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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: January 31, 2003
Commission File Number: 0-27002
INTERNATIONAL DISPLAYWORKS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3333649
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
599 Menlo Drive, Suite 200, Rocklin, California 95765-3708
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(916) 415-0864
--------------
(Registrant's telephone number, including area code)
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. [X] yes [ ] no
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the registrant's Common Stock, no par value,
as of February 24, 2003 was 19,318,246.
INTERNATIONAL DISPLAYWORKS, INC.
INDEX
Part 1 Financial Information Page Number
-----------
Item 1. Financial Statements (Unaudited):
Balance Sheets at January 31, 2003 and October 31, 2002..............3
Statements of Operations for the
Three months ended January 31, 2003 and January 31, 2002.............4
Statements of Cash Flows for the
Three months ended January 31, 2003 and January 31, 2002.............5
Notes to Financial Statements........................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation........................11
Item 3. Quantitative and Qualitative Disclosure About Market Risk...........15
Item 4. Controls and Procedures.............................................16
Part II Other Information
Item 1. Legal Proceedings...................................................16
Item 2. Changes in Securities...............................................16
Item 3. Default Upon Senior Securities......................................17
Item 4. Submission of Matters to a Vote of Security Holders.................17
Item 5. Other Information...................................................17
Item 6. Exhibits and Reports on Form 8-K................................... 17
Signatures...................................................................18
Certifications...............................................................19
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
----------------------- -------------------------
ASSETS January 31, October 31,
------
2003 2002
----------------------- -------------------------
Current assets:
Cash and cash equivalents $ 824 $ 1,556
Accounts receivable,
net of allowance for doubtful accounts of $341 and
$341 2,836 3,064
Inventories 1,691 1,460
Prepaid expense 470 538
----------------------- -------------------------
Total current assets 5,821 6,618
----------------------- -------------------------
Property and equipment at cost, net 5,131 5,197
----------------------- -------------------------
Total assets $ 10,952 $ 11,815
======================= =========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,063 $ 3,070
Accrued liabilities 840 1,365
Current portion of long term debt - related parties 140 150
Current portion of long term debt 1,195 1,508
----------------------- -------------------------
Total current liabilities 5,238 6,093
Long-term debt, net of current portion - related parties 424 474
Long-term debt, net of current portion 806 806
----------------------- -------------------------
Total liabilities 6,468 7,373
----------------------- -------------------------
Commitments and contingencies
Shareholders' equity
Preferred stock, no par, 10,000,000 shares authorized
no shares issued or outstanding - -
Common stock, no par, 40,000,000 shares authorized,
19,318,246 and 19,217,246 shares issued and
outstanding at January 31, 2003 and October 31, 2002
respectively 41,232 41,216
Accumulated deficit (36,819) (36,845)
Cumulative translation adjustment 71 71
----------------------- -------------------------
Total shareholders' equity 4,484 4,442
----------------------- -------------------------
Total liabilities and shareholders' equity $ 10,952 $ 11,815
======================= =========================
See accompanying notes to financial statements
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except Share and per share data)
Periods Ended
-------------------------------------------
January 31, 2003 January 31, 2002
------------------- --- -------------------
Net sales
Cost of goods sold $ 5,121 $ 4,611
Gross profit 3,629 3,456
------------------- -------------------
1,492 1,155
Operating expenses:
General and administrative 754 841
Selling, marketing and customer service 503 349
Engineering, advanced design and
product management 146 148
------------------- -------------------
Total operating expenses 1,403 1,338
------------------- -------------------
Operating income (loss) 89 (183)
------------------- -------------------
Other income (expense):
Interest expense (82) (181)
Other income 18 65
------------------- -------------------
Total other income (expense) (64) (116)
------------------- -------------------
Income (Loss) from continuing operations
before income taxes 25 (299)
Provision for income taxes - -
------------------- -------------------
Net income (loss) 25 (299)
=================== ===================
Basic and diluted loss per common share $ (0.00) $ (0.02)
=================== ===================
Weighted average common shares
outstanding basic and diluted 19,246,253 19,321,213
=================== ===================
See accompanying notes to financial statement
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year to date
------------------------------------------------
January 31, January 31,
2003 2002
-------------------- ----------------------
Cash flows from operating activities:
Net income (loss) $ 25 $ (299)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation 206 278
Amortization of goodwill - 108
Loss (income) on foreign currency translation 3
-------------------- ----------------------
231 90
Changes in operating assets and liabilities,
net of business combinations
(Increase) decrease in:
Accounts receivable 228 360
Inventories (231) 65
Prepaid expenses and other
current assets 69 94
Accounts payable (7) 371
Accrued liabilities (525) (45)
-------------------- ----------------------
Net cash provided by (used
in) operating activities (235) 935
Cash flows from investing activities:
Acquisitions of property, plant and equipment (140) (51)
-------------------- ----------------------
Net cash used in investing
activities (140) (51)
Cash flows from financing activities:
Proceeds from issuance of common stock 16 -
Payments on debt - related parties (10) -
Payments on debt (363) (323)
-------------------- ----------------------
Net cash provided by (used in) financing activities (357) (323)
Increase (decrease) in cash and cash equivalents (732) 561
Cash and cash equivalents at beginning of period 1,556 982
-------------------- ----------------------
Cash and cash equivalents at end of period $ 824 $ 1,543
==================== ======================
See accompanying notes to financial statements
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
International DisplayWorks, Inc., and its subsidiaries (collectively referred to
as the "Company" or IDW"). The unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended January 31,
2003 are not necessarily indicative of the results that may be expected for the
2003 fiscal year. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 2002.
The accompanying consolidated balance sheet at October 31, 2002, has been
derived from the audited consolidated financial statements at that date, but
does not include all disclosures required by generally accepted accounting
principles.
2. ORGANIZATION
The Companay incorporated in the State of Delaware, is headquartered in
Rocklin, California.
The Company is engaged in the design, manufacture and worldwide
distribution of liquid crystal displays (LCDs), modules, and assemblies for
major original equipment manufacturers (OEMs) applications in telecommunication,
automotive, industrial, medical, and consumer products.
The Company manufactures its products through its wholly owned subsidiaries
MULCD Microelectronics Company Ltd. ("MULCD") and IDW Shenzhen Technology
Development Company, Ltd. ("IDWT") collectively the "PRC Companies" which are
owned by International DisplayWorks (Hong Kong) Ltd. ("IDWHK") a wholly owned
subsidiary of IDW.
During the quarter ended January 31, 2003 and since the acquisition of the
PRC companies on February 1, 2000, the Company has operated in a single business
segment of electronic equipment and parts.
Going Concern
In the three months ended January 31, 2003, the Company generated net
income of $25,000 compared to losses of $299,000 for the three months ended
January 31, 2002, which included an amortization charge for goodwill of
$108,000. There are no amortization charges for the quarter ended January 31,
2003 as all remaining goodwill was written off at the end of fiscal 2002.
Liquidity remains tight with maturities of long-term debt falling due in
fiscal 2003 of $1,335,000 upon which the Company has not yet concluded
negotiations for rollover or extension. IDWT must invest, by way of appropriate
capital expenditures, $1,779,000 to comply with the investment conditions under
which its business license was granted. The planned future expansion of IDW and
its subsidiaries has $2,400,000 of planned capital expenditures in fiscal 2003
to enhance existing production capabilities, assure product quality and reduce
costs. Execution of this plan would satisfy the $1,779,000 required to comply
with the business license conditions of IDWT. In addition, IDW may require
additional working capital to fund revenue growth and opportunities in fiscal
2003.
The Company believes that it has developed a viable plan to address these
issues through general operations and sales, and that its plan will enable the
Company to continue as a going concern for the next twelve months. The plan
includes the realization of revenues from the sale of products, the consummation
of debt or equity financing and the reduction of certain operating expenses as
required. The financial statements do not include any adjustments to reflect the
uncertainties related to the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the inability of
the Company to continue as a going concern. There is no assurance that the
Company will be able to achieve its sales projections or obtain additional
financing or that such events will be on terms favorable to the Company.
The financial statements do not include any adjustments relating to the
recoverability and classification of assets and liabilities that might result
should the Company be unable to continue as a going concern. Management
believes, based on current forecasts of projected order volumes that it will be
successful in extending, rolling over or replacing its current long term debt as
it falls due and that the Company will generate sufficient liquidity from
operations, such that it will be able to sustain the Company's operating needs
in fiscal year 2003. Further, in the event of a shortfall, management believes
that it has the ability to raise additional equity capital and/or debt financing
and ability to cut operating costs. However, there can be no assurances that the
Company will be successful in raising additional capital.
3. INVENTORY
Inventories consisted of the following (in thousands):
January 31, 2003 October 31, 2002
------------------- ------------------
Finished goods $ 222 $ 165
Work-in-progress 341 250
Raw materials 1,497 1,414
Less: reserve for
obsolete inventory (369) (369)
------------------- ------------------
Total inventory $ 1,691 $ 1,460
=================== ==================
4. PREPAID EXPENSES
Prepaid expenses and other current assets consisted of the following (in
thousands):
January 31, 2003 October 31, 2002
------------------- -----------------
Prepaid expenses $ 168 $ 206
Advances to suppliers 87 172
PRC - VAT tax refund 150 135
Other 65 25
------------------- -----------------
Total prepaid expenses $ 470 $ 538
=================== =================
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
January 31, 2003 October 31, 2002
---------------- ----------------
Land and buildings $ 1,185 $ 1,185
Furniture, fixtures and equipment 1,837 1,837
Machinery 4,859 4,720
Leasehold improvements 83 83
---------------- ----------------
7,964 7,825
Less accumulated depreciation (2,833) (2,628)
---------------- ----------------
Net property, plant and equipment $ 5,131 $ 5,197
================ ================
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
January 31, 2003 October 31, 2002
---------------- ----------------
Accrued payroll and related liabilities $ 296 $ 523
Accrued staff hostel expenses 99 247
Accrued inventory purchases 140 165
Accrued PRC government management fees 43 115
Accrued commissions 111 102
Other accrued liabilities 151 213
---------------- ----------------
Total accrued liabilities $ 840 $ 1,365
================ ================
7. LONG TERM DEBT
Maturities of long-term debt are as follows:
Year Ending
October 31, Related parties Third parties Total
- --------------------- ------------------------ --------------------- --------------------
2003 $ 140 $ 1,195 $ 1,335
2004 424 403 827
2005 - 403 403
------------------------ --------------------- --------------------
Totals $ 564 $ 2,264 $ 2,565
======================== ===================== ====================
On February 27, 2003, related parties agreed to extend the due date of
$524,000 of notes payable falling due on December 31, 2003 to June 30, 2004.
8. STOCKHOLDERS' EQUITY
Stock Option Plans
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123
Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change of the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years ending after December 15,
2002. The expanded annual disclosure requirements and transition provisions are
effective for fiscal years ending after December 15, 2002. The Company is
required to adopt SFAS No. 148 for its fiscal year beginning November 1, 2002.
Management does not expect the adoption of SFAS No. 148 to have a material
effect on the Company's financial position, results of operations, or cash
flows.
At January 31, 2003, the Company has two stock-based employee compensation
plans and one non-employee and director stock-based compensation plan. The
Company accounts for these plans under the recognition and measurement
principles of APB No. 25, "Accounting for Stock Issued to Employees", and the
related interpretations. Stock-based employee compensation costs are not
reflected in net income when options granted under the plan had an exercise
price equal to or greater than the market value of the underlying common stock
on the date of grant.
During the quarter ended January 31, 2003, 92,000 options were granted at a
price equal to market value at the date of grant, 130,000 options were cancelled
or expired, and no options were exercised under the employee stock option plans.
The following table illustrates the effect on net income (loss) and
earnings per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation:
-------------------------------
Three Months Ended
January 31,
-------------------------------
2003 2002
---------------- -------------
Net income (loss) as reported 25 (299)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards. (12) (33)
---------------- -------------
Pro forma net income (loss) 13 (332)
================ =============
Earnings per share:
Basic and diluted - as reported $ 0.00 (0.02)
================ =============
Basic and diluted - pro forma $ 0.00 $ (0.02)
================ =============
Common Stock Shares Issued
During the three months ended January 31, 2003, the Company issued 100,000
shares of common stock as compensation to an outside consultant. The shares
were issued at $0.16, fair market value on the date of issue. The Company
also issued 1,000 shares of common stock as a retirement gift to an
employee. The shares were issued at $0.15, fair market value on the date of
issue. The value of the shares was charged to expense in both cases.
9. SEGMENT AND GEOGRAPHIC INFORMATION
The Company produces displays and display modules for the end products of
OEM manufacturers and hence operates in one segment. However, the Company
has two major geographic territories where it sells and distributes
essentially the same products. These are the United States, and Hong Kong
(including China). The following represents geographical data for
continuing operations (in thousands):
Revenues for Three Months Ended: January 31, January 31,
2003 2002
United States $ 1,991 $ 2,834
Hong Kong (including China) 2,453 1,658
Other 677 119
------------ ------------
$ 5,121 $ 4,611
============ ============
"Long Lived" Assets
January 31, October 31,
2003 2002
United States $ 149 $ 162
Hong Kong (including China) 4,982 5,035
------------ ------------
$ 5,131 $ 5,197
============ ============
10. EMPLOYMENT CONTRACT
In November 2002, the Company entered into an employment agreement with one
of its officers. The agreement has a term of two years expiring on October 31,
2004. Annual compensation is approximately $163,000 inclusive of the annual cost
of $40,600 housing accommodation. The agreement has severance provisions should
the Company elect to terminate the agreement early.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Accounting for Acquisition of International DisplayWorks, Inc., MULCD
Microelectronics Company Ltd., and IDW Shenzhen Technology Development company,
Ltd.
As previously disclosed in the Company's prior reports, on January 31,
2000, the Company acquired 100% of the outstanding shares of International
DisplayWorks, Inc., ("IDW") a Delaware corporation, through the issuance of
2,680,000 shares of common stock (it subsequently merged with this newly
acquired subsidiary and assumed its name). On February 1, 2000, IDW through its
wholly owned subsidiary, International DisplayWorks (Hong Kong) Ltd. ("IDW HK"),
acquired 100% of the shares of MULCD Microelectronics Company Ltd. ("MULCD") and
IDW Shenzhen Technology Development Company, Ltd. ("IDWT"). MULCD and IDWT were
and continue to be engaged in the manufacturing and assembly of LCDs and modules
in the Peoples Republic of China ("PRC Companies"). The PRC Companies
manufacture LCDs and assemblies for markets in the USA, Europe and Far East.
Acquisition of the PRC Companies required a total payment of approximately
$8,481,000 giving rise to goodwill of $6,474,000. $1,187,000 was amortized
through the period ended October 31, 2002 over 15 years (with an annual charge
of $432,000) and the balance written off on October 31, 2002 as an impairment
charge. The acquisitions of IDW and the PRC Companies were treated as separate
transactions and both were accounted for using the purchase method of
accounting. In October 2002, the Company recorded a goodwill impairment of
$5,287,000, which eliminated all remaining goodwill of the Company. Goodwill was
determined to have been impaired because the Company incurred losses of
$1,385,000 (before goodwill and long-lived asset impairment charges), $2,571,000
and $4,080,000 in fiscal periods ended October 31, 2002, October 31, 2001 and
December 30, 2000 and has $1,658,000 of debt falling due within one year. These
conditions caused management to commission an independent valuation of the
goodwill under the provisions of SFAS No. 121 and evaluate the carrying value of
certain long-lived assets. Goodwill was determined to be totally impaired and
the carrying value of certain long-lived assets to also be impaired. The charge
to write off these impairments was included as a component of operating expenses
in fiscal 2002.
Forward-Looking Statements
This report contains forward-looking statements, which are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The forward-looking statements involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements.
When used in this report, the words "anticipate," "believe," "estimate,"
"expect" and similar expressions as they relate to the Company or its
management, including without limitation, the Company's subsidiaries, are
intended to identify such forward-looking statements. The Company's actual
results, performance or achievements could differ materially from the results
expressed in, or implied by these forward-looking statements. The Company wishes
to caution readers to consider the important factors, among others, that in some
cases have affected and in the future could affect the Company's actual results
and could cause actual consolidated results for fiscal year 2003, and beyond, to
differ materially from those expressed in any forward-looking statements made by
or on behalf of the Company. These factors include without limitation, the
Company's change in business lines, the ability to obtain capital and other
financing in the amounts and times needed, realization of forecasted income and
expenses by the PRC Companies (as defined herein), initiatives by competitors,
price pressures, changes in the political climate for business in the People's
Republic of China, the loss of one or more of our significant customers, and
other risk factors listed from time to time in the Company's SEC reports
including in particular, the factors and discussion in the Company's Form 10-K
for the year ended October 31, 2002 and risk factors listed below.
Other factors, many of which could be beyond the IDW's control, include the
following:
o IDW's ability to maintain sales, including sales of higher margin
products, and sales in Far East, Europe and the United States;
o IDW's ability to expand sales into other industries that have
significant growth potential and to establish strong and long-
lasting relationships with companies in those industries;
o IDW's ability to provide significant design and manufacturing
services for those companies in a timely and cost-efficient manner;
o IDW's ability to raise sufficient capital to fund operations and
growth;
o Over the long run, IDW's ability to raise additional capital to buy
equipment and expand plant facilities needed to maintain capacity
and respond to technical changes;
o IDW's success in maintaining customer satisfaction with its design
and manufacturing services and its products' performance and
reliability;
o Customer order patterns, changes in order mix, and the level and
timing of orders placed by customers that IDW can complete in a
calendar quarter;
o Market acceptance and demand for our products and the product life;
o The availability and effective utilization of manufacturing
capacity;
o The quality, availability and cost of raw materials, equipment and
supplies;
o The cyclical nature of the electronics industries;
o Technological changes and technological obsolescence; and
o Competition and competitive pressure on prices.
o IDW's ability to maintain costs on long-term contracts at a fixed
selling price.
Overview
The Company designs and manufactures a wide range of display products. The
display company, MULCD, produces the LCDs. The electronics company, IDWT,
designs and manufactures customized LCD modules adding value to the basic
displays with electronics, keypads, interface circuitry, back lighting and
mounting hardware. IDWT also produces assemblies without LCDs and has production
and design capability in module processes, including chip-on-glass ("COG"),
surface mount technology ("SMT"), chip-on-board ("COB"), tape automated bonding
("TAB"), keypads and back lighting.
A wide variety of factors will affect the Company's future operating
results and could adversely impact its net sales and profitability. Significant
factors in IDW's success will be its ability to establish and maintain design
and manufacturing relationships with key OEM customers that will generate
sufficient orders at sufficient margins to increase revenues and profitability.
Although the Company's products are incorporated in a wide variety of
communications, consumer and appliance products, most of the Company's total
sales in the quarter ending January 31, 2003 were for display modules used in
the consumer appliance industry.
A slowdown in demand for types of products that utilize the Company's
devices as a result of economic or other conditions and the market served by the
Company or other factors could adversely affect the Company's operating results.
The Company's products are sold into a market characterized by increasingly
rapid product turnaround, increasingly shorter lead times, product obsolescence,
order cancellation and other factors that make it difficult to forecast future
orders, production and personnel needs and other resource requirements with a
high level of certainty. The Company's ability to anticipate such factors and
respond to them in a timely fashion will affect its ability to utilize its
manufacturing capacity effectively, maintain a proper product mix and avoid
downtimes due to product conversions and other factors. Such uncertainty also
creates difficulties in maintaining adequate supplies of raw materials to meet
shifting customer needs and customer orders placed on short notice.
Results of Operations
Comparison of the Three Months Ended January 31, 2003 and January 31, 2002.
Continuing Operations - The Company's continuing operations consist of the
International DisplayWorks, Inc. a Delaware Corporation (IDW), International
DisplayWorks (Hong Kong) Limited (IDWHK) and IDW Technology (Shenzhen) Co., Ltd.
(IDWT) MULCD Microelectronics (Shenzhen) Co., Ltd. (MULCD), collectively the PRC
Companies, which manufacture and distribute liquid crystal displays and
assemblies.
Net Sales - Net sales were $5,121,000 and $4,611,000 for the quarters ended
January 31, 2003 and 2002 respectively, an increase of 11%. The increase can be
attributed primarily to an increase in production for the Company's largest
customer. This customer accounted for 40% and 32% of the Company's net sales in
the quarter ended January 31, 2003 and 2002 respectively.
Cost of Goods Sold - Cost of sales were 71% and 75% of net sales for the
quarters ended January 31, 2003 and 2002 respectively. Approximately 2% of the
decrease is attributed to the release of a supplier accrual no longer owed by
the Company. Without this adjustment cost of sales would have been 73% and 75%
for the quarters ended January 31, 2003 and 2002 respectively. The remaining
decrease can be attributed to the Company's ability to maintain yields, the
continued focus on cost reduction, and absorption of fixed overhead over a
larger sales base.
General and Administrative - General and Administrative expenses decreased
10% to $754,000 from $841,000 for the quarters ended January 31, 2003 and 2002
respectively. The primary reason for the decrease is the elimination of
amortization expense related to the goodwill which was written off at the end
fiscal 2002. Significant elements of this expense include employee related
expenses of $378,000, professional fees of $49,000, rent, telephone and
utilities of $44,000, insurance of $52,000, and local PRC government fees of
$49,000 for the quarter ended January 31, 2003.
Selling, Marketing and Customer Service - Selling, Marketing and Customer
Service expenses increased to $503,000 from $349,000 for the quarters ended
January 31, 2003 and 2002 respectively, an increase of 44%. Significant elements
of this expense consist of employee related expenses of $193,000, trade show
expense of $36,000, commission expense of $128,000, rent of $16,000, and travel
related costs of $36,000 for the quarter ended January 31, 2003. Significant
elements contributing to the increase in this expense category were due to the
additional sales staff and participation in trade shows, both domestically and
in Europe to better position the Company for growth in fiscal 2003.
Engineering Advanced Design and Project Management - Engineering, advanced
design and project management expenses were $146,000 and $148,000 for the
quarters ended January 31, 2003 and 2002 respectively, a decrease of 1%.
Significant elements of this expense include employee related expenses of
$138,000 and $4,000 for travel and related costs.
Operating Expenses - Operating expenses consist of general and
administrative, selling, marketing, customer service, and engineering. Operating
expenses increased 5% to $1,403,000 from $1,338,000 for the quarters ended
January 31, 2003 and 2002 respectively. As a percentage of sales, operating
expenses were 27% and 29% for the quarters ended January 31, 2003 and 2002
respectively, a decrease of 2%. Significant elements contributing to the
increase in operating expenses were an increase in selling expenses due to the
additional sales staff and participation in trade shows, both domestically and
in Europe to better position the company for growth in fiscal 2003.
Interest Expense - Interest expense decreased 55% to $82,000 from $181,000
for the quarters ended January 31, 2003 and 2002 respectively. The decrease can
be attributed to the reduction in amortization of warrant costs related to
financing activities and debt retirement.
Net Income (Loss) - The net income was $25,000 ($0.00 per share) for the
quarter ended January 31, 2003 and the net loss was $299,000 ($0.02 per share)
for the quarter ended January 31, 2002. The primary reasons for the improvement
are increase in sales, increase in gross profit, and decrease in amortization
and interest expenses.
Liquidity and Capital Resources
The Company requires capital to repay certain existing fixed obligations,
and to provide for additional working capital and investment in capital
equipment if it is to grow in accordance with its plan. As discussed below, the
Company intends to generate working capital to implement its current Business
Plan, but may require additional debt and/or equity to refinance its borrowing
and capital expenditure program.
The Company generated net income from continuing operations of $25,000
during the three months ended January 31, 2003 and had an accumulated deficit of
$36,819,000, of which $23,773,000 is from discontinued operations. The Company
has shown a negative cash flow from operations in the quarter ended January 31,
2003 and a positive cash flow from operations in the fiscal year ended October
31, 2002.
Net cash used in operating activities was $235,000 for the quarter ended
January 31, 2003. Cash provided by operating activities for the quarter ended
January 31, 2003 was $231,000 due to decreases in accounts receivable of
$228,000, increases in inventories of $231,000, decreases in prepaid expenses of
$69,000, decreases in accounts payable of $7,000 and decreases in accrued
liabilities of $525,000.
Net cash used in investing activities for the quarter ended January 31,
2003 was $140,000 in capital expenditures for property and equipment.
Net cash used in financing activities for the quarter ended January 31,
2003 was $357,000 consisting primarily of payments on long-term debt.
Liquidity remains tight with maturities of long-term debt falling due in
fiscal 2003 of $1,335,000 upon which the Company has not yet concluded
negotiations for rollover or extension. IDWT must invest, by way of appropriate
capital expenditures, $1,779,000 to comply with the investment conditions under
which its business license was granted. The planned future expansion of the
Company and its subsidiaries has $2,400,000 of planned capital expenditures in
fiscal 2003 to enhance existing production capabilities, assure product quality
reduce costs. Execution of this plan would satisfy the $1,779,000 required to
comply with the business license conditions of IDWT. In addition, the Company
may require additional working capital to fund revenue growth and opportunities
in fiscal 2003.
The Company believes that it has developed a viable plan to address these
issues through general operations and sales, and that its plan will enable the
Company to continue as a going concern for the next twelve months. The plan
includes the realization of revenues from the sale of products, the consummation
of debt or equity financing and the reduction of certain operating expenses as
required. The financial statements do not include any adjustments to reflect the
uncertainties related to the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the inability of
the Company to continue as a going concern. There is no assurance that the
Company will be able to achieve its sales projections or obtain additional
financing or that such events will be on terms favorable to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inflation Risk
While inflation has remained low in recent years in the markets in which we
sell and is expected to remain so for the foreseeable future the general
inflation rate in the PRC is higher with wage expectation running at 5-10%
annually. Such inflation represents a risk to our profitability if sustained and
not compensated for by a movement in exchange rates or productivity
improvements.
Interest Rate Risk
The Company's principal exposure to interest rate changes is on the
factoring lines which are based on prime rates in the US and Hong Kong. Interest
on other financial obligations is fixed for the duration of the obligation.
Foreign Currency Exchange Risk
IDW derives the majority of its revenues in U.S. and Hong Kong dollars. The
Hong Kong dollar remained "pegged" to the U.S. dollar in the quarter ended
January 31, 2003.
The Company incurs approximately 30% of its operating expenses in the PRC
currency, Renminbi Yuan ("RMB"). An increase in the value of the RMB against the
U.S. Dollar would result in an increase in operating costs incurred in the PRC
and a translation gain on cash balances held in RMB in anticipation of meeting
payment obligations. The Company generally does not hold more than two weeks of
RMB requirements and they are always less than total payment obligations.
The Company has long-term debt, repayable in installments over three years,
of RMB 10 million (US$ 1.2 million at current exchange rates), designated in
RMB. An increase in the value of the RMB against the US dollar would result in a
translation loss in US dollar terms which would be realized as US dollars from
sales revenues are utilized to meet the repayment obligation.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
Within the 90 days prior to the date of this Form 10-Q, 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 along with the
Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief
Executive Officer along with the Company's Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company required to be
included in this Form 10-Q.
Changes in Internal Controls
There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to exposure to legal proceedings
and claims which arise in the ordinary course of business. In the opinion of
management, the amount of ultimate liability with respect to any such current
actions will not materially affect the financial position or results of
operations of the Company.
ITEM 2. CHANGES IN SECURITIES
During the first quarter ended January 31, 2003, the Company issued 100,000
shares of common stock at $0.16 per share to a consultant in exchange for
services rendered to the Company. There were no broker or placement agents in
this transaction. This issuance of the common stock was made in a private
placement in reliance upon the exemptions from registration provided under
Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of
Regulation D, promulgated by the SEC under federal securities laws and a
comparable exemption for sales to "accredited" investors under state securities
laws. The issuance was made to an accredited investor as defined in Rule 501(a)
under the Securities Act, no general solicitation was made by the Company or any
person acting on our behalf, the securities were subject to transfer
restrictions and contained an appropriate legend stating that they had not been
registered under the Securities Act and may not be offered or sold absent
registration or pursuant to an exemption there from.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-NONE-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-NONE-
ITEM 5. OTHER INFORMATION
On February 27, 2003 related parties agreed to extend the due date of
$524,000 of notes payable falling due on December 31, 2003 to June 30, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
99.1 Certification of Chief Executive and Chief Financial Officer
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(b) Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERNATIONAL DISPLAYWORKS, INC.
Date: March 11, 2003 /S/ IAN N. BEBBINGTON
-------------- -------------------------------------------
Ian N. Bebbington, Chief Financial Officer
(Principal Accounting Officer and Principal
Financial Officer)