE INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
24. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
States generally accepted accounting principles (US GAAP). The significant
difference relates principally to the following item and the adjustment
necessary to restate shareholders' equity in accordance with US GAAP is shown
in the table set out below.
ACCOUNTING FOR SHORT-TERM INVESTMENT
Under HK GAAP, the Company has not accounted for the unrealized gain on
revaluation of short-term investment. Under US GAAP, the Company would account
for the unrealized gain as a credit within shareholders' funds and record the
short-term investment at market value.
The following table summarizes the effect on shareholders' fund of the
significant difference between HK GAAP and US GAAP:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31 DECEMBER 31
-------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1997 1997
------------ ------------- ------------- ------------ ------------ -----------
<CAPTION>
HK$ HK$ HK$ US$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Shareholders' funds as reported
under HK GAAP..................... 80,964,860 115,114,912 128,899,055 16,696,769 23,875,019 3,092,620
US GAAP material adjustment:
Unrealized gain on revaluation of
short-term investment............. -- -- 79,479,063 10,295,215 -- --
------------ ------------- ------------- ------------ ------------ -----------
Shareholders' funds under US GAAP... 80,964,860 115,114,912 208,378,118 26,991,984 23,875,019 3,092,620
------------ ------------- ------------- ------------ ------------ -----------
</TABLE>
In addition to the above adjustments required to restate HK GAAP amounts to
US GAAP amounts, the Company's cash and cash equivalents under HK GAAP include
bank borrowings repayable within three months from the date of advance, under US
GAAP, such bank borrowings would be included in financing activities.
25. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The financial statements for the nine months ended December 31, 1996 and
1997 are unaudited. In the opinion of the directors, such information contains
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results for those periods.
F-37
<PAGE>
LEADING EDGE PACKAGING, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
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 Investments Limited ("Justrite"), a wholly owned subsidiary of Chung
Hwa in exchange for 2,250,000 shares of the Leading Edge common stock valued at
$6.00 per share (the "Exchange"). 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 to Chung Hwa. The Company's management believes that
presentation of Unaudited Pro Forma Consolidated Financial Information is
necessary to supplement the historical financial information.
The unaudited pro forma consolidated statements of income are based on the
historical statements of income of Leading Edge and Justrite, after giving
effect to pro forma adjustments described in the notes thereto as if the
issuance of the Company's shares in exchange for the shares held by Chung Hwa in
Justrite had occurred on April 1, 1994.
The unaudited pro forma consolidated balance sheet as of December 31, 1997,
are based on the historical balance sheets of Leading Edge and Justrite, after
giving effect to the pro forma adjustments described in the notes thereto as if
the issuance of the Company's shares in exchange for the shares held by Chung
Hwa in Justrite had occurred on December 31, 1997.
The unaudited pro forma consolidated financial information does not purport
to represent what the results of operations or the financial position would have
actually been if the exchange had occurred on such a date or at the beginning of
such period, or to project the results of operations for any future date or
period.
The unaudited pro forma consolidated financial information should be read in
conjunction with the consolidated financial statements of the Company and its
subsidiaries.
As Leading Edge was incorporated on December 15, 1995 and started trading
from April 1, 1996, there was no difference between the historical and the
proforma statements of income of Justrite for the year ended March 31, 1995 and
1996.
F-38
<PAGE>
LEADING EDGE PACKAGING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
HISTORICAL AND PROFORMA
FOR JUSTRITE
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
US$ US$
Turnover.............................................................................. 16,692,147 21,971,568
Cost of sales......................................................................... 9,654,489 12,103,245
------------ ------------
Gross profit.......................................................................... 7,037,658 9,868,323
Selling, general and administrative expenses.......................................... 4,898,763 5,076,739
------------ ------------
Operating profit...................................................................... 2,138,895 4,791,584
Interest expense...................................................................... (348,448) (355,112)
Interest income....................................................................... 141,147 45,002
Other income.......................................................................... 144,651 211,485
------------ ------------
Profit before taxation................................................................ 2,076,245 4,692,959
Taxation credit (charge).............................................................. 110,097 (191,657)
------------ ------------
Profit for the year................................................................... 2,186,342 4,510,302
------------ ------------
Pro forma earnings per share.......................................................... 0.97 2.00
------------ ------------
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial information
F-39
<PAGE>
LEADING EDGE PACKAGING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA
LEADING EDGE JUSTRITE ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
US$ US$ US$ US$
(8,406,548)
Turnover............................................. 12,987,263 19,299,108 (a) 23,879,823
(8,406,548)
Cost of sales........................................ 8,406,548 12,687,248 (a) 12,736,217
48,969(b)
------------ ------------ ------------
Gross profit......................................... 4,580,715 6,611,860 11,143,606
Selling, general and
administrative expenses............................ 1,221,849 4,760,756 5,982,605
------------ ------------ ------------
Operating profit..................................... 3,358,866 1,851,104 5,161,001
Interest expense..................................... (7,165) (346,303) (353,468)
Interest income...................................... -- 37,675 37,675
Other income......................................... 81,606 151,718 233,324
------------ ------------ ------------
Profit before taxation............................... 3,433,307 1,694,194 5,078,532
Taxation (charge) credit............................. (1,342,224) 13,596 (1,328,628)
------------ ------------ ------------
Profit for the year.................................. 2,091,083 1,707,790 3,749,904
------------ ------------ ------------
Pro forma earnings per share......................... 0.82
------------
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial information
F-40
<PAGE>
LEADING EDGE PACKAGING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA
LEADING EDGE JUSTRITE ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
US$ US$ US$ US$
(6,893,742)
Turnover............................................. 9,246,970 15,916,047 (a) 18,269,275
(6,893,742)
Cost of sales........................................ 6,315,827 10,271,653 (a) 9,733,814
40,076(b)
------------ ------------ ------------
Gross profit......................................... 2,931,143 5,644,394 8,535,461
Selling, general and
administrative expenses............................ 580,270 2,958,305 3,538,575
------------ ------------ ------------
Operating profit..................................... 2,350,873 2,686,089 4,996,886
Interest expense..................................... (1,288) (225,489) (226,777)
Interest income...................................... 13,003 5,759 18,762
Other income......................................... -- 110,077 110,077
------------ ------------ ------------
Profit before taxation............................... 2,362,588 2,576,436 4,898,948
Taxation (charge) credit............................. (897,783) 9,197 (888,586)
------------ ------------ ------------
Profit for the period................................ 1,464,805 2,585,633 4,010,362
------------ ------------ ------------
Pro forma earnings per share......................... 0.94
------------
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial information
F-41
<PAGE>
LEADING EDGE PACKAGING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA
LEADING EDGE JUSTRITE ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
US$ US$ US$ US$
(6,760,636)
Turnover............................................. 9,042,843 14,001,174 (a) 16,283,381
(6,760,636)
Cost of sales........................................ 5,849,024 9,750,582 (a) 8,898,599
59,629(b)
------------ ------------ ------------
Gross profit......................................... 3,193,819 4,250,592 7,384,782
Selling, general and
administrative expenses............................ 1,674,869 2,983,255 4,658,124
Non-recurring expense................................ -- 373,928 373,928
------------ ------------ ------------
Operating profit..................................... 1,518,950 893,409 2,352,730
Interest expense..................................... (87,338) (352,058) (439,396)
Interest income...................................... 89,225 4,948 94,173
Other income......................................... -- 88,626 88,626
------------ ------------ ------------
Profit before taxation............................... 1,520,837 634,925 2,096,133
Taxation (charge) credit............................. (565,000) 9,731 (555,269)
------------ ------------ ------------
Profit for the period................................ 955,837 644,656 1,540,864
------------ ------------ ------------
Pro forma earnings per share......................... 0.28
------------
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial information
F-42
<PAGE>
LEADING EDGE PACKAGING, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------- ADJUSTMENTS PRO FORMA
JUSTRITE ----------- ------------
------------ US$ US$
LEADING EDGE US$
------------
US$
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................ 673,198 83,295 756,493
Accounts receivable.................................. 3,667,776 3,203,212 6,870,988
Bills receivable..................................... 1,269,734 149,814 1,419,548
Inventories.......................................... 1,660,008 5,038,710 (108,599 (b) 6,590,119
Deposits to a related party.......................... 815,772 -- (815,772 (a) --
Receivable from Chung Hwa Group...................... 2,699,668 4,027,271 (2,699,668 (a) 4,027,271
Prepaid expenses..................................... 149,632 736,367 885,999
------------ ------------ ------------
Total current assets................................. 10,935,788 13,238,669 20,550,418
Property, plant and machinery, net of accumulated
depreciation....................................... 251,183 5,411,377 5,662,560
------------ ------------ ------------
TOTAL ASSETS......................................... 11,186,971 18,650,046 26,212,978
------------ ------------ ------------
CURRENT LIABILITIES
Accounts payable..................................... 87,286 2,272,587 2,359,873
Payable to a related party........................... -- 2,699,668 (2,699,668 (a) --
Bills payable........................................ 699,120 37,271 736,391
Accrued liabilities.................................. 8,860 2,026,375 2,035,235
Deposits from a related party........................ -- 815,772 (815,772 (a) --
Income taxes payable................................. 245,171 701,782 946,953
Bank borrowings...................................... -- 4,669,520 4,669,520
Capital lease obligation--current portion............ 1,143 -- 1,143
------------ ------------ ------------
Total current liabilities............................ 1,041,580 13,222,975 10,749,115
------------ ------------ ------------
LONG TERM LIABILITIES
Deferred income taxes................................ -- 55,402 55,402
Bank borrowings...................................... -- 335,943 335,943
Long term borrowings................................. -- 388,601 388,601
Capital lease obligations............................ 3,646 -- 3,646
------------ ------------ ------------
Total long term liabilities.......................... 3,646 779,946 783,592
------------ ------------ ------------
MINORITY INTERESTS................................... -- 1,554,404 1,554,404
------------ ------------ ------------
SHAREHOLDERS' EQUITY
Common stock......................................... 33,125 100 33,255
Additional paid in capital........................... 7,061,699 258,989 7,320,688
Retained earnings.................................... 3,046,921 2,833,632 (108,599 (b) 5,771,954
------------ ------------ ------------
10,141,745 3,092,721 13,125,867
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... 11,186,971 18,650,046 26,212,978
------------ ------------ ------------
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial information
F-43
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
1. ASSUMPTIONS AND DESCRIPTION OF PRO FORMA ADJUSTMENTS
The Restructuring has been accounted for as a reorganization of entities
under common control similar to a pooling of interests. The financial statements
present the results of Leading Edge and its subsidiaries as if the companies had
been combined for all periods presented. Because the entities have been under
common control for the relevant periods (including periods in which Leading Edge
was a majority-owned subsidiary of Justrite), the unaudited pro forma
consolidated financial information is the same as the audited consolidated
financial information appearing in the Annual Report on Form 10-K of Leading
Edge for the year ended March 31, 1998.
The financial statements of Justrite are maintained in Hong Kong dollars.
The amounts have been translated into U.S. dollars for all periods presented at
the rate of HK$7.72 to US$1.
The pro forma adjustments include:
(a) Elimination of intercompany transactions and balances with Justrite
on consolidation.
(b) Elimination of unrealized gain on inventories.
2. PRO FORMA EARNINGS PER SHARE
The pro forma earnings per share have been calculated by adding to the
relevant outstanding share totals for all periods up to April 1, 1994 to
2,250,000 Common Shares issued in connection with the exchange. Accordingly, pro
forma earnings per share is based on 5,562,500 Common Shares outstanding for the
year ended March 31, 1997, for the nine months ended December 31, 1996 and 1997.
F-44
<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.
