UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-32053
INDUSTRIES INTERNATIONAL, INCORPORATED
(Exact name of registrant as specified in its charter)
Nevada 87-0522115
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
4/F Wondial Building, Keji South 6 Road
Shenzhen High-Tech Industrial Park, Shennan Road
Shenzhen, China
(Address of principal executive offices)
(Zip Code)
011-86-755-26520839
(Registrant's telephone number including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ]. No [X]
The Registrant had 21,771,155 shares of common stock, par value $0.01 per share,
issued and outstanding as of August 20, 2003.
INDUSTRIES INTERNATIONAL, INCORPORATED
INDEX
PAGE
----
PART I
NUMBER
Item 1 - Financial Information
Condensed Combined Statements of Operations - Three- Month and
six-month periods ended June 30, 2002 and 2003 F-1
Condensed Combined Balance Sheets - December 31 2002 and June 30, 2003 F-2
Condensed Combined Statements of Changes in Stockholders' Equity and
Comprehensive Income/Loss F-3
Condensed Combined Statements of Cash Flows - Six -Month periods ended
June 30, 2002 and 2003 F-4
Notes to the Condensed Combined Financial Statements F-5
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 1
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 8
Item 4 - Controls and Procedures 8
PART II
Item 1 - Legal Proceedings 8
Item 2 - Changes in Securities and Use of Proceeds 9
Item 3 - Defaults Upon Senior Securities 9
Item 4 - Submission of Matters to a Vote of Security Holders 9
Item 5 - Other Information 9
Item 6 - Exhibits and Reports on Form 8-K 9
Signature Page
Industries International, Incorporated
Condensed Combined Statements of Operations
--------------------------------------------------------------------------------
(amount in thousands, except per share data)
(Unaudited)
For the three months For the six months
ended June 30, ended June 30,
2002 2003 2002 2003 2003
RMB RMB RMB RMB USD
-------- -------- -------- -------- --------
Operating revenues
Net sales 112,641 118,675 197,730 213,368 25,809
Rental income 2,040 240 4,080 480 58
-------- -------- -------- -------- --------
Total operating revenues 114,681 118,915 201,810 213,848 25,867
-------- -------- -------- -------- --------
Operating expenses
Manufacturing and other costs of sales 74,993 84,401 135,772 150,663 18,224
Sales and marketing 3,968 6,028 8,550 10,492 1,269
General and administrative 4,216 3,896 8,644 7,678 929
Research and development 2,706 3,773 5,317 6,174 747
Depreciation and amortization 4,459 5,487 5,522 6,615 800
Other operating costs and expenses 66 18,822 136 20,077 2,428
-------- -------- -------- -------- --------
Total operating expenses 90,408 122,407 163,941 201,699 24,397
-------- -------- -------- -------- --------
Operating income (loss) 24,273 (3,492) 37,869 12,149 1,470
Interest expenses (3,766) (2,549) (7,479) (4,718) (571)
Other income, net 734 (184) 1,441 40 4
-------- -------- -------- -------- --------
Income (loss) before income taxes and minority interest 21,241 (6,225) 31,831 7,471 903
Provision for income taxes (1,899) (1,838) (2,742) (3,280) (397)
-------- -------- -------- -------- --------
Income (loss) before minority interest 19,342 (8,063) 29,089 4,191 506
Minority interest in income of combined subsidiaries (7,224) (7,059) (11,188) (11,913) (1,441)
-------- -------- -------- -------- --------
Net income (loss) 12,118 (15,122) 17,901 (7,722) (935)
======== ======== ======== ======== ========
Earnings per share:
Basic weighted average number of common stock outstanding 15,315 17,010 15,315 16,168 16,168
======== ======== ======== ======== ========
Basic net income (loss) per common stock 0.79 (0.89) 1.17 (0.48) (0.06)
======== ======== ======== ======== ========
The accompanying notes are an integral part of these condensed combined
financial statements.
F-1
Industries International, Incorporated
Condensed Combined Balance Sheets
--------------------------------------------------------------------------------
(amount in thousands, except per share data)
(Unaudited)
December 31, June 30,
---------------- -----------------------------
2002 2003 2003
Note RMB RMB USD
ASSETS
Current assets:
Cash and cash equivalents 127,019 172,991 20,925
Marketable securities 7 12,603 12,702 1,536
Guaranteed investment contract 10,000 10,000 1,210
Accounts receivable, net of allowance for uncollectible
of Rmb 3,827 and Rmb 12,709 137,591 143,351 17,340
Due from related parties, director and employees 14,157 12,778 1,545
Inventories 8 36,786 53,049 6,417
Plant and equipment held for sales receivable - 48,850 5,909
Plant and equipment held for sales 64,644 - -
Prepaid expenses and other current assets 33,478 37,918 4,587
---------------- ------------- ------------
Total current assets 436,278 491,639 59,469
Goodwill 6 591 14,556 1,761
Property, plant and equipment, net 9 93,465 84,847 10,263
---------------- ------------- ------------
Total assets 530,334 591,042 71,493
================ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debts maturing within one year 141,025 152,028 18,389
Accounts payable - trade 54,269 53,657 6,490
Other payable 49,168 46,876 5,670
Tax payable 11,757 4,731 572
Accrued expenses and other accrued liabilities 43,933 42,556 5,148
---------------- ------------- ------------
Total current liabilities 300,152 299,848 36,269
---------------- ------------- ------------
Non-current liabilities
Long-term debts - 20,000 2,419
---------------- ------------- ------------
Minority interests in combined subsidiaries 121,434 125,241 15,150
---------------- ------------- ------------
Stockholders' equity:
Common stock 5 5,969 7,217 873
Additional paid-in capital 3,131 315,780 38,197
Deferred compensation 12 - (247,696) (29,961)
Dedicated reserves 21,338 22,868 2,766
Retained earnings (accumulated deficit) 79,000 48,440 5,859
Accumulated other comprehensive loss (690) (656) (79)
---------------- ------------- ------------
Total stockholders' equity 108,748 145,953 17,655
---------------- ------------- ------------
Total liabilities and stockholders' equity 530,334 591,042 71,493
================ ============= ============
The accompanying notes are an integral part of these condensed combined
financial statements.
F-2
Industries International, Incorporated
Condensed Combined Statements of Changes in Stockholders' Equity and
Comprehensive Income / Loss
--------------------------------------------------------------------------------
(amount in thousands, except per share data)
(Unaudited)
Common stock
-------------------
Accumulated
Deferred other
Number Additional stock comprehensive
of paid-in compensa Dedicated Retained income
shares Amount capital -tion reserves earnings (loss) Total
-------- -------- -------- -------- -------- -------- -------- -------------------
RMB RMB RMB RMB RMB RMB RMB USD
Balance at January 1, 2002 18,007 5,969 3,131 -- 14,562 69,657 (377) 92,942 11,241
Comprehensive income:
Net income -- -- -- -- -- 17,901 -- 17,901 2,166
Transfer to dedicated reserves -- -- -- -- 1,712 (1,712) -- -- --
Other comprehensive loss
Net unrealizable loss on
marketable securities -- -- -- -- -- -- (280) (280) (34)
Total comprehensive
income 17,621 2,132
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 2002 18,007 5,969 3,131 -- 16,274 85,846 (657) 110,5653 13,373
-------- --------
Comprehensive income:
Net income -- -- -- -- -- 23,718 -- 23,718 2,869
Transfer to dedicated
reserves -- -- -- 5,064 -- (5,064) -- -- --
Other comprehensive loss
Net unrealizable
loss on marketable securities -- -- -- -- -- -- (33) (33) (4)
--------
Total comprehensive income 23,684 2,865
-------- --------
Dividend declared -- -- -- -- -- (25,500) -- (25,500) (3,084)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2002 18,007 5,969 3,131 -- 21,338 79,000 (690) 108,748 13,154
-------- --------
Comprehensive income:
Net income -- -- -- -- -- (7,722) -- (7,722) (935)
Transfer to dedicated
reserves -- -- -- -- 1,530 (1,530) -- -- --
Other comprehensive loss
Net unrealizable
gain on marketable securities -- -- -- -- -- -- 34 34 4
-------- --------
Total comprehensive
loss (7,688) (931)
-------- --------
Acquisition of net
liabilities of INDI 1,249 414 (547) -- -- -- -- (133) (16)
Dividend declared as
a result of business
combination -- -- 21,308 -- -- (21,308) -- -- --
Issuance of stock for
acquisition of
minority interest
in subsidiary 666 221 21,851 -- -- -- -- 22,072 2,670
Issuance of stock
under Equity
Incentive Plan 2003 1,849 613 65,994 (61,635) -- -- -- 4,972 601
Issuance of stock &
stock option under
principal
stockholder plan -- -- 204,043 (190,456) -- -- -- 13,587 1,644
Amortization of
deferred stock
compensation -- -- -- 4,395 -- -- -- 4,395 533
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 2003 21,771 7,217 315,780 (247,696) 22,868 48,440 (656) 145,953 17,655
======== ======== ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these condensed combined
financial statements.
F-3
Industries International, Incorporated
Condensed Combined Statements of Cash Flows
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
For six months ended June 30,
---------------------------------------
Dec 31,
2002 2002 2003 2003
RMB RMB RMB USD
Cash flows from operating activities
Net income (loss) 20,450 17,901 (7,722) (935)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 17,883 5,662 12,192 1,474
Provision for doubtful accounts 898 - - -
Minority interest in net income of combined subsidiaries 12,346 11,288 11,913 1,441
Noncash compensation costs - - 18,555 2,245
Loss on sales, disposal or impairment of long-live assets, net 281 - 562 68
Changes in assets and liabilities:
Accounts receivable, net (12,969) (5,002) (5,761) (696)
Inventories, net 26,381 19,916 (16,263) (1,967)
Due from related parties, directors and employees 4,897 5,049 1,379 166
Plant and equipment held for sales receivable - - 15,794 1,910
Prepaid expenses and other current assets (12,189) (8,962) (4,439) (537)
Accounts payable (1,166) (16,834) (611) (74)
Due to related parties and director (5,385) (5,934) (2,292) (277)
Tax payable 1,662 (4,773) (7,026) (850)
Accrued expenses and other accrued liabilities (2,755) (898) (1,511) (181)
------------- ----------- ----------- --------
Net cash provided by operating activities 50,334 17,413 14,770 1,787
------------- ----------- ----------- --------
Cash flows from investing activities
Proceeds on disposal of other investments 66 - - -
Purchase of property, plant and equipment (6,758) (345) - -
Proceeds on disposal of property, plant and equipment - - 200 24
------------- ----------- ----------- --------
Net cash (used in) provided by investing activities (6,692) (345) 200 24
------------- ----------- ----------- --------
Cash flows used in financing activities
Borrowings of short-term debt - 15,000 12,000 1,452
Repayments of short-term debt (62,167) (30,164) (998) (121)
Borrowings of long-term debt - - 20,000 2,419
------------- ----------- ----------- --------
Net cash (used in) provided from financing activities (62,167) (15,164) 31,002 3,750
------------- ----------- ----------- --------
Net (decrease) increase in cash and cash equivalents (18,525) 1,904 45,972 5,561
Cash and cash equivalents, beginning of fiscal period 78,144 140,934 127,019 15,364
------------- ----------- ----------- --------
Cash and cash equivalents, end of fiscal period 59,619 142,838 172,991 20,925
============= =========== =========== ========
Supplemental disclosure of cash flow information
Cash paid during the fiscal period for:
Income tax - 2,620 4,276 517
Interest - 5,769 3,511 425
============= =========== =========== ========
The accompanying notes are an integral part of these condensed combined
financial statements.
F-4
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed combined financial statements of
Industries International, Incorporated (the "Company") and its
subsidiaries (collectively referred to as the "Group") as of June 30,
2003 and for the three-month and six-month periods ended June 30, 2002
and 2003, have been prepared based upon Securities and Exchange
Commission ("SEC") rules that permit reduced disclosure for interim
periods and include, in the opinion of management, all adjustments
(consisting of normal recurring adjustments and reclassifications)
necessary to present fairly the financial position, results of
operations and cash flows as of June 30, 2003 and for all periods
presented.
Effective February 10, 2003, pursuant to an Amended and Restated
Agreement and Plan of Share Exchange, the Company merged with an
operating entity, Broad Faith Limited ("BFL"), resulting in the
shareholders and management of BFL having actual and effective control
of the Company. For accounting purposes, the transaction has been
treated as a recapitalization of BFL with the Company being the legal
survivor and BFL being the accounting survivor and the operating
entity. The historical financial statements prior to February 10, 2003
are those of BFL, even though they were labeled as those of the
Company. In the recapitalization, historical shareholders' equity of
the accounting acquirer, BFL, prior to the merger was retroactively
restated for the equivalent number of shares received in the merger
with an offset to additional paid-in capital.
As described in Note 6 below, on May 14, 2003, the Company acquired all
of the outstanding stock of Li Sun Power International Limited ("LPI"),
which held approximately 72.83% interest in Wuhan Lixing Power Sources
Company Limited ("WLPS"), a leading lithium and lithium-ion battery
manufacturer in PRC. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 141, the Company has included in its
results of operations for the three-month and six-month periods ended
June 30, 2003 the results of LPI as if the acquisition had occurred as
of the beginning of each period presented.
As described in Note 5 below, on May 12, 2003, the board of directors
of the Company approved and declared a one-for-four reverse split of
the Company's common stock, thereby decreasing the number of issued and
outstanding shares and increasing the par value of each share. The
number of common shares and per-share amounts shown in these financial
statements has been retroactively restated to reflect the reverse
split.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America ("USA") have been
condensed or omitted. These condensed combined financial statements
should be read in conjunction with the audited financial statements and
notes thereto incorporated by reference in the Company's Form 10-KSB
for the year ended December 31, 2002 and the Form 8-K/A for the
information of BFL filed on April 14, 2003 and April 22, 2003
respectively.
The Company's historical financial information is no longer relevant.
The results of operations for the three-month and six-month periods
ended June 30, 2002 and 2003 are not necessarily indicative of the
operating results to be expected for the full year. Certain amounts in
prior periods' financial statements and related notes have been
reclassified to conform to the 2003 presentation.
F-5
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS (Continued)
The condensed combined financial statements and accompanying notes are
presented in Renminbi and prepared in conformity with accounting
principles generally accepted in the USA ("USGAAP") which requires
management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
For the convenience of the readers of these combined financial
statements, translation of amounts from Renminbi (Rmb) into United
States dollars (USD) has been made at the exchange rate of Rmb 1.00 =
USD0.12096. No representation is made that the Renminbi amounts could
have been or could be converted into the United States dollars at the
rates or at any other rates on June 30, 2003.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". The SFAS No.150 improves the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
equity and requires that those instruments be classified as liabilities
in statements of financial position. In addition to its requirements
for the classification and measurement of financial instruments in its
scope, SFAS No. 150 also requires disclosures about alternative ways of
settling the instruments and the capital structure of entities, all of
whose shares are mandatorily redeemable. Most of the guidance in SFAS
No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003.
As described in Note 7 below, the consideration for the acquisition of
LPI includes a cash of USD 7,662, which shall be either in the form of
promissory note payable in cash or common stock of the Company. Had
SFAS No. 150 been adopted, such consideration will be recorded as due
to a principal shareholder of the Company. As the form for settling the
USD7,662 has not been determined, which will be at the discretion of
the Company, and this obligation to Mr. Tsui Kit has not been accounted
for in these condensed combined financial statement. The Company will
adopt SFAS No. 150 in the third quarter of fiscal year 2003.
3. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed based upon the weighted
average number of shares of common stock outstanding during each period
as restated as a result of the recapitalization, as described in Note 1
above.
As described in Note 1 above, the 14,065,972 shares, in connection with
the recapitalization were included in the computation of earnings per
share as if outstanding at the beginning of each period presented and
1,249,215 shares, being the outstanding stock of the Company as of
February 10, 2003, were treated as issued on February 10, 2003 for the
historical net monetary liability of the Company before
recapitalization, RMB 133.
F-6
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
3. EARNINGS (LOSS) PER SHARE (Continued)
Diluted earnings (loss) per share is computed based upon the weighted
average number of shares of common stock and dilutive common stock equivalents
outstanding during the periods presented. The diluted earnings (loss) per share
computations also include the dilutive impact of options to purchase common
stock which were outstanding during the period calculated by the "treasury
stock" method, unvested stock grants and other awards to officers and employees
issued in conjunction with EI Plan and PS Plan as described in Note 12 below.
During the second quarter of fiscal year 2003, the options' exercise
prices were greater than the average market price of the common shares and,
therefore, the effect of employee stock options is anti-dilutive as to earnings
(loss) per share. The Company had no common equivalent shares with a dilutive
effect for any period presented, therefore basic and diluted earnings (loss) per
share are the same.
4. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) and its components are as follows:
For six months ended June 30,
----------------------------------------
2002 2003 2003
RMB RMB USD
Net income (loss) 17,901 (7,722) (935)
Other comprehensive (loss) income:
Net unrealizable (loss) income on marketable securities (280) 34 4
----------- ---------- ----------
Total comprehensive income (loss) 17,621 (7,688) (931)
=========== ========== ==========
As of December 31, 2002 and June 30, 2003, the component of accumulated
other comprehensive income (loss) is accumulated net unrealizable loss on
marketable securities.
5. STOCKHOLDERS' EQUITY
As of December 31, 2002, the authorized capital of the Company is
USD200 divided into 5,000,000 shares of common stock, par value US dollar 0.04
par value, with one vote for each share.
On April 10, 2003, the Company amended and restated its Articles of
Incorporation to authorize 125,000,000 shares of common stock and 2,500,000
shares of preferred stock.
On May 12, 2003, the board of directors of the Company approved and
declared a one-for-four reverse split of the Company's common stock, thereby
decreasing the number of issued and outstanding shares and increasing the par
value of each share. The number of common shares and per-share amounts shown in
these financial statements has been retroactively restated to reflect the
reverse split. The reverse stock split becomes effective on June 2, 2003.
F-7
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
5. STOCKHOLDERS' EQUITY (continued)
On May 14, 2003, 3,941,358 restricted share of common stock of the
Company, at USD1.92 per share, were issued for the acquisition of 100% interest
in LPI. The excess of consideration of RMB 21,308 over the net carrying value of
LPI was treated as dividend to the common control owner, Mr. Tsui Kit. See Note
6 for further discussion of LPI acquisition activities.
As described in Note 12 below, on May 21, 2003, under Equity Incentive
Plan 2003 ("EI Plan"), non-restricted stock-based awards of 1,848,750 shares of
the common stock of the Company was made to the Company's employees and external
consultants for a value of RMB 30,351 and RMB 36,256 respectively at the date of
the grant.
As described in Note 6 below, on June 10, 2003, the Company issued
665,860 restricted shares of common stock of the Company, for a value of
USD2,663, to acquire an additional 4.2372% interest in a subsidiary, Shenzhen
Wonderland Communication Science and Technology Company Limited ("Wondial").
As described in Note 12, during the second quarter of fiscal year 2003,
the principal stockholder of the Company, Mr. Tsui Kit, established a stock plan
("PS Plan") to grant restricted stock-based awards of 4,820,354 common stocks of
the Company to the Company's employees and his business associates, which are
suppliers and customers of the Company, for a value of Rmb190,456 and RMB 9,275
respectively at the date of the grant.
6. BUSINESS COMBINATION
The following combinations occurred during the second quarter of the
fiscal year 2003:
a) Merger under common control
On May 14, 2003, the Company acquired all issued and outstanding shares
of LPI, a company incorporated in British Virgin Islands on September 19, 2000,
from Mr. Tsui Kit, who is the majority stockholder of the Company as well as the
Chief Executive Officer and a director of the Company. By acquiring the capital
stock of LPI, the Company becomes the beneficial owner of LPI's approximately
72.83% interest in Wuhan Lixing Power Sources Company Limited ("WLPS"), a
leading lithium and lithium-ion battery manufacturer in PRC. Accordingly, the
Company has included the results of LPI in its combined results of operations as
if the acquisition had occurred as of the beginning the periods presented. The
acquisition of LPI is intended to enhance the Company's combined competitive
position in both telephone and battery markets in PRC, while strengthening its
R&D teams to achieve significant synergies and economies of scale and improve
results of the combined operations.
The consideration for the acquisition was 3,941,358 restricted shares
of common stock of the Company, based on a share price of USD1.92 per
share and cash of USD7,662, which shall be in the form of a promissory
note payable in cash or common stock of the Company. As of June 30,
2003, the form for settling the USD7,662 has not been determined, which
will be at the discretion of the Company, and this obligation to Mr.
Tsui Kit has not been accounted for in these condensed combined
financial statements. (the announcement date of the acquisition).
F-8
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
6. BUSINESS COMBINATION (Continued)
a) Merger under common control (Continued)
Since the Company acquires shares in LPI from its controlling
stockholder, Mr. Tsui Kit, the transaction was considered a transfer
among companies under common control. The method of accounting for such
transfer of equity interests was similar to pooling of interest method.
Consistent with the provisions of Accounting Principle Board Opinion 16
" Business Combination", Statement of Financial Accounting Standards
No. 141 "Business Combination" indicates that the assets and
liabilities transferred in such transaction should be accounted for at
existing carrying amounts. Any difference between considerations paid
for the assets acquired and the existing carrying amounts of such
assets to the controlling stockholder would be recorded as a dividend
or a capital contribution, as appropriate. Accordingly, the difference
between the consideration (the agreed price of USD1.92 per share of
3,941,358 shares of common stock of the Company and the net carrying
value of 100% interest in LPI (RMB 42,381) was treated as dividend (RMB
21,308) to the controlling stockholder of both companies (i.e., the
Company and LPI), Mr. Tsui Kit.
b) Purchase acquisition
On June 10, 2003, the Company's ownership in Wondial increased from
68.7288% to 72.966%, as a result of the Company acquiring 4,000,000
outstanding shares of Wondial's common stock from a third party. The
Company issued 665,860 restricted shares of common stock of the Company,
for a value of USD2,663, which was based on closing market price of USD 4
on March 13, 2003, the date of acquisition agreement, and recorded a
premium in excess of fair value of net assets of Wondial of RMB 13,965. The
changes in the carrying amount of goodwill for the six months period ended
June30, 2003 are as follows:
Communication Battery and
terminal related
products products Total
RMB RMB RMB
Balance as of January 1, 2003 -- 591 591
Goodwill acquired during the period 13,965 -- 13,965
------ ------ ------
Balance as of June 30, 2003 13,965 591 14,556
====== ====== ======
In accordance with SFAS No. 142, goodwill is required to be tested for
impairment at the reporting unit, which is defined as a company's operating
segment or one level below the operating segment. For the purposes of
applying SFAS No. 142, the Company has assigned the goodwill to Wondial as
a whole, which comprises of only one reporting segment of communication
terminal products, and tested for impairment using two-step process.
The first step is to identify a potential impairment, and the second
step measures the amount of the impairment loss, if any. Goodwill is deemed to
be impaired if the carrying amount of a reporting unit exceeds its estimated
fair value. The estimates of future cash flows, based on reasonable and
supportable assumptions
F-9
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
and projections, require management's judgment. Any changes in key assumptions
about the Company's businesses and their prospects, or changes in market
conditions, could result in an impairment change. No impairment loss was
recognized as of June 30, 2003.
6. BUSINESS COMBINATION (Continued)
The additional interests of 4.2372% Wondial, as described above, was
held by a wholly-owned subsidiary of the Company, Sunbest Industrial
Limited ("SIL"), a limited liability company incorporated in British
Virgin Island on February 3, 2003. SIL has authorized and outstanding
common stock of 50,000 shares and 1 share of United States one dollar
par value each respectively. The outstanding common stock was issued to
the Company on March 10, 2003. SIL has had no operation since its
incorporation up to June 10, 2003 and is used as an investment holding
company of the 4.2372% interest in Wondial.
7. MARKETABLE SECURITIES
The aggregate cost, gross unrealized gain and losses and fair value
pertaining to available-for-sales securities are as follows:
December 31, June 30,
----------------- ------------------------
2002 2003 2003
RMB RMB USD
Cost 12,971 13,036 1,577
Gross unrealized gain - 34 4
Gross unrealized losses (368) (368) (45)
----------------- ---------- ----------
Fair value 12,603 12,702 1,536
================= ========== ==========
8. INVENTORIES
Inventories comprise the follows:
December 31, June 30,
--------------- --------------------------
2002 2003 2003
RMB RMB USD
Raw materials 25,258 21,734 2,629
Work-in-progress 5,838 14,335 1,734
Finished goods 5,690 16,980 2,054
--------------- ----------- -----------
36,786 53,049 6,417
=============== =========== ===========
F-10
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
9. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment is summarized as follows:
Estimated useful life
(in years) December 31, June 30,
---------------- -------------------------
2002 2003 2003
RMB RMB USD
Buildings 30 - 35 43,575 47,691 5,769
Moulds 3 - 5 18,913 16,544 2,001
Plant and machinery 5 - 10 62,244 59,355 7,180
Electronic equipment 5 13,567 13,998 1,693
Motor vehicles 5 - 8 7,568 7,673 928
Construction in progress - 305 - -
---------------- ----------- ----------
146,172 145,261 17,571
Accumulated depreciation (52,707) (60,414) (7,308)
---------------- ----------- ----------
93,465 84,847 10,263
================ =========== ==========
10. BANKING FACILITIES
As of December 31, 2002 and June 30, 2003, the Group is still in
negotiations with a banker to further extend its outstanding bank borrowings of
RMB 46,000 which have been already been falling due since last fiscal year 2002.
The Group does not anticipate that future borrowings will be limited. There are
no significant commitment fess or requirements for compensating balances
associated with any lines of credit. The Group has paid bank interests on
schedule and believes that the outstanding bank borrowings will be extended in
the near future.
11. TAXATION
The Company and its subsidiaries are subject to income taxes on an
entity basis on income arising in or derived from the tax jurisdictions
in which each entity is domiciled.
As of December 31, 2002, the Company had a net operating loss
carry-forward for income tax reporting purposes of approximately USD
475 that might be offset against future taxable income. Current tax
laws limit the amount of loss available to be offset against future
taxable income when a substantial change in ownership occurs.
Therefore, following the recapitalization as mentioned before, the
amount available to offset future taxable income might be limited. No
tax benefit has been reported in the financial statements, because the
Company believes there is more likely than not the carry-forwards will
be limited. Accordingly, the potential tax benefits of the loss
carry-forwards are offset by a valuation allowance of the same amount.
No provision for withholding or United States federal or state income taxes
or tax benefits on the undistributed earnings and/or losses of the
Company's subsidiaries has been provided as the earnings of these
subsidiaries, in the opinion of the management, will be reinvested
indefinitely. Determination of the
F-11
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
amount of unrecognized deferred taxes on these earnings is not
practical, however, unrecognized foreign tax credits would be available
to reduce a portion of the tax liability.
F-12
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
11. TAXATION (continued)
Among the Company's subsidiaries, BFL and LPI, are not liable for
income taxes. The PRC subsidiaries comprise a 95% and 51.5% held
sino-foreign equity joint ventures, 72.966% and 72.84% incorporated
limited companies, Wondial and WLPS respectively and a 90% company with
limited liabilities. The PRC operating subsidiaries are subject to
income taxes at a rate of 15% and the sino-foreign equity joint
ventures and Wondial are entitled to be exempted from income tax for
two years starting from the year profits are first made, followed by a
50% exemption for the next three to eight years.
During the first quarter of fiscal year 2003, the tax holiday in
respect of the exemption of value added tax for any products produced
and sold within the Shenzhen Special Economic Zone of PRC has been
abolished. As a result, Wondial incurred an additional value added tax
payable RMB 2,126 as of June 30, 2003.
12. STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but
does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the
intrinsic-value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. Accordingly, compensation cost for stock-based
compensation is measured as the excess, if any, of the market price of
our common stock at the date of grant over an amount that must be paid
to acquire the stock. Any deferred compensation is recognized on a
graded vesting method.
During the second quarter of fiscal year 2003, the Company has granted
various stock options and stock-based awards under (1) Equity Inventive
Plan 2003 ("EI Plan") and (2) stock plans established by the principal
stockholder of the Company, Mr. Tsui ("PS Plan") which are described
below.
(1) EI Plan
EI Plan was approved by the Company's board of directors and
stockholders on February 28, 2003 and April 7, 2003 respectively. EI
Plan is intended to provide incentives to attract, retain and motivate
both eligible employees and directors of the Company, as well as
consultants, advisors and independent contractors who provide valuable
services to the Company.
Initially, 3,750,000 shares of the Company's common stock are
reserved for issuance under EI Plan. Under EI Plan, awards may
consist of grants of options to purchase our common stock
(either Incentive Stock Options (for eligible persons) or
Non-Qualified Stock Options, as each is defined in the
Internal Revenue Code), grants of restricted common stock, or
grants of unrestricted common stock.
F-13
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
12. STOCK-BASED COMPENSATION (Continued)
a) Stock options
Stock options under EI Plan have been granted to officers, other
employees and directors to purchase shares of common stock at or above 85% of
the market price of our common stock at the date of issuance. Generally, these
options, whether granted from the current plans, become exercisable over
staggered periods, but expire after 10 years from the date of the grant. On May
13, 2003, 425,000 and 125,000 unrestricted stock options were issued to
directors of the Company and a non-employee respectively.
As described above, the Company adopted the disclosure requirements of
SFAS No. 123, but elected to continue to measure compensation expense
in relation to options granted to employees in accordance with APB No.
25. Accordingly, no compensation expense is recorded of 425,000 stock
option granted to employees because the exercise price of the Company's
stock options is equal to or greater than the market price of the
underlying stock on the date of grant. Had compensation expense been
determined based on the estimated fair value of options granted in the
second quarter of fiscal 2003, consistent with the methodology in SFAS
No. 123, net income (loss) and earnings (loss) per share would have
been reduced (added) as follows:
For three months ended For six months
June 30, ended June 30,
(In thousand, except per share amount)
2002 2003 2002 2003 2003
RMB RMB RMB RMB USD
Net income (loss):
As reported 12,118 (15,122) 17,902 (7,722) (935)
Total stock-based compensation expense - (39) - (39) (4)
----------- ---------- ---------- ---------- --------
Pro forma 12,118 (15,161) 17,902 (7,761) (939)
=========== ========== ========== ========== ========
Basic net income (loss) per share
As reported 0.79 (0.89) 1.17 (0.48) (0.06)
=========== ========== ========== ========== ========
Pro forma 0.79 (0.89) 1.17 (0.48) (0.06)
=========== ========== ========== ========== ========
The options granted had a weighted average "fair value" per share on
date of grant of USD4.16. For purposes of pro forma disclosure, the estimated
fair value of the options is amortized to expense over the options' vesting
periods, i.e., 5 years as prescribed under EI Plan. Because the determination of
the fair value of all options granted includes an expected volatility factor,
the above pro forma disclosures are not representative of pro forma effects for
future years. The fair value of the option grant is estimated on the date of the
grant using the Black-Scholes option pricing model, assuming no dividends and
the following weighted average assumptions used for grants in the second quarter
of the fiscal year 2003:
Risk-free interest rate 4.61%
Expected volatility 99.14%
Contractual life 10 years
F-14
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
12. STOCK-BASED COMPENSATION (Continued)
a) Stock options (Continued)
On May 13, 2003, 125,000 stock options were granted to non-employee for her
past service. Consistent with the methodology in SFAS No. 123, the fair
value of stock option, RMB 4,312, was expensed on the date of grant. The
fair value of the stock option granted is estimated on the date of the
grant using the Black-Scholes option pricing model, assuming no dividends
and the weighted average assumptions described above.
Information concerning options issued under EI Plan of the Company in
the second quarter of fiscal year 2003 is presented in the following
table:
Number of Weighted Average
Options Exercise Price
--------------- ------------------
Outstanding at beginning of period - -
Stock option granted 550,000 5.6
Exercised - -
Cancelled - -
---------------
Outstanding at end of period 550,000
===============
b) Stock-based awards
On May 21, 2003, under EI Plan, stock-based awards of 732,500 and 1,116,250
shares of unrestricted common stock of the Company were made to employees
and various external consultants and advisors of the Company respectively.
i) Stock-based awards to employees
The Company applies the provisions of APB No. 25, in accounting for its
stock-based awards. 732,500 unrestricted stock awards, issued at a market
value of RMB 30,351, were granted to employees with total vesting periods
of up to five years as prescribed in EI Plan. Recipients are not required
to provide consideration to the Company other than rendering service. The
awards are recorded at the market value on the date of grant. Initially,
the total market value of the shares is treated as unearned compensation
and is charged to expense over the respective vesting period.
ii) Stock-based awards to external consultants and advisors
According to SFAS No. 123, all equity instruments transferred to non-employees
in exchange for goods and services are measured at fair value. Fair value can be
measured based on either the fair value of the goods or services received or the
fair value of the equity instrument -- whichever is more reliably determinable
(EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services").
The fair value of the stock-based awards was then based on fair value of the
goods or services received
12. STOCK-BASED COMPENSATION (Continued)
iii)Stock-based awards to external consultants and advisors (continued)
F-15
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
As with APB Opinion No. 25, compensation expense is recognized by
amortizing total compensation cost over the periods in which the related
employee services are rendered. 361,250 out of total stock-based awards was
granted to an external consultant for past service and all of the cost, RMB
4,972, is expensed in the second quarter of fiscal year 2003. The fair
value of the remaining stock-based awards of 755,000 unrestricted common
stocks, RMB 31,284, was recognized over a period of three years services
commencing from the date of grant.
(2) PS Plan
During the second quarter of fiscal year 2003, the principal stockholder of
the Company, Mr. Tsui Kit, granted stock-based awards to various parties,
including employees and business associates, to enhance or maintain the
value of his investment and the Company is implicitly benefit from the plan
by retention of, and possibly improved performance by, the employee and
maintenance of business relationship with various business associates of
Mr. Tsui Kit and the Company.
In accordance with the AICPA Accounting Interpretations of APB No. 25,
Stock Plans Established by a Principal Stockholder, a company should
account for plans, if they have characteristics otherwise established
similar to compensatory plans adopted by the company, that are established
or financed by a principal stockholder. The economic substance of this type
of plan is substantially the same for the company and the employee, whether
the plan is adopted by the company or a principal stockholder. This type of
plan should be treated as a contribution to capital by the principal
stockholder with the offsetting charge accounted for in the same manner as
compensatory plans adopted by the company. The fair value of the
share-based awards and stock option, as described below, will be the total
compensation cost, which will be expensed over the vesting period.
Stock-based awards
On June 13, 2003, under PS Plan, stock-based awards of 4,596,500 and
223,854 shares of restricted common stock of the Company were made to
Company's employees and various business associates of Mr. Tsui Kit
respectively. Recipients are not required to provide consideration to the
Company but the stocks are restricted to trade for two years.
i) Stock-based awards to employees
Stock-based awards to employees under PS Plan have been granted to
officers, other employees and directors who have been employed with the
Company and its subsidiaries at least three years or above and were
selected by the president of Company to grant the awards. Recipients are
required to rendering service for three years from the date of grant.
The Company applies the provisions of APB No. 25, in accounting for its
stock-based awards. On June 13, 2003, 4,596,500 restricted stock-based
awards, issued at a market value of Rmb 190,456 at the date of grant,
granted to employees of the Company. Initially, the total market value of
the shares is treated as unearned compensation and is charged to expense
over three years vesting period.
F-16
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
12. STOCK-BASED COMPENSATION (Continued)
(2) PS Plan (Continued)
ii) Stock-based awards to various related business parties of the
principal stockholder
Consistent with the methodology in SFAS No. 123 for equity instruments
transferred to non-employees, 223,854 stock-based awards granted to
various business associates, which are suppliers and customers of the
Company, at a value of Rmb 9,275, measured at the fair value of the
share-based award grant, were expensed in the second quarter of fiscal
year 2003. The fair value of the stock-based awards granted is
estimated on the date of the grant using the Black-Scholes option
pricing model, assuming no dividends and the weighted average
assumptions described in Note 12(1)(a) above.
The value of unearned compensation under EI Plan (Rmb 61,635) and PS
Plan (Rmb 190,456) are included as a separate component of
stockholders' equity. The total compensation expense recognized for
stock option under PS Plan and all stock-based awards were Rmb 4,312
and Rmb 14,243 respectively for the second quarter of fiscal year 2003.
13. SEGMENT INFORMATION
Effective in the second quarter of fiscal year 2003 after the
acquisition of LPI, the Company's operations are classified into three
reportable business segments: communication terminal products, mainly
corded and cordless telephone which are sold under the trademark,
Wondial (TM), battery testing equipment and battery products. The
Company's three reportable business segments are identified separately
based on fundamental differences in their operations. There are no
material intersegment sales.
F-17
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
13. SEGMENT INFORMATION (Continued)
Summarized below are the Company's segment sales and operating earnings
(loss) for the three months and six months ended June 30, 2002 and
2003:
For three months ended For six months
June 30, ended June 30,
2002 2003 2002 2003 2003
RMB RMB RMB RMB USD
Segment revenues
Communication terminal products 71,822 81,134 132,011 135,937 16,443
Battery testing equipment 17,879 16,892 27,424 33,748 4,082
Battery products 23,382 20,660 39,589 43,587 5,272
----------- ----------- ----------- ----------- --------
Segment totals 113,083 118,686 199,024 213,272 25,797
Rental income 2,040 240 4,080 480 58
Reconciling items (442) (11) (1,294) 96 12
----------- ----------- ----------- ----------- --------
Total combined 114,681 118,915 201,810 213,848 25,867
=========== =========== =========== =========== ========
Segment operating earnings (loss)
Communication terminal products 12,538 12,150 19,692 16,092 1,946
Battery testing equipment 3,836 4,098 4,052 8,256 999
Battery products 5,610 2,897 9,662 8,516 1,030
----------- ----------- ----------- ----------- --------
Segment totals 21,984 19,145 33,406 32,864 3,975
Recognized compensation expenses - (18,555) - (18,555) (2,244)
Reconciling items (743) (6,815) (1,575) (6,838) (828)
----------- ----------- ----------- ----------- --------
Total combined 21,241 (6,225) 31,831 (7,471) (903)
=========== =========== =========== =========== ========
There are no material changes in total assets of each segment since the
last fiscal year 2002.
14. COMMITMENTS
There was neither new operating lease agreement signed nor material
outstanding capital commitments since last fiscal year 2002.
F-18
PART 1 - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, this Quarterly Report on Form
10-Q contains forward-looking statements that involve risks and uncertainties
that could cause actual results to differ materially. Factors that might cause
such a difference include, but are not limited to, competitive pressures,
changing economic conditions in China which would negatively impact the
availability of money for discretionary spending, the loss of the services of
Dr. Kit Tsui, our Chief Executive Officer, those factors discussed below and
other factors, some of which will be outside of our control. When used in this
report, the words "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," and similar expressions are generally intended to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which reflect our opinions only as of the date of
this Quarterly Report. We undertake no obligation to publicly release any
revisions to the forward-looking statements after the date of this document. You
should carefully review the risk factors described in other documents we file
from time to time with the SEC, including the Annual Report on Form 10-K for the
fiscal year ended December 31, 2002 and the other Quarterly Reports on Form 10-Q
filed by us in our fiscal year 2003, which runs from January 1, 2003 to December
31, 2003.
The following discussion and analysis should be read in conjunction
with our financial statements and the accompanying notes thereto and is
qualified in its entirety by the foregoing and by more detailed financial
information appearing elsewhere in this Quarterly Report on Form 10-Q. See "Item
1. Financial Information."
When the words "we", "our" or "the Company" are used in this Quarterly
Report on Form 10-Q, they refer to Industries International, Incorporated and
its subsidiaries, which include the following:
Broad Faith Limited. ("BFL"), a holding company;
Shenzhen Kexuntong Industrial Co., Ltd. ("SKI"), a sino-foreign joint
venture company established in China that is owned 95% by Industries
International, Incorporated, and which, in turn, owns 72.966% of Shenzhen
Wonderland Communication Science and Technology Co., Ltd. ("Wonderland"), a
limited liability company; and
Li Sun Power International Limited ("LPI"), which was acquired by the
Company on May 14, 2003 through the purchase of all of LPI's outstanding stock.
LPI holds a 72.83% interest in Wuhan Lixing Power Sources Company Limited
("WLPS"), a leading lithium and lithium-ion battery manufacturer, which, in
turn, owns (i) 70.7% of Wuhan Lixing (Torch) Power Sources Company
Limited("WLPT"), a sino-foreign joint venture company and (ii) 90% of Shenzhen
Chuang Lixing Power Sources Company Limited ("SCLP"), a limited liability
company.
The Company and all its subsidiaries, with the exception of BFL and
LPI, are located in the People's Republic of China.
On May 12, 2003, the Company's board of directors approved and declared
a one-for-four reverse split of the Company's common stock, thereby decreasing
the number of issued and outstanding shares and increasing the par value of each
share.
On May 14, 2003, 3,941,358 post-split shares of the Company's
restricted common stock, valued at USD$1.92 per share, were issued for the
acquisition of a 100% interest in LPI.
1
Because many of the telephones manufactured by the Company are
cordless and require batteries to operate, management believes that the
acquisition of LPI will enhance the Company's competitive position in both the
telephone and the battery markets in the People's Republic of China. Management
also believes that the acquisition will strengthen its research and development
teams by encouraging the development of synergies and economies of scale,
thereby improving results of the combined operations.
Results of Operations
Under accounting principles generally accepted in the United States,
the Company has included the results of LPI in its combined results of
operations as if the acquisition had occurred as of the beginning the periods
presented.
During the quarter ended June 30, 2003, the Company granted various
stock options and stock-based awards under its 2003 Equity Inventive Plan ("EI
Plan") and a stock plan established by the principal stockholder of the Company,
Dr. Kit Tsui. ("PS Plan"). The total compensation expense recognized for stock
options under the PS Plan and all stock-based awards was $2,354,000. Due to our
use of stock-based compensation, our net income for the six months ended June
30, 2003 was approximately $(935,000).
The results of operations for the three-months and six-months ended
June 30, 2002 and 2003 are as follows.
For the three months ended June 30, For six months ended June 30
2002 2003 2002 2003
USD USD % of change USD USD % of change
Operating revenues
Net sales 13,625 14,355 5.36% 23,917 25,809 7.91%
Rental income 247 29 (88.24%) 494 58 (88.25%)
------------ -------- -------- --------
Total operating revenues 13,872 14,384 3.69% 24,411 25,867 5.96%
------------ -------- -------- --------
Operating expenses
Manufacturing and other costs of
sales 9,071 10,209 12.55% 16,423 18,224 10.97%
Sales and marketing 480 729 51.92% 1,034 1,269 22.70%
General and administrative 510 471 (7.59%) 1,046 929 (11.15%)
Research and development 327 456 39.43% 643 747 16.15%
Depreciation and amortization 539 664 23.05% 668 800 19.77%
Other operating costs and
expenses 8 2,277 28418.18% 16 2,428 14659.38%
------------ -------- -------- --------
Total operating expenses 10,936 14,806 35.39% 19,830 24,397 23.03%
------------ -------- -------- --------
Operating income (loss) 2,936 (422) (114.39%) 4,581 1,470 (67.91%)
Interest expenses (456) (308) (32.32%) (905) (571) (36.88%)
Other income, net 89 (22) (125.07%) 174 4 (97.71%)
------------ -------- -------- --------
Income (loss) before income taxes 2,569 (753) (129.31%) 3,850 903 (76.55%)
and minority interest
Provision for income taxes (230) (222) (3.21%) (332) (397) 19.70%
------------ -------- -------- --------
Income (loss) before minority
interest 2,340 (975) (141.69%) 3,519 506 (85.62)%
Minority interest in income of
combined subsidiaries (874) (854) (2.28%) (1,353) (1,441) 6.48%
------------ -------- -------- --------
Net income (loss) 1,466 (1,829) (224.79%) 2,165 (935) (143.18%)
============ ======== ======== ========
2
Three Months Ended June 30, 2003 as compared to the Three Months Ended June 30,
2002
Revenues
During the quarter ended June 30, 2003, we recorded approximately
$14,384,000 in operating revenues as compared to $13,872,000 in operating
revenues during the quarter ended June 30, 2002, an increase of 3.69%. The
increase in our revenues resulted primarily from increased sales, which we
experienced as a result of increasing our sales network and promoting our new
products. Our revenues were derived principally from sales of our products,
although we also recorded $29,000 in rental income from equipment leases we
entered into with certain of our OEM partners, a decrease of $218,000 from the
quarter ended June 30, 2002 during which we recorded $247,000 in rental income.
The decrease in rental income resulted because we sold the equipment.
Operating Expenses
During the quarter ended June 30, 2003, our operating expenses
increased by $3,870,000 to $14,806,000 as compared to operating expenses of
$10,936,000 during the quarter ended June 30, 2003, an increase of 35.39%.
Manufacturing and other costs of sales rose by $1,138,000 to $10,209,000 during
the quarter ended June 30, 2003 as compared to $9,071,000 during the quarter
ended June 30, 2002, an increase of approximately 12.55%. The increase in our
costs of sales resulted from the increase in sales. During the quarter ended
June 30, 2003, we also had other operating costs and expenses of approximately
$1,723,000 as compared to no such expenses during the quarter ended June 30,
2002. These expenses related primarily to our use of stock or stock options to
pay consultants and employees during the quarter ended June 30, 2003. As a
result of the increase in costs of sales and the expense related to our use of
stock or stock options as compensation, we experienced an operating loss in the
amount of $(422,000) for the quarter ended June 30, 2003 as compared to
operating income of $2,936,000 for the quarter ended June 30, 2002 and a net
loss of $(1,829,000) for the quarter ended June 30, 2003 as compared to net
income of $1,466,000 for the quarter ended June 30, 2002.
Our general and administrative expenses totaled approximately $471,000
for the quarter ended June 30, 2003 as compared to $510,000 for the quarter
ended June 30, 2002, a decrease of $39,000. General and administrative expenses
consist of salaries, employee benefits, travel and entertainment expenses and
office expenses. The decrease in general and administrative expenses resulted
primarily from a decrease in office expenses and travel and entertainment
expenses.
During the quarter ended June 30, 2003 we spent approximately $456,000
in research and development costs as compared to $327,000 for the quarter ended
June 30, 2002. This increase in research and development costs related to the
development of our 2.4 GHz cordless telephone and our new Li-ion battery as well
as for technical upgrades for our original products. During the quarter ended
June 30, 2003 we also granted incentives to engineers who invented new products.
3
During the quarter ended June 30, 2003, we spent $729,000 on sales and
marketing expenses as compared to $480,000 spent on sales and marketing expenses
during the quarter ended June 30, 2002, an increase of 51.92%. Sales and
marketing expenses consisted of advertising costs and salary and benefits for
our sales staff, which we increased. We increased our sales staff because we
believe that the related increase in sales will offset the related employment
costs.
On May 13, 2003, we granted stock options to purchase a total of
550,000 shares of our common stock to directors and others. These options were
measured at their fair value of $4.16 using the Black-Scholes option pricing
model. The unearned compensation costs are amortized to compensation expense
over their respective vesting periods and the compensation costs for past
services were fully charged at the date of grant. Total compensation expense
recognized was approximately $2,354,000, which included awards granted under
both the EI and the PS Plans, of which approximately $635,000 was amortization
of unearned compensation cost for the quarter ended June 30, 2003.
On May 21, 2003, pursuant to the EI Plan, we granted awards of common
stock to our employees and consultants. 1,116,250 shares were awarded to various
consultants for services having a total value of $4,385,000 and 732,500 shares
were granted to employees for services having a total value of $3,662,500.
Interest Expense and Other Income, Net
Interest expense and other income, net totaled approximately $(308,000)
and $(22,000), respectively, for the quarter ended June 30, 2003 as compared to
$(456,000) and $89,000, respectively, for the quarter ended June 30, 2002.
Interest expense related to interest paid on our bank loans. Other income, net
is comprised of interest on our bank deposits. We repaid a loan of $3,629,000
during the second quarter of the fiscal year ended December 31, 2002, decreasing
our interest expense.
Minority Interest
During the quarter ended June 30, 2003 we recorded $(854,000) of income
attributable to our minority interests in SKI, Wonderland, WLPS, WLTP and SCLP.
Our subsidiaries or we own 95%, 72.97%, 72.84%, 70.7% and 90% respectively, of
these five entities. During the quarter ended June 30, 2002, we recorded
$(874,000) of income attributable to these interests. The decrease in income
resulted from a decline in operating income earned during the quarter ended June
30, 2003 as compared to the quarter ended June 30, 2002.
Six Months Ended June 30, 2003 as compared to the Six Months Ended June 30, 2002
Revenues
During the six month period ended June 30, 2003, we recorded
approximately $25,867,000 in operating revenues as compared to $24,411,000 in
operating revenues during the six month period ended June 30, 2002, an increase
of 5.96%. The increase in our revenues resulted primarily from increased sales,
which we experienced as a result of increasing our sales network and promoting
our new products. Our revenues were derived principally from sales of our
products, although we also recorded $58,000 in rental income from equipment
leases we entered into with certain of our OEM partners, a decrease of $436,000
from the six month period ended June 30, 2002, during which we recorded $494,000
in rental income. The decrease in rental income resulted from our sale of the
equipment.
4
Operating Expenses
During the six month period ended June 30, 2003, our operating expenses
increased by $4,567,000, to $24,397,000 as compared to operating expenses of
$19,830,000 during the six month period ended June 30, 2003, an increase of
23.03%. Manufacturing and other costs of sales rose by $1,801,000 to $18,224,000
during the six month period ended June 30, 2003 as compared to $16,423,000
during the six month period ended June 30, 2002, an increase of approximately
10.97%. The increase in our costs of sales resulted from our increased sales.
During the six month period ended June 30, 2003, we also had other operating
costs and expenses of $2,428,000 as compared to other operating costs and
expensed of $16,000 during the six month period ended June 30, 2002. These
expenses related primarily to our use of stock or stock options to pay
consultants and employees during the six month period ended June 30, 2003. The
increase in costs of sales and the expense related to our use of stock or stock
options as compensation had the effect of reducing our operating income. Our
operating income was $1,470,000 during the six month period ended June 30, 2003
as compared to operating income of $4,581,000 for the six month period ended
June 30, 2002. We experienced a net loss of $(935,000) for the six month period
ended June 30, 2003 as compared to net income of $2,165,000 for the six month
period ended June 30, 2002. In addition, our net income was adversely affected
during the six month period ended June 30, 2003 by the decision of the
government of Shenzhen to suspend a preferential tax policy that resulted in our
payment of approximately $258,000 in Value Added Tax.
Our general and administrative expenses totaled approximately $929,000
for the six month period ended June 30, 2003 as compared to $1,046,000 for the
six month period ended June 30, 2002, a decrease of $117,000. General and
administrative expenses consist of salaries, employee benefits, travel and
entertainment expenses and office expenses. The decrease in general and
administrative expenses resulted from a decrease in office expenses and travel
and entertainment expenses.
During the six month period ended June 30, 2003 we spent approximately
$747,000 in research and development costs as compared to $643,000 for the six
month period ended June 30, 2002. This increase in research and development
costs related to the development of our 2.4 GHz cordless telephone and our new
Li-ion battery as well as for technical upgrades for our original products. We
expect our research and development costs to continue to be substantial as we
intend to expand our research and development efforts. During the six month
period ended June 30, 2003 we also granted incentives to engineers who invented
new products.
During the six month period ended June 30, 2003, we spent $1,269,000 on
sales and marketing expenses as compared to $1,034,000 spent on sales and
marketing expenses during the six month period ended June 30, 2002, an increase
of 22.70%. Sales and marketing expenses consisted of advertising costs and
salary and benefits for our sales staff, which we increased. We increased our
sales staff because we believe that the related increase in sales will offset
the related employment costs.
On May 13, 2003, we granted stock options to purchase a total of
550,000 shares of our common stock to directors and others. These options were
measured at their fair value of $4.16 using the Black-Scholes option pricing
model. The unearned compensation costs are amortized to compensation expense
over their respective vesting periods and the compensation costs for past
services were fully charged at the date of grant. Total compensation expense
recognized was approximately $5,388,000, of which approximately $635,000 was
amortization of unearned compensation cost.
On May 21, 2003, pursuant to the EI Plan, we granted awards of common
stock to our employees and consultants. 1,116,250 shares were awarded to various
consultants for services having a total value of $4,385,000 and 732,500 shares
were granted to the employees for services having a total value of $3,662,500.
5
Our Chief Executive Officer, Dr. Kit Tsui, transferred to our employees,
suppliers and customers a total of 4,820,353 shares of his restricted common
stock. Of this amount, 4,596,500 shares were transferred to our employees and
the remaining shares were transferred to suppliers and customers. The per share
value of the common stock on the date of transfer was $5.
Interest Expense and Other Income, Net
Interest expense and other income, net totaled approximately $(571,000)
and $4,000, respectively, for the six-month period ended June 30, 2003 as
compared to $(905,000) and $174,000, respectively, for the six month period
ended June 30, 2002. Interest expense related to interest paid on our bank
loans. Other income, net is comprised of interest on our bank deposits. We
repaid a loan of $3,629,000 during the second quarter of the fiscal year ended
December 31, 2002, decreasing our interest expense.
Minority Interest
During the six month period ended June 30, 2003 we recorded
$(1,441,000) of income attributable to our minority interests in SKI,
Wonderland, WLPS, WLTP and SCLP. Our subsidiaries or we own 95%, 72.97%, 72.84%,
70.7% and 95% respectively, of these five entities. During the six month period
ended June 30, 2002, we recorded $(1,353,000) of income attributable to these
interests. The decrease in income resulted from a decline in operating income
earned during the six month period ended June 30, 2003 as compared to the
quarter ended June 30, 2002.
Liquidity and Capital Resources
To date, we have financed our operations with cash from our operating
activities and bank loans totaling approximately $20,808,000. Our bank line of
credit, totaling approximately $5,560,000 was due to be paid on December 31,
2002. Of these loans, $725,000 has been extended on new terms. We are currently
in negotiations with the bank to extend our line of credit. During these
negotiations, we have continued to make the monthly payments required pursuant
to our agreement with the bank. The bank has not made a demand that the line of
credit be repaid. We expect to successfully renegotiate the terms of our line of
credit.
Other than negotiations relating to the extension of our line of
credit, we know of no demands, commitments, events or uncertainties that will
result in or that are reasonably likely to result in our liquidity increasing or
decreasing in any material way.
Cash and cash equivalents for the six months ended June 30, 2003
totaled approximately $20,925,000 and were used to fund operations.
We have invested in marketable securities. During the quarter ended
June 30, 2003, the value of our marketable securities increased by $12,000, from
$1,524,000 on December 31, 2002 to $1,536,000. Our marketable securities
represent approximately 2.58% of our current assets.
As of June 30, 2003, we had a current ratio of 1.64, net working
capital of $23.2 million and net equity of $17.7 million.
We have not made any material commitments for capital expenditures
since the end of our last fiscal year, December 31, 2002.
During the six month period ended June 30, 2003, our net cash and cash
equivalents increased by approximately $5,561,000, from approximately
$15,364,000 as of December 31, 2002 to $20,925,000 as of June 30, 2003, an
increase of approximately 36.20%. This increase was mainly attributable to the
acquisition of LPI, which provided us with $11,693,000 in cash.
6
Net cash provided by operating activities during the six months ended
June 30, 2003 totaled approximately $1,787,000. Our primary use of cash was for
the purchase of inventory and for the payment of the Value Added Tax that was
imposed as a result of the decision of the government of Shenzhen to suspend a
preferential tax policy.
Cash provided from financing activities for the six month period ended
June 30, 2003 totaled approximately $3,750,000, representing borrowings of
long-term debt.
We used cash to pay interest of approximately $425,000 during the six
month period ended June 30, 2003.
Financial Condition
Other than as described above under the section titled "Liquidity and
Capital Resources", on a recapitalization basis, there were no material changes
in financial condition from the end of the preceding fiscal year to June 30,
2003.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our combined financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The following discussion addresses our critical accounting policies,
which are those that require management's most difficult and subjective
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Revenue Recognition
Net sales represent the invoiced value of goods, net of value-added tax
("VAT"), returns and sales incentives. The Company, through its major
subsidiary, makes sales to distributors in first-tier distribution channels.
These distributors then arrange to sell products to second-tier distribution
channels or directly to consumers. The Company generally recognizes product
revenue when persuasive evidence of an arrangement exists, delivery has
occurred, fee is fixed or determinable, and collectibility is probable. The
Company's policy is to include handling costs incurred for finished goods, which
are not significant, in the sales and marketing expenses. The Company does not
accrue for warranty costs, sales returns and other allowances based on its
experience.
Stock-based compensation
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic-value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations. Accordingly, compensation cost for
stock-based compensation is measured as the excess, if any, of the market price
of our common stock at the date of grant over an amount that must be paid to
acquire the stock. Any deferred compensation is recognized on a graded vesting
method.
7
Goodwill on consolidation
Goodwill represents the excess of the cost of companies acquired over
the least fair value of their net assets at date of acquisition and is evaluated
at lease annually for impairment.
In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 requires that goodwill be tested for impairment using a
two-step process. The first step is to identify a potential impairment, and the
second step measures the amount of the impairment loss, if any. Goodwill is
deemed to be impaired if the carrying amount of a reporting unit exceeds its
estimated fair value. SFAS No. 142 requires that indefinite-lived intangible
assets be tested for impairment using a one-step process, which consists of a
comparison of the fair value to the carrying value of the intangible asset.
Intangible assets are deemed to be impaired if the net book value exceeds the
estimated fair value.
The estimates of future cash flows, based on reasonable and supportable
assumptions and projections, require management's judgment. Any changes in key
assumptions about the Company's businesses and their prospects, or changes in
market conditions, could result in an impairment change. No impairment loss was
recognized as of December 31, 2002.
PART 1 - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Our operations are located in China and most of our sales revenues are
earned in China, therefore we are not exposed to risks relating to fluctuating
currencies or exchange rates. As of June 30, 2003, our bank debt earned interest
at a fixed rate.
PART 1 - ITEM 4 CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
the end of the period covered by this report. The evaluation was undertaken in
consultation with the Company's accounting personnel. Based on that evaluation,
the Chief Executive Officer and the Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of their evaluation.
PART II - ITEM 1 LEGAL PROCEEDINGS
Not Applicable
8
PART II - ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 12, 2003, the board of directors approved and declared a
one-for-four reverse split of the Company's common stock, par value $0.01 per
share, for holders of record as of 5:00 pm (EST) on May 22, 2003. The reverse
stock split shall become effective on June 2, 2003 as of 5:00 pm (EST). The
reverse split decreased the number of shares of issued and outstanding common
stock and increased the par value.
On March 10, 2003 we entered into an agreement for the Sale and
Purchase of Shares in Li Sun Power International Limited. This transaction
closed on May 14, 2003. Pursuant to the agreement we entered into, we issued to
the stockholders of Li Sun Power International Limited 3,941,358 shares of our
restricted common stock having a value of $0.48 per share or $7,662,000 in
total. This transaction was exempt from registration under Regulation S of the
Securities Act of 1933.
On June 10, 2003 we increased our ownership in Wondial by issuing to
Sunbest Industrial Limited a total of 665,860 shares of our restricted common
stock in exchange for its 4,000,000 shares of Wondial common stock. The value of
the stock issued to Sunbest Industrial Limited was $4 per share or $2,663,000 in
total. This transaction was exempt from registration under Regulation S of the
Securities Act of 1933.
PART II - ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
PART II - ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II - ITEM 5 OTHER INFORMATION
Not Applicable
PART II - ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K
On April 22, 2003 the Company filed a report on Form 8-K which disclosed the
audited financial statements of Broad Faith Limited.
On April 24, 2003 the Company filed a report on Form 8-K to disclose the
issuance of a press release relating to the financial results of Broad Faith
Limited for the period ended December 31, 2002.
On May 7, 2003 the Company filed a report on Form 8-K to disclose a change of
auditors from Randy Simpson, CPA, P.C. to Moores Rowland, Chartered Accountants.
On May 13, 2003 the Company filed a report on Form 8-K to disclose the
postponement of the closing date for the purchase of stock in Li Sun Power
International Limited.
On May 16, 2003 the Company filed a report on Form 8-K to announce a 4-for-1
reverse stock split declared on May 12, 2003 and effective on June 2, 2003.
On May 19, 2003, the Company filed a report on Form 8-K which disclosed the
Company's unaudited pro forma condensed financial information, giving effect to
the acquisition as a purchase of Li Sun Power International Limited by the
Company in accordance with Article 11 of Regulation S-X.
9
Exhibits
2. Amended and Restated Agreement and Plan of Share Exchange by and among
Broad Faith Limited, a British Virgin Islands Corporation, and the Sole
Stockholder of Broad Faith Limited on the one hand, and Industries
International, Inc., a Nevada corporation and Certain Stockholders of
Industries International, Inc., on the other hand dated February 10,
2003. (1)
3.1 Articles of Incorporation. (2)
3.2 By-laws, as amended. (2)
31.1 Certification pursuant to Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934. (3)
31.2 Certification pursuant to Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934. (3)
32. Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. (3)
------------------
(1) Incorporated by reference from the Company's Current Report on Form
8-K, as filed on February 12, 2003.
(2) Incorporated by reference from the Company's Annual Report on Form
10-KSB for the year ended December 31, 2002, as filed on April 14,
2003.
(3) Filed herewith.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated August 21, 2003
INDUSTRIES INTERNATIONAL, INCORPORATED
By: /s/ Kit Tsui
----------------------------------------
Dr. Kit Tsui, Chief Executive Officer
INDUSTRIES INTERNATIONAL, INCORPORATED
By: /s/ Guoqiong Yu
----------------------------------------
Guoqiong Yu, Chief Financial Officer
11