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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2004
-----------------------
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _______________ to _______________
Commission file number: 000-32053
Industries International, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 87-0522115
- ------------------------------------- -----------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4/F Wondial Building, Keji South 6 Road
Shenzhen High-Tech Industrial Park, Shennan Road
Shenzhen, China
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code 011-86-755-26520839
-----------------------
- 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 30,042,944 shares of common stock, par value $0.01 per
share, issued and outstanding as of March 31, 2004.
TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION..............................................1
Item 1. Financial Statements...............................................1
Condensed Combined Statements of Operations........................1
Condensed Combined Balance Sheets..................................2
Condensed Combined Statements of Changes in Stockholders'
Equity and Comprehensive Income / Loss..........................3
Condensed Combined Statements of Cash Flows........................4
Notes to Condensed Combined Financial Statements...................5
Item 2. Management Discussion and Analysis of Financial Condition
and Results of Operations......................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risks.......18
Item 4. Controls and Procedures...........................................18
PART II OTHER INFORMATION.................................................19
Item 1. Legal Proceedings.................................................19
Item 2. Changes in Securities and Use of Proceeds.........................19
Item 3. Defaults Upon Senior Securities...................................19
Item 4. Submission of Matters to a Vote of Security Holders...............19
Item 5. Other Information.................................................19
Item 6. Exhibits and Reports on Form 8-K..................................19
i
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(amount in thousands, except per share data) (Unaudited)
FOR THREE MONTHS ENDED MARCH 31,
2003 2004
USD USD
OPERATING REVENUES
Net sales 11,454 14,091
Rental income 29 97
---------- ----------
Total operating revenues 11,483 14,188
---------- ----------
OPERATING EXPENSES
Manufacturing and other costs of sales 8,015 10,174
Sales and marketing 540 467
General and administrative 457 668
Research and development 290 281
Depreciation and amortization 136 116
Other operating costs and expenses 150 1,988
---------- ----------
Total operating expenses 9,588 13,694
---------- ----------
OPERATING INCOME 1,895 494
Interest expenses (262) (208)
Other (expenses) income, net 27 46
---------- ----------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST 1,658 333
Provision for income taxes (174) (291)
---------- ----------
INCOME BEFORE MINORITY INTEREST 1,484 42
Minority interest in income of combined
subsidiaries (587) (567)
---------- ----------
NET INCOME (LOSS) 897 (525)
========== ==========
Earnings (loss) per share:
Basic weighted average number of common stock
outstanding 19,256 28,322
========== ==========
Basic net income (loss) per common stock 0.05 (0.02)
========== ==========
The accompanying notes are an integral part of these condensed combined
financial statements.
CONDENSED COMBINED BALANCE SHEETS
(amount in thousands, except per share data)
(Unaudited)
December 31, 2003 March 31, 2004
----------------- --------------
Note USD USD
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 32,607 33,897
Marketable securities 6 -- 715
Guaranteed investment contract 1,210 1,210
Accounts receivable, net 19,034 17,600
Due from related parties, director and
employees 1,821 6,168
Inventories 7 3,064 4,816
Prepaid expenses and other current
assets 2,274 1,870
---------- ----------
TOTAL CURRENT ASSETS 60,010 66,276
Goodwill 5 1,761 1,761
Property, plant and equipment, net 8 9,136 8,888
---------- ----------
TOTAL ASSETS 70,907 76,925
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Debts maturing within one year 11,795 11,795
Accounts payable - trade 7,142 7,808
Due to principal stockholder 7,840 7,945
Other payable 5,420 5,420
Tax payable 967 905
Accrued expenses and other accrued
liabilities 4,883 4,896
---------- ----------
TOTAL CURRENT LIABILITIES 38,047 38,769
---------- ----------
NON-CURRENT LIABILITIES
Long-term debts 2,419 2,419
---------- ----------
MINORITY INTERESTS IN COMBINED 10,878 9,660
SUBSIDIARIES
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock 4 1,102 1,204
Additional paid-in capital 18,750 25,139
Deferred stock compensation (12,500) (11,951)
Dedicated reserves 3,479 3,705
Retained earnings 8,732 8,616
Accumulated other comprehensive loss -- (636)
---------- ----------
Total stockholders' equity 19,563 26,077
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY 70,907 76,925
========== ==========
The accompanying notes are an integral part of these condensed combined
financial statements.
2
CONDENSED COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME / LOSS
(amount in thousands, except per share data)
(Unaudited)
COMMON STOCK
NUMBER ADDITIONAL
OF PAID-IN DEFERRED STOCK
SHARES AMOUNT CAPITAL COMPENSATION
----------- ----------- ----------- -----------
USD USD
BALANCE AT JANUARY 1, 2001 18,007,330 725 -- --
Comprehensive income:
Net income -- -- -- --
Other comprehensive loss
Net unrealizable loss on
marketable securities -- -- -- --
Total comprehensive income
Transfer to dedicated
reserves -- -- -- --
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2001 18,007,330 725 -- --
Comprehensive income:
Net income -- -- -- --
Other comprehensive loss
Net unrealizable loss on
marketable securities -- -- -- --
Total comprehensive income
Transfer to dedicated
reserves -- -- -- --
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2002 18,007,330 725 -- --
Comprehensive income:
Net income -- -- -- --
Other comprehensive loss
Realization of loss on
disposal of marketable
securities -- -- -- --
Total comprehensive loss
Transfer to dedicated
reserves -- -- -- --
Acquisition of net
liabilities of IDUL
(Note 4) 1,249,215 50 (66) --
Issuance of stock for
acquisition of minority
interest in subsidiary 665,860 27 2,643 --
Issuance of stock to
employee under Equity
Incentive Plan 2003 2,525,500 100 8,297 (8,397)
Issuance of stock to
non-employee under Equity
Incentive Plan 2003 5,013,385 200 1,453 --
Issuance of stock & stock
option under principal
stockholder plan -- -- 6,423 (5,301)
Amortization of deferred
stock compensation -- -- -- 1,198
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2003 27,461,290 1,102 18,750 (12,500)
=========== =========== =========== ===========
Net income -- -- -- --
Transfer to dedicated -- -- -- --
reserves
Issuance of stock to
investors 2,521,745 101 5,125 ~~
Issuance of stock to
non-employee under Equity
Incentive Plan 2003 59,907 2 161 --
Amortization of deferred
stock compensation -- -- -- 1650
----------- ----------- ----------- -----------
----------- ----------- -----------
BALANCE AT MARCH 31, 2004 30,042,942 1,205 24,036 (10,850)
=========== =========== =========== ===========
ACCUMULATED
OTHER
DEDICATED RETAINED COMPREHENSIVE
RESERVES EARNINGS INCOME(LOSS) TOTAL
----------- ----------- ----------- -----------
USD USD USD USD
BALANCE AT JANUARY 1, 2001 931 1,270 48 2,974
-----------
Comprehensive income:
Net income -- 3,792 -- 3,792
Other comprehensive loss
Net unrealizable loss on
marketable securities -- -- (94) (94)
-----------
Total comprehensive income 3,698
-----------
Transfer to dedicated
reserves 829 (829) -- --
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2001 1,760 4,233 (46) 6,672
Comprehensive income:
Net income -- 5,036 -- 5,036
Other comprehensive loss
Net unrealizable loss on
marketable securities -- -- (38) (38)
-----------
Total comprehensive income 4,998
-----------
Transfer to dedicated
reserves 820 (820) -- --
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2002 2,580 8,449 (84) 11,670
-----------
Comprehensive income:
Net income -- 1,182 -- 1,182
Other comprehensive loss
Realization of loss on
disposal of marketable
securities -- -- 84 84
-----------
Total comprehensive loss 1,266
-----------
Transfer to dedicated
reserves 899 (899) -- --
Acquisition of net
liabilities of IDUL
(Note 4) -- -- -- (16)
Issuance of stock for
acquisition of minority
interest in subsidiary -- -- -- 2,670
Issuance of stock to
employee under Equity
Incentive Plan 2003 -- -- -- --
Issuance of stock to
non-employee under Equity
Incentive Plan 2003 -- -- -- 1,653
Issuance of stock & stock
option under principal
stockholder plan -- -- -- 1,122
Amortization of deferred
stock compensation -- -- -- 1,198
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2003 3,479 8,732 -- 19,563
=========== =========== =========== ===========
Net income -- (526) -- (526)
Transfer to dedicated 111 (111) -- --
reserves
Issuance of stock to
investors ~~ ~~ ~~ 5,226
Issuance of stock to
non-employee under Equity
Incentive Plan 2003 -- -- -- 163
Amortization of deferred
stock compensation -- -- -- 1650
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
BALANCE AT MARCH 31, 2004 3,590 8,095 -- 26,077
=========== =========== =========== ===========
The accompanying notes are an integral part of these condensed combined
financial statements.
3
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(amount in thousands)
(Unaudited)
Three months
fiscal year ended March 31,
--------------- ---------------
2003 2004
USD USD
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME 1,182 (525)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,880 116
Minority interest in net income of consolidated
subsidiaries 3,314 567
Non-cash compensation costs 3,979 1,813
Provision for doubtful accounts 213 (72)
Net loss on sales, disposal or impairment
of long-lived assets and marketable securities, net 128 --
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable, net (2,605) 1,434
Inventories, net 1,386 (1,752)
Due from related parties (130) (4,347)
Due from directors and employees 22 (1,563)
Prepaid expenses and other current assets 1,827 404
Accounts payable - Trade 577 666
Due to principal stockholder (205) 105
Due to related parties (163) 0
Tax payable (454) (62)
Accrued expenses and other accrued liabilities (446) 13
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,505 (3,203)
--------------- ---------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Acquisition of subsidiaries, net of cash -- --
Acquisition of marketable securities -- (715)
Acquisition of guaranteed investment contract -- --
Purchase of property, plant and equipment (830) (21)
Proceeds on disposal of marketable securities 1,541 --
Proceeds on disposal of property, plant and equipment 8,877 3
---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,588 (733)
--------------- ---------------
CASH FLOWS USED IN FINANCING ACTIVITIES
Issue of share capital -- 5,226
Borrowings of short-term debt 11,799 1,814
Repayments of short-term debt (17,064) (1,814)
Borrowings of long-term debt 2,420 --
---------------
NET CASH FROM (USED IN) FINANCING ACTIVITIES (2,845) 5,226
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,248 1,290
CASH AND CASH EQUIVALENTS, BEGINNING OF FISCAL YEAR 15,359 32,607
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF FISCAL YEAR 32,607 33,897
=============== ===============
The accompanying notes are an integral part of these condensed combined
financial statements.
4
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Industrial International, Inc., ("IDUL"), a Nevada corporation,
incorporated under the laws of the state of Nevada on January 11, 1991.
IDUL was accepted for quotation on the OTC Bulletin Board on December 7,
2001 and organized originally for the purpose of proposing, planning and
developing a golf course in either Moapa area or Overton Valley area in
Nevada.
As described in Note 2 below, prior to the reorganization with Broad Faith
Limited ("BFL"), a company incorporated under the International Business
Companies Act of the British Virgin Islands on February 10, 2003, IDUL was
a development stage company, which, other than a proposed golf course
project in Nevada, has had no operations. After recapitalization, IDUL
exited the development stage in the quarter ended March 31, 2003.
IDUL and its subsidiaries (collectively referred to as the "Company") are
principally engaged in the development, production and distribution
throughout China of communications terminal products, mainly corded and
cordless telephones which are sold under the trademark, Wondial (TM)
through a 69.5296% owned affiliate, Shenzhen Wonderland Communication
Science & Technology Company Limited ("Wondial"), sale of communications
terminal products through a 95% owned affiliate, Shenzhen Leltsj
Industires Development Company Limited ("Leltsj") and battery testing
equipment and battery products through a 72.84% owned affiliate, Wuhan
Lixing Power Sources Company Limited ("WLPS").
2. PREPARATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed combined financial statements of
Industries International, Inc. (the "Company") and its subsidiaries
(collectively referred to as the "Group") as of March 31, 2004 and for the
three-month periods ended March 31, 2003 and 2004, 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 March 31, 2004 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 stockholders 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 stockholders'
equity of the accounting acquirer, BFL, prior to the merger was
retroactively restated for the equivalent number of shares received
(14,065,972 shares) in the merger with an offset to additional paid-in
capital.
5
On May 14, 2003, the Company acquired all of the outstanding stock of Li
Sun Power International Limited ("LPI"), which held approximately 72.84%
interest in Wuhan Lixing Power Sources Company Limited ("WLPS"), a leading
lithium and lithium-ion battery manufacturer in the 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
periods ended March 31, 2003 and 2004 the results of LPI as if the
acquisition had occurred as of the beginning of each period presented.
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 shares of common
stock and per-share amounts shown in these financial statements have 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 ("USGAAP") 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-K/A for the
year ended December 31, 2003 filed on April 20, 2004 and the Form 8-K/A
for the information of BFL filed on April 22, 2003 respectively.
The Company's historical financial information prior to recapitalization,
February 10, 2003, is no longer relevant. The results of operations for
the three-month periods ended March 31, 2003 and 2004 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.
The Company considers Renminbi as its functional currency as a substantial
portion of the Company's business activities are based in Renminbi.
However, the Company has chosen the United States dollar as its reporting
currency.
Transactions in currencies other than functional currency during the year
are translated into the functional currency at the applicable rates of
exchange prevailing at the time of the transactions. Monetary assets and
liabilities denominated in currencies other than functional currency are
translated into functional currency at the applicable rates of exchange in
effect at the balance sheet date. Exchange gains and losses are dealt with
in the consolidated statement of operations.
For translation of financial statements into the reporting currency,
assets and liabilities are translated at the exchange rate at the balance
sheet date, equity accounts are translated at historical exchange rates,
and revenues, expenses, gains and losses are translated at the weighted
average rates of exchange prevailing during the period. Translation
adjustments resulting from this process are recorded in accumulated other
comprehensive income (loss) within stockholders' equity.
6
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 2
above.
The 14,065,972 and 3,941,358 shares, in connection with the
recapitalization and merger under common control, 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, USD 16.
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 the Equity
Incentive Plan 2003 ("EI Plan") and PS Plan as described in Note 11 below.
During the first three-months of fiscal year 2004, 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. COMMON STOCK
As of December 31, 2002, the authorized capital of the Company is USD 200
divided into 5,000,000 shares of common stock, par value US dollar 0.04
par value, with one vote for each share.
As described in Note 2 above, on February 10, 2003, 1,249,215 shares,
represented by the outstanding shares of IDUL before recapitalization,
were issued and offset against the additional paid-in capital, for the
historical book value of net monetary liability of IDUL before
recapitalization, USD 16.
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 became effective on June 2, 2003.
7
On May 14, 2003, 3,941,358 restricted shares of common stock of the
Company, at par value, were issued for the acquisition of a 100% interest
in LPI.
During the fiscal year 2003, the total number of shares issued, under the
EI Plan was 7,538,885, par value US dollar 0.04 per share, for a value of
USD22,166. These shares are granted to the Company's employees (2,525,000
shares) for a value of USD 8,397 at the date of the grant and external
consultants (5,013,385 shares) for a value of USD 13,769 measured at their
then-current fair value as of the financial reporting dates and fair value
of services. See Note 11 below for deferred compensation cost under EI
Plan.
As described in Note 8(b) below, on June 10, 2003, the Company issued
665,860 restricted shares of common stock of the Company, for a value of
USD2,670, to acquire an additional 4.2372% interest in an affiliate,
Wondial.
As described in Note 11 below, during the fiscal year 2003, the Company
established a stock plan ("PS Plan") to grant restricted stock awards of
1,281,519 shares, of which 1,057,666 were issued to an employee and
233,853 were issued to business associates.
During the first quarter of fiscal year 2004, the total number of shares
issued, under the EI Plan was 59,907, par value USD 0.04 per share, for a
value of USD 163. These shares are granted to the Company's external
consultants for a value of USD 163 measured at their then-current fair
value as of the financial reporting dates and fair value of services. See
Note 11 below for deferred compensation cost under the EI Plan.
During the first quarter of fiscal year 2004, Company issued 2,521,745
common stock to investors, par value US dollar 0.04 per share, for an
aggregate consideration of USD 5.8 million. The Company intends to use the
proceeds to finance acquisitions
5. BUSINESS COMBINATION
The following combinations occurred during fiscal year 2003:
a) Recapitalization
Effective February 10, 2003, pursuant to an Amended and Restated Agreement
and Plan of Share Exchange, IDUL merged with an operating entity, BFL,
resulting in the stockholders and management of BFL having actual and
effective control of IDUL.
For accounting purposes, the transaction has been treated as a
recapitalization of BFL with IDUL being the legal survivor and BFL being
the accounting survivor and the operating entity. These transactions are
considered as capital transactions in substance rather than business
combinations. That is, the historical financial statements prior to
February 10, 2003 are those of BFL, even though they were labeled as those
of IDUL.
8
The recapitalization transaction was effected by an exchange of stock
under which the sole stockholder of BFL, Mr. Kit Tsui, had exchanged all
of the outstanding shares (2 shares) of BFL for 14,065,972 new shares of
IDUL.
In the recapitalization, historical stockholders' equity of the accounting
acquirer, BFL, prior to the merger was retroactively restated for the
equivalent number of shares received (14,065,972 shares) in the merger
with an offset to additional paid-in capital. Retained earnings of the
accounting survivor, BFL, is carried forward after the recapitalization.
Operations prior to the recapitalization are those of the accounting
survivor, BFL. Earnings per share for periods prior to the
recapitalization are restated to reflect the equivalent number of shares.
Upon completion of the transaction, the financial statements become those
of the operating company, with adjustments to reflect the changes in
equity structure and receipt of the assets/liabilities of the public
shell, IDUL. Following the recapitalization, IDUL held 100% of the issued
and outstanding shares of BFL and Mr. Kit Tsui (and/or his designees)
became the principal stockholder of IDUL.
b) Merger under common control
On May 14, 2003, IDUL acquired all issued and outstanding shares of Li Sun
Power International Limited ("LPI"), a company incorporated in the British
Virgin Islands on September 19, 2000, from Mr. Kit Tsui, who is the
majority stockholder of IDUL as well as the Chief Executive Officer and a
director of IDUL. By acquiring the capital stock of LPI, IDUL becomes the
beneficial owner of LPI's approximately 72.84% interest in WLPS, a leading
lithium and lithium-ion battery manufacturer in the PRC. The acquisition
of LPI is intended to enhance the Company's consolidated competitive
position in both telephone and battery markets in the PRC. The
consideration for the merger was 3,941,358 restricted shares of common
stock of IDUL and in obligation of payment of USD 7,662, which shall be in
the form of a promissory note payable in cash or common stock of IDUL at
the discretion of IDUL.
Since IDUL acquired shares in LPI from its controlling stockholder, Mr.
Kit Tsui, the transaction was considered a transfer among companies under
common control. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 141 "Business Combination" (Appendix D), the method
of accounting for such transfer of equity interests was similar to the
pooling of interest method and the acquisition is reflected as if it had
occurred at the beginning of the earliest period presented.
The entire 3,941,358 restricted shares of common stock of IDUL was
considered outstanding from the beginning of the period and recorded at
the carrying amount of the net assets of LPI, without regard to the fair
value of the stock. The obligation of USD7,662 to Mr. Kit Tsui was
recorded as due to a principal stockholder of the Company as of the
beginning of the earliest period presented. See "Recent issued accounting
pronouncements" within Note 3 below for the adoption of SFAS No. 150.
c) Business combination
9
The following combination occurred during the fiscal year 2003:
Purchase acquisition
On June 10, 2003, IDUL's ownership in Wondial increased from 65.2924% to
69.5296%, as a result of IDUL acquiring 4,000,000 outstanding shares of
Wondial's common stock from a third party. IDUL issued 665,860 restricted
shares of common stock of IDUL, for a value of USD2,670, which was based
on closing market price of USD4 on March 28, 2003 and recorded a premium
in excess of fair value of net assets of Wondial of USD1,690. The changes
in the carrying amount of goodwill as of December 31, 2003 are as follows:
BATTERY
COMMUNICATION AND
TERMINAL RELATED
PRODUCTS PRODUCTS TOTAL
USD USD USD
Balance as of January 1, 2003 - 71 71
Goodwill acquired during the
period 1,690 - 1,690
--------------- ----------- ------------
Balance as of December 31,
2003 1,689 71 1,761
=============== =========== ============
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 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, 2003.
The additional interests of 4.2372% Wondial, as described above, is held
by a wholly-owned affiliate of IDUL, Sunbest Industrial Limited ("SIL"), a
limited liability company incorporated in the British Virgin Islands 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 IDUL 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.
10
6. MARKETABLE SECURITIES
The aggregate cost, gross unrealized losses and fair value pertaining to
available-for-sales securities are as follows:
AS OF MARCH 31,
----------------------
2004 2003
USD USD
Cost - 1,569
Gross unrealized gain 6
---------- ----------
Gross unrealized losses - (45)
---------- ----------
Fair value - 1,530
========== ==========
During the fiscal year 2003, all marketable securities were sold for
proceeds of USD1,541 and resulted in an insignificant realized gain.
7. INVENTORIES
As of March 31,
-----------------------
2004 2003
USD USD
Raw materials 1,195 3,857
Work-in-progress 1,285 990
Finished goods 2,336 1,509
---------- -----------
4,816 6,356
========== ===========
8. PROPERTY, PLANT AND EQUIPMENT, NET
Estimated
useful life (in
years) AS OF MARCH 31,
------------------------
2004 2003
USD USD
Buildings 35 5,613 5,496
Moulds 3 - 5 1,802 2,288
Plant and machinery 5 - 10 5,949 7,251
Electronic equipment 5 1,633 1,634
Motor vehicles 5 - 8 935 922
----------- -----------
15,932 17,591
Accumulated depreciation (7,044) (6,723)
----------- -----------
8,888 10,868
=========== ===========
9. BANKING FACILITIES
As of March 31, 2004, the total company bank loan was $14,214,000, one
year due loan was $11,795,000, long term loan was $2,419,000. All these
loans were stated in the Agreement, and the company is paying interest
regularly.
11
10. TAXATION
The Company is subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdictions in which they operate.
As of December 31, 2003 and 2002, IDUL had a net operating loss
carry-forward for income tax reporting purposes of approximately USD475
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 that it 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 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. Among
the Company's subsidiaries, BFL, SIL and LPI, are not liable for income
taxes.
11. STOCK-BASED COMPENSATION
During the first quarter of fiscal year 2004, the Company has granted
59,907 stock-based awards to an external consultants for their past
services for USD163, measured and expensed all at the approximately quoted
market price at the date of grant.
The total compensation expense recognized for all stock awards was
USD1,813 for the first quarter of fiscal year 2004.
12. COMMITMENTS AND CONTINGENCIES
There was no new operating lease agreement signed nor material outstanding
capital commitments since last fiscal year 2003.
12
ITEM 2. MANAGEMENT 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 from the forward-looking
statements. 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, our
ability to raise capital as and when we need it, our ability to successfully
integrate any acquisitions we have made or will make in the future, 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. 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 the more detailed financial information
appearing elsewhere in this Quarterly Report on Form 10-Q.
When the words "we", "our" or "the Company" are used in this Quarterly Report on
Form 10-Q, they refer to Industries International, Inc. and its subsidiaries,
which include the following:
o Broad Faith Limited ("BFL"), a holding company;
o Shenzhen Kexuntong Industrial Co., Ltd. ("SKI"), a sino-foreign joint
venture company established in China that is owned 95% by Industries
International, Inc., and which, in turn, owns 72.966% of Shenzhen
Wonderland Communication Science and Technology Co., Ltd. ("Wonderland"),
a limited liability company; and
o 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.
Subsequent to the end of first quarter 2004, the Company completed the sale of
surplus equipment used to manufacture analog and digital cordless and
traditional corded telephones. The purchaser was the Company's Chairman and CEO,
Dr. Kit Tsui. The sale is a result of the Company's decision to focus on its
much more profitable telecommunications products distribution business, rather
than its lower-margin manufacturing operations. The Company is no longer using
the assets in its manufacturing business operated by its 95%-owned Shenzhen
Kexuntog Industrial (SKI) subsidiary, and it has closed the facility where the
equipment was located. Dr. Tsui has paid the Company $12,318,840 and has agreed
to surrender 1,206,435 shares of THE COMPANY's common stock. In addition, he has
13
agreed to eliminate $7,662,000 in debt that the Company owed him in connection
with the sale of a former company to the Company and to assume $8.77 million in
bank debt that SKI owed. This consideration is equal to 105% of the appraised
value of the net assets of SKI as of December 31, 2003. The CPA firm of Shenzhen
Fa Wei provided a fairness opinion in connection with the sale of the assets.
The businesses of the Company and all of its subsidiaries are located in the
People's Republic of China.
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
NET SALES. The Company's net sales in the three months ended March 31, 2004 and
March 31, 2003 were $14,091,000 and $11,454,000, respectively, an increase of
$2,637,000, or 23.02%. Sales for the Company's telecommunication products were
$8,788,000 and $6,642,000 in the three months ended March 31, 2004 and March 31,
2003, respectively, an increase of $2,145,000, or 32.3%. The main reasons for
the increase include the introduction of a new phone model and the establishment
of a new sales network. In the three months ended March 31, 2004 and March 31,
2003, the Company's sales revenues for battery and battery examining equipment
products were $5,303,000 and $4,812,000, respectively, an increase of $491,000,
or 10.21%. The main reason for the increase was an increase in market demand.
MANUFACTURING AND OTHER COSTS OF SALES. The Company's cost of sales for the
three months ended March 31, 2004 and March 31, 2003 were $10,174,000 and
$8,015,000, respectively, an increase of $2,159,000, or 26.94%. The cost of
sales for the Company's telecommunication products were $7,026,000 and
$5,129,000 in the three months ended March 31, 2004 and March 31, 2003,
respectively, an increase of $1,897,000, or 37.00%. The cost of sales for
battery and battery examining equipment products were $3,148,000 and $2,886,000
in the three months ended March 31, 2004 and March 31, 2003, respectively, an
increase of $261,000, or 9.06%. The main reasons for the increase include an
increase in sales that resulted in an increase in cost and an increase in the
expense of equipment maintenance or repairs.
SALES AND MARKETING EXPENSES. The Company's sales and marketing expenses for the
three months ended March 31, 2004 and March 31, 2003 were $467,000 and $540,000,
respectively, a decrease of $73,000, or 13.58%. Sales and marketing expenses
include salary and benefits of sales personnel, advertising expenses, sales
service expenses, business trips and socializing expenses. The sales and
marketing expenses for the Company's telecommunication products were $195,000
and $267,000 in the three months ended March 31, 2004 and March 31, 2003,
respectively, a decrease of $72,000, or 26.91%. The sales and marketing expenses
for the Company's battery and battery examining products were $271,000 and
$273,000 in the three months ended March 31, 2004 and March 31, 2003,
respectively, a decrease of $2,000, or 0.98%. The main reasons for the decrease
include a decrease in advertising expenses and the fact that the Company's sales
network has reached a mature stage.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and administrative
expenses for the three months ended March 31, 2004 and March 31, 2003 were
$668,000 and $457,000, respectively, an increase of $211,000, or 46.03%. The
general and administrative expenses for the Company's telecommunication products
14
were $353,000 and $294,000 in the three months ended March 31, 2004 and March
31, 2003, respectively, an increase of $60,000, or 20.26%. The general and
administrative expenses for the Company's battery and battery examining products
were $315,000 and $164,000 in the three months ended March 31, 2004 and March
31, 2003, respectively, an increase of $151,000, or 92.31%. The main reason for
the increase include an increase in the business trip and socializing expenses
of administrators and an increase in payment to [middle organizations].
RESEARCH AND DEVELOPMENT EXPENSES. The Company's research and development
expenses for the three months ended March 31, 2004 and March 31, 2003 were
$281,000 and $290,000, respectively, a decrease of $39,000, or 3.33%. The
research and development expenses for the Company's telecommunication products
were $164,000 and $203,000 in the three months ended March 31, 2004 and March
31, 2003, respectively, a decrease of $39,000, or 19.20%. The research and
development expenses for the Company's battery and battery examining products
were $117,000 and $88,000 in the three months ended March 31, 2004 and March 31,
2003, respectively, an increase of $29,000, or 33.43%. The main reasons for the
increase include a decrease in the usage of raw materials and products for
research and development in the Company's telecommunication products and an
increase in expenses in research and development for new products in the
Company's battery and battery examining products.
DEPRECIATION AND AMORTIZATION. The Company's depreciation and amortization
expenses for the three months ended March 31, 2004 and March 31, 2003 were
$116,000 and $136,000, respectively, a decrease of $20,000, or 14.72%.
Depreciation and amortization expenses include the depreciation of the Company's
fixed assets (not including depreciation of manufacturing fixed assets which is
included in cost of production sales). The depreciation and amortization
expenses for the Company's telecommunication products were $87,000 and $111,000
in the three months ended March 31, 2004 and March 31, 2003, respectively, a
decrease of $24,000, or 21.61%. The depreciation and amortization expenses for
the Company's battery and battery examining products in the three months ended
March 31, 2004 and March 31, 2003 were $29,000 and $25,000, respectively, an
increase of $4,000, or 15.94%. The main reason for the decrease was the
substantial decrease in the depreciation of fixed assets due to the sale of the
fixed assets to Cheng De Telecommunication Productions Company, Limited.
OTHER OPERATING EXPENSES. The Company's other operating expenses for the three
months ended March 31, 2004 and March 31, 2003 were $1,988,000 and $150,000,
respectively, an increase of $1,838,000, or 1225.40%. Other operating expenses
include: issued share amortization expenses, duration loss of fixed assets,
depreciation reserve for fixed assets, and fine expenses paid. The other
operating expenses for the Company's telecommunication products were $0 and
$94,000 in the three months ended March 31, 2004 and March 31, 2003,
respectively, a decrease of $94,000, or 100%. The other operating expenses for
the Company's battery and battery examining products were $24,000 and $56,000 in
the three months ended March 31, 2004 and March 31, 2003, respectively, a
decrease of $32,000, or 57.17%. The main reason for the increase was the expense
amortization of the issued shares that generated a total of $1,988,000.
15
OPERATING PROFIT. The Company's operating profits for the three months ended
March 31, 2004 and March 31, 2003 were $494,000 and $1,894,000, respectively, a
decrease of $1,399,000, or 73.90%. The operating profits for the Company's
telecommunication products in the three months ended March 31, 2004 and March
31, 2003 were $1,059,000 and $573,000, respectively, an increase of $486,000, or
84.91%. The operating profits for the Company's battery and battery examining
products in the three months ended March 31, 2004 and March 31, 2003 were
$1,400,000 and $1,321,000, respectively, an increase of $79,000, or 5.95%. The
overall decrease is due to the expense amortization of the shares that
constituted a large part of other operating expenses and directly affected
operating profit.
INTEREST EXPENSE. The Company's interest expenses for the three months ended
March 31, 2004 and March 31, 2003 were $208,000 and $262,000, respectively, a
decrease of $54,000, or 20.70%. The main reason for the decrease is due to the
fact that the Company has partially repaid a bank loan.
BEFORE TAX PROFIT. The Company's before tax profits for the three months ended
March 31, 2004 and March 31, 2003 were $333,000 and $1,658,000, respectively. a
decrease of $1,325,000, or 79.92%. The before tax profits for the Company's
telecommunication products in the three months ended March 31, 2004 and March
31, 2003 were $939,000 and $405,000, respectively, an increase of $534,000 or
131.87%. The before tax profits for the Company's battery and battery examining
products in the three months ended March 31, 2004 and March 31, 2003 were
$1,358,000 and $1,254,000, respectively, an increase of $104,000, or 8.32%. The
main reason for the increase is due to the expense amortization of the shares
that constituted a large part of other operating expenses and directly affected
the profit amount.
MINORITY SHAREHOLDERS' BEFORE RIGHTS AND INTERESTS PROFIT. The Company's
minority shareholders before rights and interests profits for the three months
ended March 31, 2004 and March 31, 2003 were $567,000 and $587,000,
respectively, a decrease of $20,000, or 3.4%. The minority shareholders before
rights and interests profits for the Company's telecommunication products in the
three months ended March 31, 2004 and March 31, 2003 were $221,000 and $179,000,
respectively, an increase of $42,000, or 23.46%. The minority shareholders
before rights and interests profits for the Company's battery and battery
examining products in the three months ended March 31, 2004 and March 31, 2003
were $346,000 and $408,000, respectively, a decrease of $62,000, or 15.17%.
NET PROFIT. The Company's net profits for the three months ended March 31, 2004
and March 31, 2003 were -$526,000 and $897,000, respectively, a decrease of
$1,423,000, or 158.65%. The net profits for the Company's telecommunication
products in the three months ended March 31, 2004 and March 31, 2003 were
$608,000 and $183,000, respectively, an increase of $425,000, or 232.45%. The
net profits for the Company's battery and battery examining products in the
three months ended March 31, 2004 and March 31, 2003 were $830,000 and $714,000,
respectively, an increase of $116,000, or 16.25%. The main reason for the
decrease is due to the expense amortization of the shares that constituted a
large part of the other operating expenses and directly affected net profit.
16
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of fiscal year 2004, the Company generated cash of more
than $33.9 million, which is used to fund operations. The Company holds
short-term debt of $11.8 million and long-term debt of $2.4 million maturing at
the end of 2005. Over the last three years, the Company has maintained a policy
of reducing outstanding debt, and has successfully reduced its outstanding debt
balance each year. The short-term debt has to be repaid within twelve months and
can generally be extended for another twelve months. As of March 31, 2004, the
Company has not made any additional, significant capital commitments payable
during fiscal year 2004. The Company does not anticipate experiencing
significant liquidity problems during fiscal year 2004.
The Company has one outstanding promissory note in the amount of $7,662,000 with
Dr. Kit Tsui, described in the Form 8-K/A filed on April 22, 2003. The terms of
the note do not provide for expiration or maturity, bearing no interest rate,
and is payable in cash or the Company's common stock based on mutual agreement.
The Company currently has the following debt obligations to six PRC banks.
BORROWING
AMOUNT INTEREST
BANK (US$ 000) MATURITY RATE
- ----------------------------------------------------------------------------
Shenzhen Development Bank 2,965 2 Months 6.75%
China Industries and Commerce Bank 726 1 Months 6.03%
China Enterprise Trust Bank 1,814 6 Months 5.36%
Guangdong Development Bank 3,266 5 Months 5.84%
Xingye Bank 3,024 12 Months 5.25%
Huaxia Bank 2,419 13 Months 5.49%
Total 14,214
All of the above debt has no amortization schedule before maturity. The Company
usually enters into another agreement with the banks when the debt matures. The
lenders are not affiliates of the Company.
The Company is not currently invested in any marketable securities. During the
quarter ended December 31, 2003, it sold all of its the marketable securities,
receiving $1,541,000, in order to pay down the Company's short-term debt.
As of March 31, 2004, the Company had a current ratio of 1.71, net working
capital of $27,507,000 and net equity of $26,077,000. During the first quarter
of fiscal year 2004, our net cash and cash equivalents increased by
approximately $1,290,000, from approximately $32,607,000 as of December 31, 2003
to $33,897,000 as of March 31, 2004, an increase of approximately 4.0%.
17
Net cash used in operating activities during the first quarter of fiscal year
2004 totaled approximately $3,203,000. The Company's primary use of cash was for
the purchase of inventory and for the payment of Value Added Tax.
Net cash provided by financing activities for the first quarter of fiscal year
2004 totaled approximately $5,226,000, primarily for the Company is issuance of
share capital.
The Company's objective is to further reduce debt. We are currently going
through an asset divestiture plan. The Company will further sell some of it
telephone manufacturing machines to pay back Dr. Kit Tsui's promissory note.
Other than as described above, on a recapitalization basis, there were no
material changes in financial condition from the end of the preceding fiscal
year to March 31, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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 March 31, 2004, our bank debt earned interest at a
fixed rate.
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
18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this report:
3.1 Articles of Incorporation (1)
3.2 By-laws, as amended (1)
31.1 Certification pursuant to Rules 13a-14 and 15d-14 of the
Securities Exchange Action of 1934 (2)
31.2 Certification pursuant to Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934 (2)
32. Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)
(1) 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.
(2) Filed herewith.
(b) Reports on Form 8-K:
19
The Company filed current reports on Form 8-K on February 24, 2004 under Item 6
and on March 1, 2004 under Item 5.
20
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 MAY 14, 2004
INDUSTRIES INTERNATIONAL, INCORPORATED
By: /s/ Kit Tsui
-----------------------------------------
Dr. Kit Tsui, Chief Executive Officer
By: /s/ Guoqiong Yu
-----------------------------------------
Guoqiong Yu, Chief Financial Officer
21