================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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: September 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 24,104,540 shares of common stock, par
value $0.01 per share, issued and outstanding as of November 13, 2003.
================================================================================
INDUSTRIES INTERNATIONAL, INCORPORATED
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INDEX
PAGE
----
PART I
NUMBER
Item 1 - Financial Information
Condensed Combined Statements of Operations - Three-Month and
Nine-month periods ended September 30, 2002 and 2003 F-1
Condensed Combined Balance Sheets - December 31 2002 and September 30, 2003 F-2
Condensed Combined Statements of Changes in Stockholders' Equity and
Comprehensive Income/Loss F-3
Condensed Combined Statements of Cash Flows - Nine-Month periods ended
September 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
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Industries International, Incorporated
Index to Condensed Combined Financial Statements
================================================================================
Condensed Combined Statements of Operations for the three-month F-1
and nine-month periods ended September 30, 2002 and 2003
Condensed Combined Balance Sheets as of December 31, 2002 and F-2
September 30, 2003
Condensed Combined Statements of Changes in Stockholders' Equity and F-3
Comprehensive Income / Loss
Condensed Combined Statements of Cash Flows for the nine-month periods F-4
ended September 30, 2002 and 2003
Notes to Condensed Combined Financial Statements F5 - F18
Industries International, Incorporated
Condensed Combined Statements of Operations
================================================================================
(amount in thousands, except per share data)
(Unaudited)
For three months For nine months
ended September 30, ended September 30,
--------------------- ----------------------------------
2002 2003 2002 2003 2003
RMB RMB RMB RMB USD
-------- -------- -------- -------- --------
Operating revenues
Net sales 136,813 130,340 334,543 343,708 41,575
Rental income 2,040 240 6,120 720 87
-------- -------- -------- -------- --------
Total operating revenues 138,853 130,580 340,663 344,428 41,662
-------- -------- -------- -------- --------
Operating expenses
Manufacturing and other costs of sales 88,437 97,690 224,209 248,353 30,041
Sales and marketing 5,661 4,889 14,211 15,381 1,860
General and administrative 4,389 3,527 13,033 11,205 1,355
Research and development 3,212 3,192 8,529 9,366 1,133
Depreciation and amortization 2,685 997 8,207 3,217 389
Other operating costs and expenses 233 8,615 369 30,370 3,673
-------- -------- -------- -------- --------
Total operating expenses 104,617 118,910 268,558 317,892 38,451
-------- -------- -------- -------- --------
Operating income 34,236 11,670 72,105 26,536 3,211
Interest expenses (2,541) (2,048) (10,020) (6,766) (818)
Other (expenses) income, net (186) 475 1,254 515 62
-------- -------- -------- -------- --------
Income before income taxes and minority interest 31,509 10,097 63,339 20,285 2,455
Provision for income taxes (3,106) (1,994) (5,848) (5,274) (638)
-------- -------- -------- -------- --------
Income before minority interest 28,403 8,103 57,491 15,011 1,817
Minority interest in income of combined subsidiaries (10,291) (5,943) (21,479) (17,856) (2,160)
-------- -------- -------- -------- --------
Net income (loss) 18,112 2,160 36,012 (2,845) (343)
======== ======== ======== ======== ========
Earnings (loss) per share:
Basic weighted average number of common stock outstanding
15,315 22,332 15,315 18,245 18,245
======== ======== ======== ======== ========
Basic net income (loss) per common stock 1.18 0.10 2.35 (0.155) (0.02)
======== ======== ======== ======== ========
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, September 30,
--------------- ---------------------
2002 2003 2003
Note RMB RMB USD
---- -------- -------- --------
ASSETS
Current assets:
Cash and cash equivalents 127,019 197,425 23,880
Marketable securities 8 12,603 12,643 1,529
Guaranteed investment contract 10,000 10,000 1,210
Accounts receivable, net of allowance for uncollectible of Rmb
3,827 and Rmb 12,709 137,591 148,217 17,928
Due from related parties, director and employees 14,157 14,132 1,710
Inventories 9 36,786 45,088 5,454
Plant and equipment held for sales receivable -- 12,231 1,479
Plant and equipment held for sales 64,644 -- --
Prepaid expenses and other current assets 33,478 22,666 2,742
-------- -------- --------
Total current assets 436,278 462,402 55,932
Goodwill 7 591 14,556 1,761
Property, plant and equipment, net 10 93,465 84,096 10,172
-------- -------- --------
Total assets 530,334 561,054 67,865
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debts maturing within one year 141,025 97,571 11,802
Accounts payable - trade 54,269 59,271 7,169
Due to principal stockholder 67,458 65,570 7,931
Other payable 45,205 44,800 5,419
Tax payable 11,757 6,183 748
Accrued expenses and other accrued liabilities 43,933 43,444 5,255
-------- -------- --------
Total current liabilities 363,647 316,839 38,324
-------- -------- --------
Non-current liabilities
Long-term debts -- 20,000 2,419
-------- -------- --------
Minority interests in combined subsidiaries 121,434 131,181 15,868
-------- -------- --------
Stockholders' equity:
Common stock 6 5,969 7,722 934
Additional paid-in capital (60,364) 161,932 19,594
Deferred stock compensation 13 -- (113,037) (13,672)
Dedicated reserves 21,338 26,010 3,146
Retained earnings 79,000 11,119 1,339
Accumulated other comprehensive loss (690) (712) (87)
-------- -------- --------
Total stockholders' equity 45,253 93,034 11,254
-------- -------- --------
Total liabilities and stockholders' equity 530,334 561,054 67,865
======== ======== ========
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)
Deferred Accumulated
Additional stock other
Number paid-in compensa Dedicated Retained comprehensive
shares Amount capital -tion reserves earnings income (loss) Total
------- ------ ------- -------- -------- -------- ------------- ------------------
RMB RMB RMB RMB RMB RMB RMB USD
Balance at January 1, 2002 18,007 5,969 -- -- 14,562 9,293 (377) 29,447 3,562
------- -------
Comprehensive income:
Net income -- -- -- -- -- 36,012 -- 36,012 4,357
Transfer to dedicated -- -- -- 5,501
reserves -- (5,501) -- -- --
Other comprehensive loss
Net unrealizable loss on
marketable securities -- -- -- -- -- -- (256) (256) (31)
------- -------
Total comprehensive income 35,756 4,326
------ ------ -------- -------- ------ ------- ---- ------- -------
Balance at September 30, 2002 18,007 5,969 -- -- 20,063 39,804 (633) 65,203 7,888
------- -------
Comprehensive income:
Net income -- -- -- -- -- 5,607 -- 5,607 679
Transfer to dedicated reserves -- -- -- -- 1,275 (1,275) -- -- --
Other comprehensive loss
Net unrealizable loss on
marketable securities -- -- -- -- -- -- (57) (57) (7)
------- -------
Total comprehensive income 5,550 672
------- -------
Dividend declared -- -- -- -- -- (25,500) -- (25,500) (3,084)
------ ------ -------- -------- ------ ------- ---- ------- -------
Balance at December 31, 2002 18,007 5,969 -- -- 21,338 18,636 (690) 45,253 5,476
------- -------
Comprehensive income:
Net income -- -- -- -- -- (2,845) -- (2, 845) (343)
Transfer to dedicated reserves -- -- -- -- 4,672 (4,672) -- -- --
Other comprehensive loss
Net unrealizable loss on
marketable securities -- -- -- -- -- -- (22) (22) (2)
------- -------
Total comprehensive loss (2,867) (345)
------- -------
Acquisition of net
liabilities of the 1,249 414 (547) -- -- -- -- (133) (16)
Company
Issuance of stock for
acquisition of minority
interest in subsidiary 666 221 21,851 -- -- -- -- 22,072 2,669
Issuance of stock under
Equity Incentive Plan 2003 3,374 1,118 83,216 (78,581) -- -- -- 5,753 695
Issuance of stock & stock
option under principal
stockholder plan -- -- 57,412 (43,824) -- -- -- 13,588 1,642
Amortization of deferred
stock compensation -- -- -- 9,368 -- -- -- 9,368 1,133
------ ------ -------- -------- ------ ------- ---- ------- -------
Balance at September 30, 2003 23,296 7,722 161,932 (113,037) 26,010 11,119 (712) 93,034 11,254
====== ====== ======== ======== ====== ======= ==== ======= =======
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 nine months ended September 30,
--------------------------------------
2002 2003 2003
RMB RMB USD
Cash flows from operating activities
Net income (loss) 36,012 (2,845) (343)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 16,449 12,865 1,556
Minority interest in net income of combined subsidiaries 21,581 17,856 2,160
Non-cash compensation costs -- 28,709 3,471
Loss on sales, disposal or impairment of long-live assets, net 12 580 70
Changes in assets and liabilities:
Accounts receivable, net (6,015) (10,626) (1,285)
Inventories, net 28,673 (8,302) (1,004)
Due from related parties, directors and employees 5,622 25 3
Prepaid expenses and other current assets (2,723) 10,812 1,308
Accounts payable (16,008) 5,002 604
Due to principal stockholder 130 (1,888) (228)
Other payable (8,463) (405) (49)
Tax payable (2,805) (5,574) (674)
Accrued expenses and other accrued liabilities 860 (621) (75)
-------- -------- -------
Net cash provided by operating activities 73,325 45,588 5,514
-------- -------- -------
Cash flows used in investing activities
Plant and equipment held for sales receivable -- 52,413 6,340
Acquisition of marketable securities (10,000) -- --
Purchase of property, plant and equipment (7,667) (4,341) (525)
Proceeds on disposal of property, plant and equipment -- 200 24
-------- -------- -------
Net cash (used in) provided by investing activities (17,667) 48,272 5,839
-------- -------- -------
Cash flows used in financing activities
Borrowings of short-term debt 28,636 31,000 3,750
Repayments of short-term debt (81,800) (74,454) (9,006)
Borrowings of long-term debt -- 20,000 2,419
-------- -------- -------
Net cash used in financing activities (53,164) (23,454) (2,837)
-------- -------- -------
Net increase in cash and cash equivalents 2,494 70,406 8,516
Cash and cash equivalents, beginning of fiscal period 140,934 127,019 15,364
-------- -------- -------
Cash and cash equivalents, end of fiscal period 143,428 197,425 23,880
======== ======== =======
Supplemental disclosure of cash flow information Cash paid during the fiscal
period for:
Income tax 5,442 5,879 711
Interest 9,132 5,708 690
======== ======== =======
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 September 30,
2003 and for the three-month and nine-month periods ended September 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 September 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 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.
As described in Note 7(a) 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 nine-month periods ended September 30,
2002 and 2003 the results of LPI as if the acquisition had occurred as of
the beginning of each period presented.
As described in Note 6 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 stocks 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 ("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 filed on April 14, 2003 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 and nine-month periods ended September 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 September 30, 2003.
2. CHANGE IN ACCCOUNTING PRINCIPLE
As described in Note 7(a) below, the consideration for the acquisition of
LPI includes an amount of USD 7,662, which shall be settled either in the
form of promissory note payable in cash or common stock of the Company at
the discretion of the Company and this obligation to Mr. Tsui Kit was
recorded as due to a principal stockholder of the Company. On the adoption
of SFAS No. 150, the carrying amounts of such consideration was measured
at their fair values. No cumulative effect was made because the obligation
approximates their fair values because of their short maturity as the
Company intends to settle it by issuing shares before the end of the
fiscal year 2003.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In July 2003, Statement of Position 03-1 ("SOP 03-1"), "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts," was issued. Among
other provisions, the SOP provides guidance on separate account
presentation. The statement requires disclosure of the nature, extent and
timing of minimum guarantees related to variable contracts and the amount
of gains and losses recognized on assets transferred to separate accounts.
SOP 03-1 is effective for financial statements for fiscal years beginning
after December 15, 2003. The adoption of the provisions of SOP 03-1 is not
expected to have a material impact on the Group's results of operations,
financial position or cash flows.
4. 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)
4. 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 13 below.
During the first nine-month 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.
5. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) and its components are as follows:
For nine months ended September 30,
-----------------------------------
2002 2003 2003
RMB RMB USD
Net income (loss) 36,012 (2,845) (343)
Other comprehensive (loss) income:
Net unrealizable (loss) income on marketable securities (256) (22) (2)
------- ------ ----
Total comprehensive income (loss) 35,756 (2,867) (345)
======= ====== ====
As of December 31, 2002 and September 30, 2003, the component of
accumulated other comprehensive income (loss) is accumulated net
unrealizable loss on marketable securities.
6. 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 become effective on June 2, 2003.
F-7
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
================================================================================
(amount in thousands)
(Unaudited)
6. STOCKHOLDERS' EQUITY (Continued)
On May 14, 2003, 3,941,358 restricted shares of common stock of the
Company, atpar value, were issued for the acquisition of 100% interest in
LPI.
During the first nine-month of fiscal year 2003, the total number of
shares issued, under Equity Incentive Plan 2003 ("EI Plan") was 3,373,937,
par value US dollar 0.04 par value, for a value of Rmb 76,281. These
shares are granted tothe Company's employees (732,500 shares) for a value
of Rmb 30,351 at the date of the grant and external consultants (2,641,437
shares) for a value of Rmb 45,931 measured at their then-current fair
value as of the financial reporting dates and fair value of services. The
Company also agrees to issue 451,948 shares in exchange for professional
services rendered by various external consultants for a value of Rmb 8,052
measured at their then-current fair value when the appropriate portion of
services during the third quarter of 2003 is performed. See Note 13(b)
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
USD2,669, to acquire an additional 4.2372% interest in a subsidiary,
Shenzhen Wonderland Communication Science and Technology Company Limited
("Wondial").
As described in Note 13 below, during the first nine-month of fiscal year
2003, the principal stockholder of the Company, Mr. Tsui Kit, established
a stock plan ("PS Plan") to grant restricted stock awards of 1,281,519,
which was issued to him for recapitalizaton and acquisition of LPI, to
employee (1,057,666 shares), for a value of Rmb 43,824 and his business
associates (223,853 shares), which are suppliers and customers of the
Company, for a value of Rmb 9,275 at the date of the grant.
7. BUSINESS COMBINATION
The following combinations occurred during 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 all 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.
F-8
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
================================================================================
(amount in thousands)
(Unaudited)
7. 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", SFAS No. 141 "Business Combination", the assets and
liabilities transferred in such transaction have been accounted for at
existing carrying amounts.
The consideration for the acquisition was 3,941,358 restricted shares of
common stock of the Company and obligation of USD7,662, which shall be in
the form of a promissory note payable in cash or common stock of the
Company at the discretion of the Company and was recorded as due to a
principal stockholder of the Company. See Note 2 above for the adoption of
SFAS 150.
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 USD2,669, which was based on closing market price of USD 4
on March 28, 2003 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 nine-month period ended September 30, 2003 are as
follows:
Communication Battery and
terminal related
products products Total
RMB RMB RMB USD
Balance as of January 1, 2003 -- 591 591 72
Goodwill acquired during the period 13,965 -- 13,965 1,689
------ --- ------ -----
Balance as of September 30, 2003 13,965 591 14,556 1,761
====== === ====== =====
F-9
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
================================================================================
(amount in thousands)
(Unaudited)
7. BUSINESS COMBINATION (Continued)
b) Purchase acquisition (Continued)
In accordance with Statement of Financial Accounting Standards (`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
September 30, 2003.
The additional interests of 4.2372% Wondial, as described above, is 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.
8. MARKETABLE SECURITIES
The aggregate cost, gross unrealized gain and losses and fair value
pertaining to available-for-sales securities are as follows:
December 31, September 30,
------------ ----------------------
2002 2003 2003
RMB RMB USD
Cost 12,971 13,035 1,577
Gross unrealized losses (368) (392) (48)
------- ------- ------
Fair value 12,603 12,643 1,529
======= ======= ======
F-10
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
================================================================================
(amount in thousands)
(Unaudited)
9. INVENTORIES
Inventories comprise the follows:
December 31, September 30,
------------ ----------------------
2002 2003 2003
RMB RMB USD
Raw materials 25,258 15,981 1,933
Work-in-progress 5,838 10,551 1,276
Finished goods 5,690 18,556 2,245
------ ------ -----
36,786 45,088 5,454
====== ====== =====
10. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment is summarized as follows:
Estimated useful life
(in years) December 31, September 30,
------------ ----------------------
2002 2003 2003
RMB RMB USD
Buildings 30 - 35 43,575 47,158 5,704
Moulds 3 - 5 18,913 15,940 1,928
Plant and machinery 5 - 10 62,244 59,570 7,205
Electronic equipment 5 13,567 13,857 1,676
Motor vehicles 5 - 8 7,568 7,673 929
Construction in progress -- 305 -- --
-------- -------- -------
146,172 144,198 17,442
Accumulated depreciation (52,707) (60,102) (7,270)
-------- -------- -------
93,465 84,096 10,172
======== ======== =======
11. BANKING FACILITIES
Bank loans of Rmb 39,570 have been falling due since September 2003. The
Group does not anticipate that future borrowings will be limited. There
are no significant commitment fees 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.
F-11
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
================================================================================
(amount in thousands)
(Unaudited)
12. 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 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. 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 Rmb5,997 as
of September 30, 2003.
F-12
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
================================================================================
(amount in thousands)
(Unaudited)
13. 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 fiscal year 2003, the Company has granted various stock options
and stock-based awards under (1) EI Plan and (2) 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. On October 2, 2003, a further 5,000,000 shares of
the Company are reserved 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.
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 for the 425,000 stock
options 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:
F-13
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
================================================================================
(amount in thousands)
(Unaudited)
13. STOCK-BASED COMPENSATION (Continued)
a) Stock options
For three months For nine months
ended September 30, ended September 30,
(In thousand, except per share amount)
2002 2003 2002 2003 2003
RMB RMB RMB RMB USD
Net income (loss):
As reported 18,112 2,160 36,012 (2,845) (343)
Total stock-based compensation expense -- (74) -- (146) (18)
------ ------ ------ ------ -----
Pro forma 18,112 2,086 36,012 (2,991) (361)
====== ====== ====== ====== =====
Basic net income (loss) per share
As reported 1.18 0.10 2.35 (0.155) (0.02)
====== ====== ====== ====== =====
Pro forma 1.18 0.09 2.35 (0.164) (0.02)
====== ====== ====== ====== =====
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 first
nine-month of the fiscal year 2003:
Risk-free interest rate 4.61%
Expected volatility 99.14%
Contractual life 10 years
On May 13, 2003, 125,000 stock options were granted to a non-employee for
her past service. Consistent with the methodology in SFAS No. 123, the
fair value of stock options, 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.
F-14
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
================================================================================
(amount in thousands)
(Unaudited)
13. STOCK-BASED COMPENSATION (Continued)
Information concerning options issued under EI Plan of the Company in the
first nine-month of fiscal year 2003 is presented in the following table:
Weighted
Number of Average Exercise
Options Price
--------- ----------------
Outstanding at beginning of period: -- --
- Stock option granted on May 13, 2003 550,000 5.6
- Stock option granted on June 24, 2003 (Note 13(b)(ii)) 712,500 6.0
Exercised -- --
Cancelled -- --
---------
Outstanding at end of period 1,262,500
=========
b) Stock awards
During the first nine-month of fiscal year 2003, under EI Plan, stock
compensation costs of Rmb 30,351 and Rmb 48,230 were deferred for all
vested stock awards to employees and various external consultants and
advisors of the Company respectively.
i) Stock awards to employees
The Company applies the provisions of APB No. 25, in accounting for its
stock 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 their intrinsic value on the date of grant.
Initially, the intrinsic value of the shares is treated as deferred
compensation and is charged to expense over the respective vesting period.
ii) Stock 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"). 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.
In consideration of an external consultant's (the "Consultant") past
services, the Company agreed to pay USD 600 (Rmb 4,972) and expensed it in
the second quarter of fiscal year 2003. Instead of paying the agreed
consideration, the services were settled by granting 712,500 shares and
712,500 stock options to the Consultant. On May 21, 2003, 356,250 stock
awards were issued. On June 24, 2003, 356,250 stocks and 712,500 stock
options were agreed toissue. The contractual life of these vested options
is 5 years with USD6 exercise price.
F-15
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
================================================================================
(amount in thousands)
(Unaudited)
13. STOCK-BASED COMPENSATION (Continued)
ii) Stock awards to external consultants and advisors (continued)
For other external consultants, during the first nine-month of fiscal year
2003, 30,187 stock awards were granted for their past services for Rmb
781, measured and expensed all at the approximately quoted market price at
the date of grant.
During the first nine-month of fiscal year 2003, the Company also issued
755,000 and 1,500,000 stock- awards of unrestricted common stocks for
services with a period of three and five years respectively. In addition,
during the same period, the Company intended to issue 400,000 and 51,948
stock awards of unrestricted common stocks were granted for services with
a period of five and one year respectively. There were no performance
commitment date, as defined in EITF 96-18, prior to the completion of
performance, thus, all these stock awards (Rmb 48,230) were measured at
their then-current fair value as of September 30, 2003.
(2) PS Plan
During the first nine-month of fiscal year 2003, the principal stockholder
of the Company, Mr. Tsui Kit, granted stock 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.
a) Stock awards
On June 13, 2003, under PS Plan, stock compensation costs of Rmb 43,824
and Rmb 9,275 were deferred for stock awards granted to employees and
expensed for stock awards granted to various related business parties of
the principal stockholder respectively.
F-16
Industries International, Incorporated
Notes to Condensed Combined Financial Statements
================================================================================
(amount in thousands)
(Unaudited)
13. STOCK COMPENSATION (Continued)
(2) PS Plan (Continued)
a) Stock awards (Continued)
i) Stock awards to employees
Stock 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. Recipients are not required to provide consideration
to the Company but 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 awards. In June 2003, 1,057,666 restricted stock awards were granted
at a market value of Rmb 43,824at the date of grant, to employees of the
Company. Initially, the total market value of the shares is treated as
deferred compensation and is charged to expense over the period of
expected services.
ii) Stock 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, in June 2003, 223,854 stock 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
award grant, were expensed in the second quarter of fiscal year 2003. The
fair value of the stock 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 13 (1)(a) above.
The value of unearned compensation under EI Plan (Rmb 78,581 ) and PS Plan
(Rmb 43,824 ) are included as a separate component of stockholders'
equity. The total compensation expense recognized for stock option under
PS Plan and all stock awards were Rmb 4,312 and Rmb 24,397 respectively
for the first nine-month of fiscal year 2003.
14. SEGMENT INFORMATION
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)
14. SEGMENT INFORMATION (Continued)
Summarized below are the Company's segment sales and operating earnings
(loss) for the three months and nine months ended September 30, 2002 and
2003:
For three months For nine months
ended September 30, ended September 30,
2002 2003 2002 2003 2003
RMB RMB RMB RMB USD
Segment revenues
Communication terminal products 87,209 80,753 219,220 216,690 26,211
Battery testing equipment 21,396 17,948 48,820 51,696 6,253
Battery products 26,414 31,584 66,003 75,171 9,093
------- -------- ------- -------- -------
Segment totals 135,019 130,285 334,043 343,557 41,557
Rental income 2,040 240 6,120 720 87
Reconciling items 1,794 55 500 151 18
------- -------- ------- -------- -------
Total combined 138,853 130,580 340,663 344,428 41,662
======= ======== ======= ======== =======
Segment operating earnings (loss)
Communication terminal products 6,145 19,599 25,836 35,691 4,317
Battery testing equipment 10,466 4,933 14,518 13,189 1,595
Battery products 5,473 5,662 15,135 14,178 1,715
------- -------- ------- -------- -------
Segment totals 22,084 30,194 55,489 63,058 7,627
Recognized compensation expenses -- (8,471) -- (28,709) (3,473)
Reconciling items 9,425 (11,626) 7,850 (14,064) (1,699)
------- -------- ------- -------- -------
Total combined 31,509 10,097 63,339 20,285 2,455
======= ======== ======= ======== =======
There are no material changes in total assets of each segment since the
last fiscal year 2002.
15. COMMITMENTS AND CONTINGENCIES
There was neither new operating lease agreement signed nor material
outstanding capital commitments since last fiscal year 2002.
F-18
--------------------------------------------------------------------------------
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION 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, Incorporated 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, Incorporated, 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.
The businesses of the Company and all of its subsidiaries are located in the
People's Republic of China.
On May 12, 2003, our board of directors approved and declared a one-for-four
reverse split of our common stock, thereby decreasing the number of issued and
outstanding shares and increasing the par value of each share.
On May 14, 2003 we acquired LPI. In exchange for all of LPI's issued and
outstanding shares, we issued to its sole stockholder, Dr. Kit Tsui, our largest
stockholder and an officer and director, 3,941,358
1
--------------------------------------------------------------------------------
post-split shares of our restricted common stock and we signed a promissory note
for the balance of the purchase price in the amount of $7,662,000. The
promissory note may be paid in cash or in shares of our common stock and was
recorded as a liability due to a principal stockholder in the "Current
Liabilities" section of our Condensed Combined Balance Sheet. As a result of our
adoption of SFAS 150, the carrying amount of the obligation ($7,662,000) was
measured at the fair value. No cumulative effect was included because the
carrying value of the obligation approximates its fair value due to the short
maturity, as we intend to settle the obligation by issuing shares of our common
stock in full payment of it before the end of the 2003 fiscal year.
Results of Operations
Under accounting principles generally accepted in the United States, we have
included LPI's results in our combined results of operations as if the
acquisition had occurred as of the beginning the periods presented. During the
second and third quarters of this fiscal year, we granted various stock options
and stock-based awards under our 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 non-cash compensation expense recognized for stock
options under the PS Plan and all stock-based awards was $3,473,000 which is
included in "Other operating costs and expenses" of our Condensed Combined
Statement of Operation. Due to our use of stock-based compensation, our net loss
for the nine months ended September 30, 2003 was approximately $(343,000).
The results of operations for the three-months and nine-months ended September
30, 2002 and 2003 are as follows.
For three months ended For nine months ended
September 30, September 30,
2002 2003 2002 2003
USD USD % of change USD USD % of change
Operating revenues
Net sales 16,549 15,766 -4.73% 40,466 41,575 2.74%
Rental income 247 29 -88.26% 740 87 -88.24%
--------------------------------------------------------------------------
Total operating revenues 16,796 15,795 -5.96% 41,207 41,662 1.10%
-------------------------------------------------------------------------
Operating expenses
Manufacturing and other costs of sales 10,697 11,817 10.47% 27,120 30,041 10.77%
Sales and marketing 685 591 -13.72% 1,719 1,860 8.20%
General and administrative 531 427 -19.59% 1,576 1,356 -13.96%
Research and development 389 386 -0.77% 1,032 1,133 9.79%
---------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 325 121 -62.77% 993 389 -60.83%
Other operating costs and expenses 28 1,042 3621.43% 45 3,673 8062.22%
-------------------------------------------------------------------------
Total operating expenses 12,654 14,383 13.66% 32,485 38,451 18.37%
-------------------------------------------------------------------------
Operating income 4,141 1,412 -65.90% 8,722 3,211 -63.19%
Interest expenses (307) (248) -19.22% (1,212) (818) -32.51%
Other (expenses) income, net (22) 57 -359.09% 152 62 -59.21%
-------------------------------------------------------------------------
Income before income taxes and minority 3,811 1,221 -67.96% 7,661 2,455 -67.95%
interest
Provision for income taxes (376) (241) -35.90% (707) (638) -9.76%
-------------------------------------------------------------------------
Income before minority interest 3,436 980 -71.48% 6,954 1,817 -73.87%
Minority interest in income of combined (1,245) (719) -42.25% (2,598) (2,160) -16.86%
subsidiaries
-------------------------------------------------------------------------
Net income (loss) 2,191 261 -88.09% 4,356 (343) -107.87%
=========================================================================
2
--------------------------------------------------------------------------------
Three Months Ended September 30, 2003 as compared to the Three Months Ended
September 30, 2002
Revenues
During the quarter ended September 30, 2003, we recorded approximately
$15,795,000 in operating revenues as compared to $16,796,000 in operating
revenues during the quarter ended September 30, 2002, a decrease of 5.96% or
$1,001,000. The decrease in our revenues resulted primarily from the elimination
of a tax holiday that had been enacted within the Shenzhen Special Economic
Zone. During the tax holiday, there was no value added tax imposed on any
products that were manufactured and sold within the Shenzhen Special Economic
Zone. Once the tax holiday was eliminated, we incurred $1,092,000 in value added
tax for the nine month period ended September 30, 2003 as a result of our sales.
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
September 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 September 30, 2003, our operating expenses increased by
$1,729,000 to $14,383,000 as compared to operating expenses of $12,654,000
during the quarter ended September 30, 2003, an increase of 13.66%.
Manufacturing and other costs of sales rose by $1,120,000 to $11,817,000 during
the quarter ended September 30, 2003 as compared to $10,697,000 during the
quarter ended September 30, 2002, an increase of approximately 10.46%. The
increase in our costs of sales resulted from the increase in our product sales.
During the quarter ended September 30, 2003, we also had non-cash compensation
costs of approximately $1,025,000 as compared to no non-cash compensation
expenses during the quarter ended September 30, 2002. These expenses related
primarily to our use of stock or stock options to pay consultants and employees
during the quarter ended September 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, during the quarter ended September 30, 2003 our operating income
decreased by $2,729,000, to $1,412,000, as compared to operating income of
$4,141,000 for the quarter ended September 30, 2002 and our net income for the
quarter ended September 30, 2003 decreased by $1,930,000 to $261,000 as compared
to net income of $2,191,000 for the quarter ended September 30, 2002.
Our general and administrative expenses totaled approximately $427,000 for the
quarter ended September 30, 2003 as compared to $531,000 for the quarter ended
September 30, 2002, a decrease of $104,000. 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 September 30, 2003 we spent approximately $386,000 in
research and development costs as compared to $389,000 for the quarter ended
September 30, 2002. Included in research and development costs for the quarter
ended September 30, 2003 are incentives we granted to engineers who invented new
products.
3
--------------------------------------------------------------------------------
During the quarter ended September 30, 2003, we spent $591,000 on sales and
marketing expenses as compared to $685,000 spent on sales and marketing expenses
during the quarter ended September 30, 2002, a decrease of 13.72%. Sales and
marketing expenses consisted of advertising costs, salary and benefits for our
sales staff, and travel and entertainment expenses. The decrease in sales and
marketing expenses during the quarter ended September 30, 2003 resulted from a
decrease in travel and entertainment expenses.
On July 9, 2003, we issued 25,187 shares of our common stock in exchange for
services having a value of $69,431 rendered to us by a consultant. The per share
value of the common stock was determined by reference to the market price at the
date of grant.
In August 2003, we issued 1,500,000 shares of common stock and agreed to issue
451,948 shares of common stock for services that will be rendered over a period
of time (from five years to one year). There were no performance commitment
dates, as defined in EITF 96-18, prior to the completion of performance,
therefore these stock-based awards were measured at their fair value as of
September 30, 2003.
Interest Expense and Other Income, Net
Interest expense and other income, net totaled approximately $(248,000) and
$57,000, respectively, for the quarter ended September 30, 2003 as compared to
$(307,000) and $(22,000), respectively, for the quarter ended September 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
$5,034,000 during the quarter ended September 30, 2003, thereby decreasing our
interest expense.
Minority Interest
During the quarter ended September 30, 2003 we recorded $(719,000) 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 September 30, 2002, we recorded
$(1,245,000) of income attributable to these interests. The decrease in income
resulted from a decline in operating income earned during the quarter ended
September 30, 2003 as compared to the quarter ended September 30, 2002. Revenues
declined due to the payment of value added tax on the products we sold due to
the elimination of the tax holiday in the Shenzhen Special Economic Zone.
Nine Months Ended September 30, 2003 as compared to the Nine Months Ended
September 30, 2002
Revenues
During the nine month period ended September 30, 2003, we recorded approximately
$41,662,000 in operating revenues as compared to $41,207,000 in operating
revenues during the nine month period ended September 30, 2002, an increase of
1.10%. 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 $87,000 in rental income from equipment
leases we entered into with certain of our OEM partners, a
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decrease of $653,000 from the nine month period ended September 30, 2002, during
which we recorded $740,000 in rental income. The decrease in rental income
resulted from our sale of the equipment.
Operating Expenses
During the nine month period ended September 30, 2003, our operating expenses
increased by $5,966,000, to $38,451,000 as compared to operating expenses of
$32,485,000 during the nine month period ended September 30, 2002, an increase
of 18.37%. Manufacturing and other costs of sales rose by $2,922,000 to
$30,042,000 during the nine month period ended September 30, 2003 as compared to
$27,120,000 during the nine month period ended September 30, 2002, an increase
of approximately 10.77%. The increase in our costs of sales resulted from our
increased sales. During the nine month period ended September 30, 2003, we also
had non-cash compensation costs of $3,473,000 as compared to no such expenses
during the nine month period ended September 30, 2002. These expenses related
primarily to our use of stock or stock options to pay consultants and employees
during the nine month period ended September 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 $3,211,000 during the nine month period ended September 30, 2003 as
compared to operating income of $8,722,000 for the nine month period ended
September 30, 2002. We experienced a net loss of $(343,000) for the nine month
period ended September 30, 2003 as compared to net income of $4,356,000 for the
nine month period ended September 30, 2002. In addition, our net income was
adversely affected during the nine month period ended September 30, 2003 by the
decision of the government of Shenzhen to suspend a preferential tax policy that
resulted in our payment of approximately $725,000 in value added tax.
Our general and administrative expenses totaled approximately $1,356,000 for the
nine month period ended September 30, 2003 as compared to $1,576,000 for the
nine month period ended September 30, 2002, a decrease of $220,000. 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 nine month period ended September 30, 2003 we spent approximately
$1,133,000 in research and development costs as compared to $1,032,000 for the
nine month period ended September 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 nine month period ended September 30, 2003 we also granted incentives to
engineers who invented new products.
During the nine month period ended September 30, 2003, we spent $1,860,000 on
sales and marketing expenses as compared to $1,719,000 spent on sales and
marketing expenses during the nine month period ended September 30, 2002, an
increase of 8.20%. 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 increase in our sales will offset
the employment costs.
On May 13 and June 24, 2003, pursuant to the EI Plan, we granted stock options
to purchase a total of 1,262,500 shares of our common stock to directors and
others. Under USGAAP, no compensation expense
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is recorded for the 425,000 stock options granted to employees. For others, the
options were measured at their fair value of $4.16 using the Black-Scholes
option pricing model and the fair value of the services.
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 $2,248,250 and 732,500 shares
were granted to employees for services having a total value of $3,662,500.
On July 9, 2003, we issued 25,187 shares of our common stock in exchange for
services having a value of $69,431 rendered to us by a consultant. The per share
value of the common stock was determined by reference to the market price at the
date of grant.
In August 2003, we issued 1,500,000 shares of common stock and 51,948 shares of
common stock for services that will be rendered over a period of five years and
one year, respectively. There were no performance commitment dates, as defined
in EITF 96-18, prior to the completion of performance, therefore, these
stock-based awards were measured at their fair value as of September 30, 2003.
During the first nine-months of the 2003 fiscal year, our principal stockholder,
Dr. Kit Tsui, granted stock awards to various parties, including employees and
business associates, to enhance or maintain the value of his investment. We
refer to these grants as the "PS Plan." We benefit from these awards because
they foster employee loyalty and, possibly, improved employee performance and
the grants to business associates help to maintain business relationships. Under
the PS Plan, Dr. Tsui granted restricted stock awards of 1,281,519 shares of his
common stock, which was issued to him for in conjunction with the
recapitalizaton and acquisition of LPI. Of this amount, 1,057,666 shares, having
a value of $5,288,000, were granted to employees and 223,853 shares, having a
value of $1,119,000, were granted to his business associates, who are our
suppliers and customers.
Under both the EI Plan and the PS Plan, the deferred 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.
Interest Expense and Other Income, Net
Interest expense and other income, net totaled approximately $(818,000) and
$62,000, respectively, for the nine-month period ended September 30, 2003 as
compared to $(1,212,000) and $152,000, respectively, for the nine month period
ended September 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 $5,034,000 during the nine month period ended September 30,
2003, decreasing our interest expense.
Minority Interest
During the nine month period ended September 30, 2003 we recorded $(2,160,000)
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 nine month period ended
September 30, 2002, we recorded $(2,598,000) attributable to these interests.
The decrease in income resulted from a decline in operating income earned during
the nine month period ended September 30, 2003 as compared to the nine month
period ended September 30, 2002.
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Revenues declined because of the payment of value added tax on the products we
sold due to the elimination of the tax holiday in the Shenzhen Special Economic
Zone.
Liquidity and Capital Resources
To date, we have financed our operations with cash from our operating activities
and bank loans totaling approximately $14,221,000. Our bank loans, totaling
approximately $5,564,000, were due to be paid on December 31, 2002. We paid back
$4,838,000 of these loans, and $726,000 has been extended on new terms.
Cash and cash equivalents for the nine months ended September 30, 2003 totaled
approximately $23,880,000 and were used to fund operations.
We have invested in marketable securities. During the quarter ended September
30, 2003, the value of our marketable securities increased by $5,000, from
$1,524,000 on December 31, 2002 to $1,529,000. Our marketable securities
represent approximately 2.25% of our current assets.
As of September 30, 2003, we had a current ratio of 1.46, net working capital of
$17,608,000 and net equity of $11,254,000.
We have not made any material commitments for capital expenditures since the end
of our last fiscal year, December 31, 2002.
During the nine month period ended September 30, 2003, our net cash and cash
equivalents increased by approximately $8,516,000, from approximately
$15,364,000 as of December 31, 2002 to $23,880,000 as of September 30, 2003, an
increase of approximately 55.43%. This increase was mainly attributable to the
acquisition of LPI, which provided us with $12,579,000 in cash.
Net cash provided by operating activities during the nine months ended September
30, 2003 totaled approximately $5,514,000. 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 abolish a
preferential tax policy.
Cash provided from financing activities for the nine month period ended
September 30, 2003 totaled approximately $(2,837,000), representing repayment of
short-term debt.
We used cash to pay interest of approximately $690,000 during the nine month
period ended September 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 September 30,
2003.
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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.
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.
Goodwill on consolidation
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at date of acquisition and is evaluated at least
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.
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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 September 30, 2003, 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
ITEM 1 LEGAL PROCEEDINGS
Not Applicable
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 29, 2003 we entered into an agreement with The Research Works. Pursuant
to this agreement, we agreed to issue 51,948 of our restricted common stock in
exchanges for services rendered by The Research Works. The value of the common
stock on the date we issued the stock, which was September 30, 2003, was $2.15
per share.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5 OTHER INFORMATION
Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K
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On July 28, 2003 the Company filed a report on Form 8-K which disclosed pro
forma financial statements in connection with the acquisition of Li Sun Power
International Limited.
On July 30, 2003 the Company filed an amended report on Form 8-K which amended
the pro forma financial statements that had been filed on July 28, 2003 relating
to the acquisition of Li Sun Power International Limited.
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 Action 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)
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(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.
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 November 13, 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