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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, 2004
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. Yes [X] 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 March 4, 2004 was 24,810,508.
INTERNATIONAL DISPLAYWORKS, INC.
INDEX
Part 1 Financial Information Page Number
-----------
Item 1. Financial Statements (Unaudited):
Balance Sheets at January 31, 2004 and October 31, 2003............3
Statements of Operations for the
Three months ended January 31, 2004 and 2003.......................4
Statements of Cash Flows for the
Three months ended January 31, 2004 and 2003.......................5
Notes to Financial Statements......................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation......................10
Item 3. Quantitative and Qualitative Disclosure About Market Risk...........14
Item 4. Controls and Procedures.............................................14
Part II Other Information
Item 1. Legal Proceedings...................................................15
Item 2. Changes in Securities...............................................15
Item 3. Default Upon Senior Securities......................................15
Item 4. Submission of Matters to a Vote of Security Holders.................15
Item 5. Other Information...................................................15
Item 6. Exhibits and Reports on Form 8-K....................................15
Signatures...................................................................17
Certifications...............................................................18
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
----------------- ----------------
ASSETS January 31, October 31,
------
2004 2003
----------------- ----------------
Current assets:
Cash and cash equivalents $ 3,744 $ 1,178
Accounts receivable,
net of allowance for doubtful accounts of $39 and $40 6,788 4,260
Inventories 3,103 2,465
Prepaid expense 950 1,361
----------------- ----------------
Total current assets
14,585 9,264
----------------- ----------------
Property and equipment at cost, net 5,422 4,796
----------------- ----------------
Total assets $ 20,007 $ 14,060
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,995 $ 4,770
Accrued liabilities 1,896 1,636
Line of credit 402 1,051
Current portion of long term debt - related parties 534 50
Current portion of long term debt 1,402 452
----------------- ----------------
Total current liabilities
10,229 7,959
Long-term debt, net of current portion - related parties - 624
Long-term debt, net of current portion 403 1,253
----------------- ----------------
Total liabilities 10,632 9,836
----------------- ----------------
Commitments and contingencies
Shareholders' equity
Preferred stock, no par, 10,000,000 shares authorized, none issued Common
Stock, no par, 40,000,000 shares authorized
24,688,508 and 20,984,913 shares issued and outstanding
at January 31, 2004 and October 31, 2003 respectively
46,335 41,806
Accumulated deficit (37,032) (37,653)
Cumulative translation adjustment 72 71
----------------- ----------------
Total shareholders' equity
9,375 4,224
----------------- ----------------
Total liabilities and shareholders' equity $ 20,007 $ 14,060
================= ================
The accompanying notes are an integral part of these financial statements
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except Share and per share data)
---------------------------------------------------------
Three Months Ended
---------------------------------------------------------
January 31, 2004 January 31, 2003
Net sales $ 9,796 $ 5,121
Cost of goods sold 7,418 3,689
-------------------------- ---------------------------
Gross profit 2,378 1,432
-------------------------- ---------------------------
Operating expenses:
General and administrative 1,106 754
Sales, marketing and customer service 394 443
Engineering, advanced design and
product management 142 146
-------------------------- ---------------------------
Total operating expenses 1,642 1,343
-------------------------- ---------------------------
Operating income 736 89
-------------------------- ---------------------------
Other income (expense):
Interest expense (138) (82)
Other income 23 18
--------------------------
---------------------------
Total other income (expense) (115) (64)
-------------------------- ---------------------------
Income before income taxes 621 25
Provision for income taxes - -
-------------------------- ---------------------------
Net income 621 25
========================== ===========================
Net income per common share:
Basic $ 0.03 $ 0.00
========================== ===========================
Diluted $ 0.02 $ 0.00
========================== ===========================
Weighted average number of shares used in
computing share amounts:
Basic 22,819,624 19,246,253
========================== ===========================
Diluted 25,523,436 19,246,253
========================== ===========================
The accompanying notes are an integral part of these financial statements
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
-------------------------------------
January 31, January 31,
2004 2003
-------------------------------------
Cash flows from operating activities:
Net income $ 621 $ 25
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 218 206
Stock issued for services 58 -
Foreign currency translation 1 -
-------------------------------------
898 231
Changes in operating assets and liabilities, net
of business combinations
(Increase) decrease in accounts receivable (2,528) 228
Increase in Inventories (638) (231)
Decrease in prepaid expenses and other current assets 411 69
Increase (decrease) in accounts payable 1,225 (7)
Increase (decrease) in accrued liabilities 260 (525)
-------------------------------------
Net cash used in operating activities (372) (235)
Cash flows from investing activities:
Acquisitions of property, plant and equipment (844) (140)
-------------------------------------
Net cash used in investing activities
(844) (140)
Cash flows from financing activities:
Proceeds from issuance of common stock 4,407 16
Proceeds from issuance of warrants 64 -
Payment on lines of credit, net (649) (363)
Payment on debt - related parties (40) (10)
-------------------------------------
Net cash provided by (used in) financing activities 3,782 (357)
Increase (decrease) in cash and cash equivalents 2,566 (732)
Cash and cash equivalents at beginning of period 1,178 1,556
-------------------------------------
Cash and cash equivalents at end of period $ 3,744 $ 824
=====================================
The accompanying notes are an integral part of these 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, 2004 are not necessarily indicative of the results that may be
expected for the 2004 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,
2003.
The accompanying consolidated balance sheet at October 31, 2003, 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
Description of Business
-----------------------
International DisplayWorks, Inc. (the "Company"), headquartered in
Rocklin, California, was incorporated in the state of Delaware in July of
1999. On October 31, 2001, the Company merged with its parent, Granite Bay
Technologies, Inc., a California corporation.
The Company, together with its subsidiaries, all of which are wholly
owned, is engaged in the design, manufacture and worldwide distribution of
liquid crystal displays (LCDs), modules, and assemblies for major original
equipment manufacturers (OEMs) with applications in telecommunications,
automotive, industrial, medical, and consumer products.
The Company's manufacturing operations are in Shenzhen, People's
Republic of China (PRC). The display company MULCD Microelectronics
(Shenzhen) Co., Ltd. ("MULCD") and the module company IDW Technologies
(Shenzhen) Co., Ltd. ("IDWT") manufacture Liquid Crystal Displays (LCDs)
and LCD modules using various display technologies such as chip-on-glass
("COG"), chip-on-board ("COB"), chip-on-flex ("COF"), surface mount
technology ("SMT"), and tape automated bonding ("TAB"). IDWT also provides
additional module enhanced services by adding other components such as back
lighting, and keypads to module assemblies as well as having the
capabilities to produce complete turn-key products.
Liquidity
---------
In the three months ended January 31, 2004 and January 31, 2003, the
Company generated income of $621,000 and $25,000 respectively.
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 business plan.
To this end the Company has completed the following transactions:
o On December 23, 2003, the Company successfully completed a
$5,000,002 private placement through the sale of 3,333,335
shares of the Company's common stock at $1.50 a share.
Proceeds, net of expenses of $668,000 were $4,332,002. The
placement agent received a five-year warrant to purchase
166,666 shares at $1.75 a share.
o On March 9, 2004 the Company signed an agreement for a new
$5,000,000 asset based credit line with Wells Fargo Business
Credit, Inc. The new line replaces an existing domestic only
receivable line and creates up to $3,000,000 in additional
working capital with more favorable terms. The credit line,
which expires on March 9, 2006, is subject to a minimum
monthly interest payment of $10,000, includes certain
financial covenants, and is guaranteed by an officer of the
Company.
Management believes that the aforementioned equity transaction, the asset
based lines of credit, and cash flows from operations will provide the Company
sufficient working capital to fund operations for the foreseeable future.
3. INVENTORY
Inventories consisted of the following (in thousands):
January 31, October 31,
2004 2003
------------------- --------------------
Finished goods $ 199 $ 687
Work-in-progress 1,484 752
Raw materials 1,907 1,537
Less: reserve for obsolete inventory (487) (511)
------------------- --------------------
Total inventory $ 3,103 $ 2,465
=================== ====================
4. PREPAID EXPENSES
Prepaid expenses and other current assets consisted of the following (in thousands):
January 31, October 31,
2004 2003
------------------- --------------------
Prepaid expenses $ 352 $ 377
Advances to suppliers 54 303
PRC - VAT tax refund 326 354
Other 218 327
------------------- --------------------
Total prepaid expenses $ 950 $ 1,361
=================== ====================
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
January 31, October 31,
2004 2003
------------------- --------------------
Land and buildings $ 1,185 $ 1,185
Construction in progress 415 56
Furniture, fixtures and equipment 1,812 1,742
Machinery 5,180 4,865
Leasehold improvements 183 83
------------------- --------------------
8,775 7,931
Less accumulated depreciation (3,353) (3,135)
------------------- --------------------
Net property, plant and equipment $ 5,422 $ 4,796
=================== ====================
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
January 31, October 31,
2004 2003
------------------- --------------------
Accrued payroll and related liabilities $ 837 $ 747
Accrued staff hostel expenses 139 219
Accrued inventory purchases 57 68
Accrued royalties 156 129
Accrued PRC government management fees 58 102
Accrued private placement expenses 188 -
Accrued commissions 136 -
Other accrued liabilities 325 371
------------------- --------------------
Total accrued liabilities $ 1,896 $ 1,636
=================== ====================
7. STOCKHOLDERS' EQUITY
Stock Option Plans
------------------
During the three months ended January 31, 2004, there were no options
granted, there were no options that were cancelled or expired, and 124,500
options were exercised under the employee stock option plans at a price
that ranged from $0.15 to $0.50 per share.
The following table illustrates the effect on net income 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
2004 2003
-------------------------------------------
Net income as reported $ 621 $ 25
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards. (18) (12)
------------------- -------------------
Pro forma net income $ 603 $ 13
=================== ===================
Earnings per share:
Basic - as reported $ 0.03 $ 0.00
======= ======
Diluted - as reported $ 0.02 $ 0.00
======= ======
Basic - pro forma $ 0.03 $ 0.00
======= ======
Diluted - pro forma $ 0.02 $ 0.00
=================== ===================
Common Stock Shares Issued
- --------------------------
During the three months ended January 31, 2004, the Company issued
3,703,595 shares of common stock. 3,333,335 shares of common stock were
issued in conjunction with a private placement as reported on Form S-1
filed with the Securities and Exchange Commission on February 6, 2004. The
shares were issued at $1.50 per share with proceeds of $5,000,002 less
costs of approximately $668,000. 55,000 shares of the Company's common
stock were issued as compensation to the Company's three independent
directors at a price of $0.85 per share, fair market value on the date of
the grant. 13,000 shares of the Company's common stock were issued in
payment of consulting fees at a price of $0.85, fair market value on the
date of the grant. 177,760 shares of the Company's common stock were issued
through exercise of warrants to purchase the company's stock ranging in
exercise price from $0.16 to $0.78 per share. 124,500 shares of the
Company's common stock was issued through exercise of stock options issued
under the Company's stock option and incentive plans at exercise prices
ranging form $0.15 to $0.50 per share.
8. 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 four major geographic territories where it sells and
distributes essentially the same products. These are the United States,
Hong Kong (including China), Asia (excluding Hong Kong and China) and
Europe. The following represents geographical data for continuing
operations (in thousands):
Revenues for Three Months Ended:
--------------------------------------------
January 31, January 31,
2004 2003
--------------------------------------------
United States $ 3,643 $ 1,991
Hong Kong (including China) 3,400 2,453
Asia (excluding Hong Kong and China) 1,095 -
Europe 1,267 -
Other 391 677
--------------------------------------------
$ 9,796 $ 5,121
==================== ================
"Long Lived" Assets
--------------------------------------------
January 31 , October 31,
2004 2003
--------------------------------------------
United States $ 123 $ 109
Hong Kong (including China) 5,299 4,687
--------------------------------------------
$ 5,422 $ 4,796
==================== ===============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Except for statements of historical facts, this section contains
forward-looking statements involving risks and uncertainties. You can identify
these statements by forward-looking words including "believes," "considers,"
"intends," "expects," "may," "will," "should," "forecast," or "anticipates," or
the negative equivalents of those words or comparable terminology, and by
discussions of strategies that involve risks and uncertainties. Forward-looking
statements are not guarantees of our future performance or results, and our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors." This section should be read in conjunction with our
consolidated financial statements.
The following discussion is presented on a consolidated basis, and analyzes
our financial condition and results of operations for the three month period
ended January 31, 2004 and January 31, 2003.
Overview
We manufacture LCDs and LCD modules and assemblies for major OEMs, and
offer design and engineering services related to those products. Our target OEM
customers operate in the telecommunications, automotive, medical, computing,
office equipment, home appliance and consumer electronics industries. Our
components and modules are used in various electronic products, including
cellular phones and other wireless communication devices. Developments in our
industry over the past years have resulted in lower costs for displays. As a
result of the decreased costs and thus prices for LCDs, new display designs and
applications are being incorporated into products in new market segments.
During the past several years, we have focused our efforts on decreasing
costs and streamlining our corporate structure, while focusing on development of
new key customers with high volume, multi-product needs for displays and display
modules. We also strengthened our core engineering competencies and
manufacturing processes, enabling us to improve our margins, predominantly
through higher yields in the manufacturing process. We also began to engage our
customers at the design phase and emphasized our engineering design capability
and product quality to facilitate product changes and the effective rollout of
new products for our customers. More recently, with our expanded base of strong
customers, our focus has begun to shift to servicing those customers through
continual product changes and development of new products. We believe that our
emphasis on engineering and process manufacturing will allow us to continue to
maintain high yields that will translate into competitive pricing and
maximization of margins in our industry.
Our production is typically based on purchase orders received from
customers. However, for certain customers we may purchase components based on
non-binding forecasts or in anticipation of orders for products, consistent with
our involvement with the customer. We generally do not obtain long-term
commitments from our customers and economic changes in a customer's industry
could impact our revenue in any given period. One of our risks in manufacturing
results from inventory that may become obsolete due to customer product changes
and discontinuation of old products for next generation products. We manage this
risk through customer forecasts and our involvement in product changes and
engineering. Our design and engineering services also allow us to better
understand and meet our customers' needs and anticipate industry changes that
might impact our inventory and purchasing decisions. Although increases in labor
costs and other charges may impact cost of sales, our yield rate is one of the
most significant factors affecting our manufacturing operations and results.
We are ISO certified and emphasize our quality and manufacturing processes,
and we are generally pre-qualified through quality inspections by our
significant customers. We emphasize incoming quality inspection and in-process
inspection to improve yield and reduce warranty claims and product returns. We
believe that our quality and manufacturing processes are our core strengths. We
do not anticipate any change in our practices and consider our investment in our
engineering and quality departments as a continuing cost of doing business. We
believe our current facilities and resources are adequate to sustain higher
sales volume and growth.
With the increase in key customers that we anticipate will result in high
volume sales, we intend to emphasize our design engineering, process engineering
and quality efforts to drive increased sales in conjunction with our sales and
marketing efforts, often working with our customers in teams that will include
engineering input and support at early phases.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition presented in this
section are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles, or GAAP, in the U.S.
During the preparation of our financial statements we are required to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates and judgments,
including those related to sales returns, pricing concessions, bad debts,
inventories, investments, fixed assets, intangible assets, income taxes,
pensions and other contingencies. We base our estimates on historical experience
and on various other assumptions that we believe are reasonable under current
conditions. Actual results may differ from these estimates under different
assumptions or conditions.
Revenue Recognition
We recognize revenue from product sales in accordance with Staff Accounting
Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements." SAB No.
101 requires that revenue be recognized when all of the following conditions are
met:
o Persuasive evidence of an arrangement exists;
o Delivery has occurred or services have been rendered;
o Price to the customer is fixed or determinable; and
o Collectability is reasonably assured.
We recognize revenue from the sale of our products when the products are
shipped from our factories in China, provided collectability is reasonably
assured from the customer. Sales revenue is recorded net of discounts and
rebates except for prompt payment discounts, which are accounted for as an
operating expense. Returns and adjustments are booked as soon as they have been
assessed for validity.
Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability or unwillingness of our customers to make required
payments. We determine the adequacy of this allowance by regularly evaluating
individual customer receivables and considering a customer's financial
condition, credit history and current economic conditions.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on the weighted average-cost basis. Costs included in the valuation of inventory
are labor, materials (including freight and duty) and manufacturing overhead.
Provisions are made for obsolete or slow moving inventory based on management
estimates.
Income Taxes
Pursuant to Financial Accounting Standards Board ("FASB") Statement of
Financial Standards ("SFAS") No. 109, "Accounting for Income Taxes," income
taxes are recorded based on current year amounts payable or refundable, as well
as the consequences of events that give rise to deferred tax assets and
liabilities. We base our estimate of current and deferred taxes on the tax laws
and rates that are currently in effect in the appropriate jurisdiction. Changes
in laws or rates may affect the current amounts payable or refundable as well as
the amount of deferred tax assets or liabilities. At January 31, 2004, we had
approximately $8,752,000 of net operating loss carry available for use in 2004
resulting in approximately $3,455,000 of deferred tax assets.
Results of Operations
Comparison of the Three Months Ended January 31, 2004 and 2003.
Net Sales - Net sales were $9,796,000 and $5,121,000 for the quarters ended
January 31, 2004 and 2003 respectively, an increase of 91%. The increase can be
attributed to the maturity of the Company's marketing plan which realigned the
Company's customer base to eliminate low volume customers and replace them with
high volume customers.
Cost of Goods Sold - Cost of sales was 76% and 72% of net sales for the
quarters ended January 31, 2004 and 2003, respectively, an increase of 4%. The
increase was due to higher raw material costs caused by unfavorable currency
exchange rates offset by absorption of overhead over greater utilization of
capacity.
General and Administrative - General and Administrative expenses increased
47% to $1,106,000 from $754,000 for the quarters ended January 31, 2004 and 2003
respectively. This increase can be attributed to increased number of employees
and employee related expenses, increased professional fees, increased insurance
costs and increased currency exchange losses. Significant elements of this
expense include employee related expenses of $519,000, professional fees of
$157,000, rent, telephone and utilities of $39,000, insurance of $80,000, and
local PRC government fees of $49,000 for the quarter ended January 31, 2004.
Selling, Marketing and Customer Service - Selling, Marketing and Customer
Service expenses decreased to $394,000 from $443,000 for the quarters ended
January 31, 2004 and 2003 respectively, a decrease of 11%. The decrease can be
attributed to a decrease in salary and related costs due to the maturity of the
Company's marketing plan which caused a reduction in the actual number of
customers to be serviced. Significant elements of this expense consist of
employee related expenses of $157,000, commission expense of $165,000, rent of
$23,000 for sales offices, and travel related costs of $22,000 for the quarter
ended January 31, 2004.
Engineering Advanced Design and Project Management - Engineering, advanced
design and project management expenses were $142,000 and $146,000 for the
quarters ended January 31, 2004 and 2003 respectively, a decrease of 3%. The
decrease is attributable to decreased travel costs. Significant element of this
expense includes employee related expenses of $138,000.
Interest Expense - Interest expense increased 68% to $138,000 from $82,000
for the quarters ended January 31, 2004 and 2003 respectively. The increase can
be attributed to the issuance of an additional 1,000,000 notes for working
capital.
Net Income - The net income was $621,000 ($0.03 per share) and $25,000
($0.00 per share) for the quarters ended January 31, 2004 and 2003 respectively.
The increase in sales was the major contributing factors to the increased net
income.
Liquidity and Capital Resources
Since we acquired our Chinese manufacturing operations in 2000 and thereby
entered the LCD business, our cash flow from operations has, taken as a whole,
been negative. With the acquisition we were short of liquidity, had low
utilization of our capacity and large fixed overhead expenses, a poor quality
customer base and disaffected suppliers. We also faced a significant downturn in
our industry subsequently compounded by the events of September 11, 2001, the
Iraqi war and the impact of SARS. Our share price was negatively impacted
rendering equity financing unattractive.
In the year ended December 30, 2000, we sustained a loss of $4,080,000. In
the ten months ended October 31, 2001, we sustained a loss of $2,571,000. In the
fiscal year 2002, we considered it necessary, after evaluation, to write down
our goodwill stemming from the acquisition and to write down certain assets
incurring a total charge of $5,989,000, which contributed to a total loss of
$6,942,000, including a loss of $953,000 from other activities. In the fiscal
year ended October 31, 2003, we sustained a loss of $808,000. Our total loss
since entering the LCD business has been $13,820,000, which when combined with
losses from the snowboard and apparel businesses of our predecessor resulted in
an accumulated deficit of $37,653,000.
Adjusted for non-cash items, net income for the three months ended January
31, 2004 and 2003 resulted in net cash inflows from operations of $898,000 and
$231,000, respectively. Cash outflows as a result in changes in operating assets
and liabilities were $1,270,000 and $466,000 for the three months ended January
31, 2004 and 2003, respectively. The increase in cash outflows as a result of
changes is operating assets and liabilities from fiscal 2003 to 2004 was caused
primarily by increased accounts receivable as the Company paid down its
receivable lines of credit in preparation for the transition to the Company's
new line with Wells Fargo Business Credit, Inc. Cash used in investing
activities was $844,000 and $140,000 for the three months ended January 31, 2004
and 2003, respectively. Cash provided from financing activities for the three
months ended January 31, 2004 was $3,782,000, primarily from the issuance of
common stock. The Company used $357,000 in financing activities for the
comparative period ended January 31, 2003. Cash and cash equivalents were
$3,744,000 and $824,000 at January 31, 2004 and 2003, respectively.
At January 31, 2004, we had $1,936,000 of debt due within a year and a
further $403,000 due thereafter in addition to $402,000 due on our credit lines.
We have met our repayment obligations as they fell due, and on December 23,
2003, we successfully completed a $5,000,000 private placement through the sale
of 3,333,335 shares of our common stock.
On March 9, 2004, the Company executed a new $5,000,000 asset based credit
line with Wells Fargo Business Credit, Inc. The new line replaces an existing
domestic only receivable line and creates up to $3,000,000 in additional working
capital with more favorable terms.
We believe that we will achieve positive operating cash flows in the
upcoming fiscal years based on current market conditions and our performance. We
have commenced investment in Chip-on-Glass, a relatively new LCD technology for
which we believe there is considerable customer demand and which commands a
higher margin than our existing technologies. We are analyzing our market and
our position within it and considering what investments may be appropriate
given the risks disclosed in the document and the opportunities that may be
available. We have not commenced negotiations to extend or replace our
obligations, and there can be no certainty that we would be successful should we
seek to do so. However, we believe that, in the absence of new projects, our
resources as outlined above will be sufficient to meet our obligations as they
fall due. Although we may conclude that opportunities exist such that we will
wish to make investments in excess of existing resources and will do so if,
taking into account the risk, these have the probability of providing positive
returns, and how the need to raise additional capital will impact stockholder
value.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Fluctuations
We sell a majority of our products in U.S. dollars and pay for our material
components in U.S. dollars, Hong Kong dollars, Chinese RMB and Japanese yen. We
pay labor costs and overhead expenses in U.S. dollars, RMB and Hong Kong
dollars.
The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed
by the Hong Kong government since 1983 at approximately HK$7.80 to US$1.00
through the currency issuing banks in Hong Kong and accordingly has not in the
past presented a currency exchange risk. This could change in the future as
there is discussion in some circles concerning the advantages of the fixed rate.
Effective January 1, 1994, China adopted a floating currency system whereby
the official exchange rate equaled the market rate. Since the market and
official RMB rates were unified, the value of the RMB against the U.S. dollar
has been stable. There is currently pressure being exerted by the U.S. for the
RMB to be permitted to float more freely but it is unclear whether this would
lead to an upward movement in the exchange rate between the RMB and the U.S.
dollar. It is not currently possible to hedge against movement in the RMB
exchange rate through conventional means. We are thus not hedged and remain
exposed to movement in the exchange rate. We incur approximately 30% of our
expenses in RMB and have negligible RMB revenue; an increase in the value of the
RMB would thus have an adverse affect on our operating margins.
In addition, we had long term debt, repayable in installments over three
years, of RMB 10 million (U.S. $1.2 million at current exchange rates), of which
two installments were outstanding at the fiscal year ended October 31, 2003. An
increase in the value of the RMB against the U.S. dollar would result in a
translation loss in U.S. dollar terms which would be realized as U.S. dollars
from sales revenues were utilized to meet the repayment obligation.
We hold comparatively small amounts of cash in RMB, of the amount required
for approximately two weeks of disbursements. An increase in the value of the
RMB would thus result in small translation gain; however, this would be more
than offset by our accounts payable balances in RMB as these tend to be larger
than the cash holding.
We also incur liabilities in Japanese Yen from the purchase of raw
materials. We do not currently hedge against this exposure and thus exposed to
exchange rate movement at present.
Interest Rate Risk
Our principal exposure to interest rate changes is on the asset based
lending line which is based on prime rates in the U.S.
Inflation Risk
Although inflation has remained low in recent years in the markets in which
we currently sell and expect to do so for the foreseeable future, the general
inflation rate in China 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.
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 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.
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, based on facts known at this time, 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
In December 2003, the Company completed a private financing of 3,333,335
shares of common stock at $1.50 per share. The Company's net proceeds from the
offering were $4,332,002. Roth Capital Partners, LLC acted as the placement
agent for the financing and received an eight percent (8%) fee based on gross
proceeds and a five (5) year warrant to purchase 166,666 shares of common stock
at $1.75 per share.
The sales and issuances of common stock, debt instruments and warrants to
purchase common stock in private placements listed above were made by us in
reliance upon the exemptions from registration provided under Section 4(2) and
4(6) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D,
promulgated by the SEC under federal securities laws and comparable exemptions
for sales to "accredited" investors under state securities laws. The offers and
sales were made to accredited investors as defined in Rule 501(a) under the
Securities Act, no general solicitation was made by us or any person acting on
our behalf; the securities sold were subject to transfer restrictions, and the
certificates for those shares 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
-NONE-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
32. Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act
99. Wells Fargo Credit Agreement
(b) Reports on Form 8-K
Date of Report Date of Event Item Reported
-------------- ------------- ------------
12/30/2003 12/23/2003 Press release announcing
private stock placement
01/15/2004 01/09/2004 Press release announcing
Wells Fargo Business
Credit commitment
02/13/2004 02/06/2004 Press release announcing
for fiscal 2003 and
revenues for Q1 2004
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.
INTERNATIONAL DISPLAYWORKS, INC.
Date: March 15, 2004 /s/ Ian N. Bebbington
----------------------- -------------------------------------------
Ian N. Bebbington, Chief Financial Officer
(Principal Accounting Officer and Principal
Financial Officer)