SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended: September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File No.: 333-12911
LEADING EDGE PACKAGING, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3432883
- - --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Empire State Building, Suite 3922, 350 Fifth Avenue, New York, New York 10018
-----------------------------------------------------------------------------
(Address of principal executive offices)
(212) 239-1865
- - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (D) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES |X| NO |_|
State the number of shares outstanding of each of the issuer's classes of common
stock: As of September 30, 1998, the issuer had 4,562,500 shares of its common
stock, par value $.01 per share, outstanding.
<PAGE>
LEADING EDGE PACKAGING, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
Part I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Condensed Combined Balance Sheet 3
Six and Three Months Ended
September 30, 1998 & 1997
Condensed Combined Statement of Income 4
Six and Three Months Ended
September 30, 1998 and 1997
Condensed Combined Statement of Cash Flows 5
Six and Three Months Ended
September 30, 1998 and 1997
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of 7-9
Financial Condition and Results of Operations
Part II. OTHER INFORMATION
Item 2. None 9
Item 5. Other Information 10
Item 6.
SIGNATURES 11
2
<PAGE>
LEADING EDGE PACKAGING, INC.
CONDENSED COMBINED BALANCE SHEET
(In Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash & cash equivalents $1,127 $951
Accounts receivable 2,734 2,296
Bills receivable (Note 2) 1,612 936
Inventories (Note 3) 8,293 6,590
Receivable from Chung Hwa Development Holdings Limited (Note 4) 12,416 12,746
Prepaid expenses and other current assets 1,006 505
------------ ------------
Total Current Assets 27,188 24,024
------------ ------------
Property and equipment, net of accumulation depreciation 5,362 5,588
of $3,409 and $3,160 ------------ ------------
TOTAL ASSETS $32,550 $29,612
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 2,603 $2,425
Bills payable 5,053 1,251
Accrued liabilities 2,414 2,154
Income Taxes payable 78 547
Short-term borrowings 4,684 5,865
Current portion of long-term debt 21 273
------------ ------------
TOTAL CURRENT LIABILITIES 14,853 12,515
------------ ------------
LONG TERM LIABILITIES
Deferred income taxes 51 51
Long-term debt 645 657
------------ ------------
TOTAL LONG TERM DEBT 696 708
------------ ------------
MINORITY INTERESTS 1,550 1,550
------------ ------------
SHAREHOLDERS' EQUITY
Common Stock, par value $0.01 per share,
Authorized 5,000,000 shares,
Issued and outstanding 4,562,500 shares 46 46
Additional paid in capital 7,308 7,308
Retained earnings 8,106 7,494
Foreign currency translation adjustments (9) (9)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 15,451 14,839
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $32,550 $29,612
============ ============
</TABLE>
See Accompanying Notes to Condensed Combined (Unaudited) Financial Statements
3
<PAGE>
LEADING EDGE PACKAGING, INC.
CONDENSED COMBINED STATEMENT OF INCOME
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended Three months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $9,240 $9,045 $4,801 $4,759
Cost of goods sold 6,033 4,974 3,265 2,595
----------- ----------- ----------- -----------
Gross profit 3,207 4,071 1,536 2,164
Selling, general, and administrative
expenses 2,572 2,638 1,339 1,537
----------- ----------- ----------- -----------
Operating income 635 1,433 197 627
Interest expense net of interest income (197) (185) (87) (150)
Other income 112 51 66 26
----------- ----------- ----------- -----------
Income before income taxes 550 1,299 176 503
----------- ----------- ----------- -----------
Provision for income taxes (62) 446 (103) 161
----------- ----------- ----------- -----------
Net income $612 $853 $279 $342
=========== =========== =========== ===========
Basic and diluted earnings per share $0.13 $0.19 $0.06 $0.08
=========== =========== =========== ===========
Weighted average of
Shares outstanding 4,562,500 4,562,500 4,562,500 4,562,500
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes to Condensed Combined (Unaudited) Financial Statements
4
<PAGE>
LEADING EDGE PACKAGING, INC.
CONDENSED COMBINED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Six months ended Three months ended
September 30 , September 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net Income $612 $853 $279 $342
Adjustment to reconcile net income to net
Cash provided (used in) activities:
Depreciation and amortization 419 316 170 151
Net increase (decrease) in cash due to
Changes in current assets and liabilities 1,774 (170) 4,204 (1,742)
--------- --------- --------- ---------
Net cash provided by (used in) operating activities: 2,805 999 4,653 (1,249)
--------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (193) (75) (49) (47)
--------- --------- --------- ---------
Net cash used in investing activities: (193) (75) (49) (47)
--------- --------- --------- ---------
Cash flows from financing activities:
Net Proceeds of short-term borrowings (2,172) 1,161 (4,258) 1,025
Dividend paid to Chung Hwa Group -- (14,249) -- (14,249)
Advances from Chung Hwa Group -- 9,061 -- 9,061
Repayments of long term debt (264) (416) (6) (355)
--------- --------- --------- ---------
Net cash (used in) provided by financing activities (2,436) (4,443) (4,264) (4,518)
--------- --------- --------- ---------
Effect of exchange rate changes on cash & cash equivalents -- 18 -- 18
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 176 (3,501) 340 (5,796)
Cash and cash equivalents at the beginning of period 951 5,100 787 7,395
--------- --------- --------- ---------
Cash and cash equivalents at the end of period $1,127 $1,599 $1,127 $1,599
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid $211 $259 $101 $178
--------- --------- --------- ---------
Taxes paid $351 $853 $0 $488
--------- --------- --------- ---------
</TABLE>
See Accompanying Notes to Condensed Combined (Unaudited) Financial Statements
5
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
September 30, 1998
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited financial statements of Leading Edge Packaging,
Inc. (the "Company") as of September 30, 1998 and 1997 for the six and three
months 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.
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 Investment Limited, ("Justrite") a wholly owned subsidiary of Chung Hwa
incorporated in the British Virgin Islands, in exchange for 2,250,000 shares of
Leading Edge's common stock valued at $6.00 per share. Justrite is engaged in
the manufacturing sale and distribution of packaging products. Leading Edge and
Chung Hwa completed the transaction on March 13, 1998, subject to the issuance
of 2,250,000 shares of Leading Edge's common stock to Chung Hwa. 1,250,000 of
such shares were issued on June 10, 1998, and the remaining 1,000,000 shares are
expected to be issued upon amendment of Leading Edge's certificate of
incorporation increasing its authorized share capital.
Leading Edge and Justrite are under common control, the financial
statements have been prepared to reflect the combined financial position,
results of operations and cash flows of Leading Edge and Justrite for all
periods presented at historical cost as if the structure of the Company
resulting from the above transactions had been in existence for each of the
periods presented.
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 six and three-month period ended
September 30, 1998 and 1997 are not necessarily indicative of the results to be
expected for the entire year or for any other period. The accompanying financial
statements should be read in conjunction with the financial statements and notes
thereto included in the company's annual report on Form 10-K for the year ended
March 31, 1998.
6
<PAGE>
LEADING EDGE PACKAGING, INC.
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 September 30, 1998, the Company had not factored any bills receivable
or accounts receivable with financial institutions.
Note 3. Inventories
Inventories held for resale are stated at the lower cost, determined by
the first-in, first-out method, or value determined by the market. Finished
goods inventories consist of raw materials, direct labor, and overhead
associated with the manufacture process.
Note 4. Receivable from Chung Hwa Development Limited
The amounts due from Chung Hwa are unsecured, non-interest bearing, and
repayable on demand.
7
<PAGE>
LEADING EDGE PACKAGING, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements under this item constitute "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995 (the "Reform Act").
See "Part II. Item 5(a). Other Information."
General
The Company manufactures, sells and distributes worldwide packaging products
used primarily in the sale of luxury consumer goods. Its packaging products
include metal, plastic and paper based jewelry, optical and watch cases, pouches
and bags, and paper gift boxes, premium and novelty items. The Company has a
2,000 square-foot office and showroom in the Empire State Building, 350 Fifth
Avenue, New York City and a 65,000 square-foot warehouse and distribution
facility and light assembly in Raritan Center Industrial Park, Edison, New
Jersey. The Company has two overseas subsidiaries, Leading Edge Packaging,
Limited in Hong Kong, an international trading company, and Dongguang Walford
Ornaments Packaging Co. Ltd. in China, a manufacturing subsidiary employing
3,000 workers, and it is considered a fully integrated manufacturing plant in
this industry, where every phase of the production process, ranging from making
of moulds, metal stamping of shells, injection molding process, hinge production
to powder coating process, are all conducted in-house
Results of Operations
Net sales for the six and three months ended September 30, 1998 were
approximately $4,801,000, a negligible increase from approximately $4,759,000
for the three months ended September 30, 1997. While the Company's 2nd Quarter's
sales deemed unchanged from the same period in 1997, the net income for the
Quarter had decreased due to the Company's revised pricing policy of focusing on
maintaining its market share strategy rather than a short term profitability.
Continued Asian economic downturn, which widely caused other manufacturers to
operate for cash flow rather than for profitability, will affect the Company's
revenue for the next two quarters to decrease. The decrease is anticipated in
view of continuing recession in Asia and in line with the Company's
implementation of its strategic plan to over-haul its pricing policy to compete
and to consolidate the industry. Meanwhile, the Company's production facilities
in China will undergo re-engineering and upgrading to improve efficiency and
cost reduction. The Company expects to experience a 30% lower productivity in
the course of re-engineering and upgrading process, which takes to complete in
three months. The Company believes that the timing of such implementation, which
will strengthen its global market penetration, is appropriate, while
anticipating some recovery in Asian economy.
To off-set a short term decline in revenue, the Company has aggressively
expanded its marketing team in North America, staffed with seasoned and
experienced marketing executives, headed by Mr. John Fee, Senior Vice President.
At the same time, the Company entered into a joint marketing agreement with
Gatto L.C. Astucci s.r.l of Domegge di Cadore, the oldest and largest optical
case manufacturer in Italy to market the Company's product line in North
America. The Company will continue to pursue the course of growth by
acquisition, whenever it deems appropriate.
The Company will continue to implement market consolidation strategy,
which allows the Company to reduce reliance on traditional importers and
distributors in North America and to sell directly to end-users. This will bring
savings to end-users by eliminating a layer of middleman add-on profits, and
thus present the Company's product line in a more competitive and favorable
pricing structure.
8
<PAGE>
LEADING EDGE PACKAGING, INC.
Cost of goods sold for the three months ended September 30, 1998 was
approximately $3,265,000, an increase of $670,000 or 26% from approximately
$2,595,000 for the three months ended September 30, 1997. As a percentage of net
sales, cost of goods sold for the three months ended September 30, 1998 was 68%
or 13% higher compared to 55% for the three months ended September 30, 1997. An
increase of Cost of Goods Sold to the Net Sales as a percentage was largely due
to price cutting measures to meet competition and an increase of local materials
cost and revamping production cost, thereby it had an impact to the Gross
Profit. Such gross margin pressure will remain for the next three-quarters until
completion of planned re-engineering and upgrading process.
Selling, general and administrative expenses for the three months ended
September 30, 1998 were approximately $1,339,000, a decrease of $198,000 from
approximately $1,537,000 for the three months ended September 30, 1997. For the
three and six months ended September 30, 1998, these expenses primarily
consisted of additional cost of corporate planning and development, combined
selling, general and administrative expenses of the parent Company and its Hong
Kong and China subsidiaries.
The Company had net income of approximately $279,000 (or $0.06 per share
on a fully diluted basis) for the three months ended September 30, 1998,
compared to net income of approximately $342,000 (or $0.08 per share on a fully
diluted basis) for the three months ended September 30, 1997.
Liquidity and Capital Resources
The Company's primary sources of working capital are cash flows from
operations and borrowing under its credit facilities. The Company's working
capital increased to approximately $12,335,000 at September 30, 1998 from
$11,509,000 at September 30, 1997. Management expects that cash flows from
operating activities and funds available under its credit facilities will not be
sufficient to support the Company's and its subsidiaries in Hong Kong and
China's current business program and seasonal working capital needs for the
foreseeable future. The lines of credit previously granted to the Company's
subsidiaries in Hong Kong and China were withdrawn by Hong Kong Shanghai Bank
and Hong Kong Chinese Bank, Hong Kong. The Company currently is in negotiation
with its main bank, First Union Bank to increase the existing lines to replace
lines of credit that were withdrawn by the two banks aforesaid. Without the
additional lines of credit for its subsidiaries, the Company will face serious
business impediment in delivering goods to its customers. The primary purpose
for additional lines of credit is to satisfy the financial needs of Chinese
joint venture partner, who is responsible for payment of workers' wages and is
capable to withhold release of finished goods to the Company's customers.
9
<PAGE>
LEADING EDGE PACKAGING, INC.
Part II. OTHER INFORMATION
Item 1. None
Item 2. None
Item 3. None
Item 4. None
Item 5. Other Information
(a) Forward-Looking Statements
Certain statements in this form 10-Q and in the future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases,
and in oral statements made by or with the approval of an authorized executive
officer constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors, which may
cause the actual results, performance, or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions which may
impact demand for the Company's packaging products; changes in tax laws and
regulations; the ability of the Company to implement its market consolidation
strategy and to expand its business in the North American market; and changes in
laws and government regulations applicable to the Company.
Item 6. None
10
<PAGE>
LEADING EDGE PACKAGING, INC.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LEADING EDGE PACKAGING, INC.
----------------------------
Dated: November 3, 1998 By: /s/ Casey K. Tjang
--------------------------------------
Casey K. Tjang
President, Director, Chief Financial
Officer and Secretary
Signing on behalf of the registrant as
principal accounting officer.
11
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<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,127
<SECURITIES> 0
<RECEIVABLES> 4,346
<ALLOWANCES> 0
<INVENTORY> 8,293
<CURRENT-ASSETS> 27,188
<PP&E> 8,941
<DEPRECIATION> (3,579)
<TOTAL-ASSETS> 32,550
<CURRENT-LIABILITIES> 14,853
<BONDS> 696
0
0
<COMMON> 46
<OTHER-SE> 15,405
<TOTAL-LIABILITY-AND-EQUITY> 32,550
<SALES> 9,240
<TOTAL-REVENUES> 9,240
<CGS> 6,033
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