<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended: December 31, 1998
---------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
COMMISSION FILE NO.: 0-28868
LEADING EDGE PACKAGING, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3432883
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Empire State Building, Suite 3922, 350 Fifth Avenue,
New York, New York 10018
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(212) 239-1865
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (D) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES /X/ NO / /
State the number of shares outstanding of each of the issuer's classes of common
stock: As of December 31, 1998, the issuer had 5,562,500 shares of its common
stock, par value $.01 per share, outstanding.
<PAGE>
LEADING EDGE PACKAGING, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Balance Sheet 3
Ended December 31, 1998 and March 31,1998
Condensed Statement of Income 4
Nine and Three Months Ended
December 31, 1998 and 1997
Condensed Statement of Cash Flows 5
Nine and Three Months Ended
December 31, 1998 and 1997
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of 8-9
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in securities and use of proceeds
Item 3. Technical defaults on the Loan Agreement 11
Item 5. Other Information 11
Item 6. None
SIGNATURES 12
2
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LEADING EDGE PACKAGING, INC.
CONDENSED BALANCE SHEET
(In Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash & cash equivalents $ 367 $ 912
Accounts receivable 1,928 2,739
Bills receivable (Note 2) 836
Inventories (Note 3) 3,138 2,585
Receivable from related party 4,305
Prepaid expenses and other current assets 451 163
------------ ------------
Total Current Assets 5,884 11,852
------------ ------------
Property and equipment, net of accumulation
depreciation of $181 438 5,588
------------ ------------
TOTAL ASSETS $ 6,322 $ 29,612
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 108 $ 167
Bills payable 2,159 1,059
Accrued liabilities 159 419
Short-term bank borrowings 2,986
Current portion of long-term debt 4 1
------------ ------------
TOTAL CURRENT LIABILITIES 5,413 1,646
------------ ------------
LONG TERM LIABILITIES
Convertible subordinated debt 350
Long-term debt 35 4
------------ ------------
TOTAL LONG TERM DEBT 385 4
SHAREHOLDERS' EQUITY
Common Stock, par value $0.01 per share,
Authorized 8,000,000 shares
Issued and outstanding 5,562,500 shares
of Common Stock 56 56
Preferred Stock, par value $ 0.01per share
Authorized 5,000,000 shares (not issued)
Additional paid in capital (not issued) 7,039 7,039
Retained earnings (6,571) 3,107
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 524 10,202
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 6,322 $ 11,852
============ ============
</TABLE>
See Accompanying Notes to Condensed Combined (Unaudited) Financial Statements
3
<PAGE>
LEADING EDGE PACKAGING, INC.
CONDENSED STATEMENT OF INCOME
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
December 31, December 31,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 5,628 $ 9,043 $ 1,437 $ 3,262
Cost of goods sold 4,323 5,849 1,274 2,206
------------ ------------ ------------ ------------
Gross profit 1,305 3,194 163 1,056
Selling, general, and administrative expenses 2,482 1,675 1,206 649
------------ ------------ ------------ ------------
Operating income (loss) (1,177) 1,519 (1,043) 407
Net interest income (expense) (61) 2 (9) (59)
Liquidation of subsidiary (loss) (8,440) (8,440)
------------ ------------ ------------ ------------
Income before income taxes (9,678) 1,521 (9,492) 348
------------ ------------ ------------ ------------
Provision for income taxes 565 (103) 119
------------ ------------ ------------ ------------
Net income $ (9,678) $ 956 $ (9,492) $ 229
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ (1.74) $ 0.17 $ (1.70) $ 0.04
============ ============ ============ ============
Weighted average of
Shares outstanding 5,562,500 5,562,500 5,562,500 5,562,500
============ ============ ============ ============
</TABLE>
See Accompanying Notes to Condensed Combined (Unaudited) Financial Statements
4
<PAGE>
LEADING EDGE PACKAGING, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Nine months ended Three months ended
December 31, December 31,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (9,678) $ 956 $ (9,492) $ 229
Adjustment to reconcile net income to net
Cash provided (used in) activities:
Depreciation and amortization 82 56 53 20
Loss on liquidation of subsidiary 8,440 8,440
Net increase (decrease) in cash due to
Changes in current assets and liabilities 1,584 (5,040) 2,039 (1,255)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities: 428 (4,028) 1,040 (1,006)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (173) (33) (173) 0
Advances to related party (4,135) 0 (2,080) 0
------------ ------------ ------------ ------------
Net cash used in investing activities: (4,308) (33) (2,253) 0
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net Proceeds of short-term borrowings 2,986 0 486 0
Proceeds from convertible sub-debt 350 0 350 0
Repayments of long term debt (1) (1) (1) (1)
------------ ------------ ------------ ------------
Net cash (used in) provided by financing activities 3,335 (1) 835 (1)
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (545) (4,062) (378) (1,007)
Cash and cash equivalents at the beginning of period 912 4,734 745 1,679
------------ ------------ ------------ ------------
Cash and cash equivalents at the end of period $ 367 $ 672 $ 367 $ 672
============ ============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 80 $ 64 $ 47 $ 55
------------ ------------ ------------ ------------
Taxes paid 0 $ 1,384 0 $ 932
------------ ------------ ------------ ------------
</TABLE>
See Accompanying Notes to Condensed Combined (Unaudited) Financial Statements
5
<PAGE>
LEADING EDGE PACKAGING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1998
(UNAUDITED)
Note 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Leading Edge
Packaging, Inc. (the "Company") as of December 31, 1998 and 1997 for the three
and 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.
On December 14, 1998, Justrite Investment Limited ("Justrite"), a
wholly owned subsidiary of the Company incorporated in the British Virgin
Islands, filed for a voluntary self-liquidation, which was conducted by the
independent liquidators, Messrs. Nelson Wheeler, Hong Kong. Justrite is engaged
in the manufacturing sale and distribution of packaging products. The Company
completed the acquisition transaction of Justrite on March 13, 1998 through the
issuance of 2,250,000 shares of Leading Edge's common stock to Chung Hwa.
The Company's financial statements have been prepared as if the above
acquisition of Justrite had never taken place.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The results of operations for the three and nine-month period ended
December 31, 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 and subsequent filings of 8-K reports to Securities and Exchange
Commission.
6
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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 December 31, 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. Loss on liquidation of subsidiary, Justrite Investment Limited.
On January 23, 1998, the Company 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, the Company received all of the issued and outstanding shares of
Justrite Investment Limited, ("Jusrite") a wholly-owned subsidiary of Chung Hwa
incorporated in the British Virgin Island, in exchange for 2,250,000 shares of
the Company's common stock valued at $6.00 per share. Justrite , which was
engaged in manufacturing, sale and distribution of packaging products, had a
joint venture subsidiary, Dongguan Walford Ornaments Packaging Limited in China.
On November 24, 1998, the Chinese joint venture partner, Hua Nan Enterprise
Limited unilaterally announced cessation of production and withheld 14
containers of finished goods that resulted in serious disruption of the
Company's supply of merchandise to its customers. To preserve and protect its
continued business viability, Justrite filed for self-liquidation and claimed on
all residual assets due to it, including but not limited receivables from Chung
Hwa. The Company has written off its investment and advances to Justrite as
shown in the Company's condensed Statement of Income for the nine and three
months ended December 31, 1998.
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.
Previously, through its wholly owned subsidiary, Justrite Investment
Limited, the Company originally had two overseas subsidiaries, Leading Edge
Packaging, Limited ("LEP HK") in Hong Kong, an international trading company,
and a manufacturing joint venture, Dongguang Walford Ornaments Packaging Co.
Ltd., ("Dongguan Walford"), a mnaufacturing joint venture in China, employing
3,000 workers. The Company held a 60% interest in Dongguan Walford and the other
40% interest was held by a Chinese joint venture partner, Hua Nan Enterprises
Limited ("Hua Nan") since 1994. On November 24, 1998, the Company learned that
Dongguan Walford had ceased to operate and further withheld 14 containers of
finished goods, which rightfully belonged to the Company. The Company took a
legal action in China in aneffort to take back the finished goods and also wrote
a letter to United States Consul General, Mr. Edward McKeon, seeking his
intervention and inquiry to the proper Chinese authority that oversees Dongguan
County. On December 14, 1998, Leading Edge Packaging Limited filed for a
voluntary liquidation, which was carried out by the independent statutory
liquidators, Messrs. Nelson Wheeler, Hong Kong. The Company believes that these
events adversely affected its financial condition and results of operation for
the three months ended December 31, 1998. The Company has taken steps to reverse
the problems in China and to resume production at a new facility.
RESULTS OF OPERATIONS
Net sales for the nine and three months ended December 31, 1998 were
approximately $5,628,000 and $1,437,000, respectively, reflecting a $3,415,000
or 75% decrease from approximately $9,043,000 and a $1,825,000 or 56% decrease
from approximately $3,262,000 for the same period ended December 31, 1997. Loss
for the third quarter ending December 31, 1998 represents a loss of $1.74 per
share or a loss of $1.70 per share for the nine-month period ended December 31,
1998.
While the Company suffered significant losses for the period ended
December 31, 1998 due to sudden disruption of production and delivery of
merchandise during the 1998 holiday seasons, the management took measures to
safeguard and preserve the Company's business viability of continuing to serve
its customers. Among other things management undertook to raise funds for
building a new production facility and secondly, to file a petition for
voluntary liquidation of Leading Edge Packaging Limited and a claim for all
residual assets due to the Company as a major creditor to Leading Edge Packaging
Ltd., including but not limited to receivables due from Chung Hwa. As a result,
the Company took a onetime write-off of approximately $6.5 million in relation
to the liquidation of Leading Edge Packaging Limited, Hong Kong.
8
<PAGE>
LEADING EDGE PACKAGING, INC.
The Company has completed the organization of LEPI (Zhong Shan)
Manufacturing Company Limited ("LEPI Zhongshan"), the Company's new wholly-owned
foreign enterprise in China. LEPI Zhongshan was established to manufacture the
Company's packaging products after the cessation of production at its former
China joint venture factor. LEPI Zhongshan manufacturing facility is located at
Building Nos. 19 & 20, Hi-Tech Development Area, Zhong Shan Hi-Tech Industrial
Development Zone, Zhong Shan City, Guangdong Province, China. The existing
facility is a completed industrial building occupying approximately 230,000
square feet. The Company plans to have a fully integrated production facility
with on-line computerized production and management control systems. The Company
believes that this will be more efficient and cost effective than its previous
production facilities.
The Company anticipates the new facility will be fully operational by
the end of March, 1999. Management believes that the absence of a China joint
venture partner will result in a more reliable source of production and lower
operation costs. In this way, the Company anticipates that its new factory
arrangements will represent an improvement over its prior joint venture.
To off-set a short term decline in revenue, the Company has
aggressively made direct sales from existing inventories to new customers in
wholesale and retail. At the same time, the Company has been campaigning to
retain the majority of its former customers in Europe and North America.
9
<PAGE>
LEADING EDGE PACKAGING, INC.
Cost of goods sold for the three months ended December 31, 1998 was
approximately $1,274,000, an increase of $932,000 or 42% from approximately
$2,206,000 for the three months ended December 31, 1997. As a percentage of net
sales, cost of goods sold for the three months ended December 31, 1998 was 87%
or 20% higher compared to 67% for the three months ended December 31, 1997. An
increase of Cost of Goods Sold to the Net Sales as a percentage was largely due
to the cessation of production in China on November 23, 1998 and thereby
substantially reduced shipment and sales for the quarter just ended.
Selling, general and administrative expenses for the three months ended
December 31, 1998 were approximately $1,206,000, an increase of $557,000 from
approximately $649,000 for the three months ended December 31, 1997. For the
three and six months ended December 31, 1998, increases as a percentage of net
sales on these expenses primarily consisted of additional cost of corporate
planning and development, combined selling, general and administrative expenses
of the Company and its Hong Kong and China subsidiaries coupled with reduced
sales caused by sudden cessation of production in China.
The Company had net loss of approximately $9,492,000 (or $1,70 per
share on a fully diluted basis) for the three months ended December 31, 1998,
compared to net income of approximately $229,000 (or $0.04) per share on a fully
diluted basis) for the three months ended December 31, 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 currently is
in the process of negotiating a forbearance agreement with its primary banker,
First Union National Bank. Until the agreement is reached, the Company is unable
to utilize the existing bank line of credit as usual. The Company may face a
difficulty to bridge the need of working capital in the near future.
YEAR 2000 MATTERS
The Company is currently assessing the impact of the Year 2000 on its
information systems, including the year 2000 readiness of those with whom it
conducts business, and is developing and implementing a Year 2000 compliance
strategy. The Company expects increased spending to bring its systems into Year
2000 compliance, but Year 2000 related expenses are not expected to be material
to the Company's results of operations and financial position and will be
expensed as incurred. However, if modifications and conversions by the Company
and those with whom it conducts business are not completed in a timely manner,
the Year 2000 issue may have a material adverse effect on the Company's
business, results of operations and financial position.
10
<PAGE>
LEADING EDGE PACKAGING, INC.
PART II. OTHER INFORMATION
Item 1. NONE
Item 2. The Company has issued 1,000,000 shares of Preferred Stock to
BroadAsia Partners LLC (See Form 8-K filed on January 29, 1999). The
Company has used the proceeds from sale of Preferred Shares for
rebuilding production facility in China.
Item 3. The Company is in technical default under the Loan Agreement dated
September 25, 1997 with First Union National Bank, Edison, New Jersey
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. "Forward-looking statements" include
any plans, objectives, goals, strategies and future events and underlying
assumptions thereof. Such forward looking statements involve known and unknown
risks, uncertainties and other factors, which may cause the actual results,
future 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 worldwide market; the ability of the Company to shift
its production to another source of supply; and changes in laws and government
regulations applicable to the Company.
(b) Officers of the Company have attended a hearing with The Nasdaq
Stock Market, Inc. Listing Qualifcations Panel and have submitted additional
information which was requested by the panel. The listing status of the
Company is still under review, pending a complete review by the panel.
Item 6. NONE
11
<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: February 16, 1999 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.
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 367
<SECURITIES> 0
<RECEIVABLES> 1,928<F2>
<ALLOWANCES> 0
<INVENTORY> 3,138
<CURRENT-ASSETS> 5,884
<PP&E> 438
<DEPRECIATION> 181
<TOTAL-ASSETS> 6,322
<CURRENT-LIABILITIES> 5,413
<BONDS> 350
0
0
<COMMON> 56
<OTHER-SE> 7,039<F1>
<TOTAL-LIABILITY-AND-EQUITY> 6,322
<SALES> 1,437
<TOTAL-REVENUES> 1,437
<CGS> 1,274
<TOTAL-COSTS> 1,206
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 400<F5>
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,492)<F3>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,492)<F4>
<EPS-PRIMARY> 0
<EPS-DILUTED> (1.70)
<FN>
<F1>Additional paid-up capital.
<F2>Receivables net of $400 received for doubtful accounts.
<F3>Write-off all investments in JUSTRITE.
<F4>Operating loss for the quarter ended 12/31/98.
<F5>Loss per share ($1.70) for the quarter.
</FN>
</TABLE>
