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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: April 30, 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 June 2, 2004 was 29,892,133.
1
INTERNATIONAL DISPLAYWORKS, INC.
INDEX
Part 1 Consolidated Financial Information Page Number
-----------
Item 1. Consolidated Financial Statements (Unaudited):
Balance Sheets at April 30, 2004 and October 31, 2003..............3
Statements of Operations for the
Three and six months ended April 30, 2004 and 2003.................4
Statements of Cash Flows for the
Six months ended April 30, 2004 and 2003...........................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...........16
Item 4. Controls and Procedures.............................................17
Part II Other Information
Item 1. Legal Proceedings...................................................17
Item 2. Changes in Securities...............................................18
Item 3. Default Upon Senior Securities......................................18
Item 4. Submission of Matters to a Vote of Security Holders.................18
Item 5. Other Information...................................................18
Item 6. Exhibits and Reports on Form 8-K....................................19
Signatures...................................................................20
Certifications...............................................................21
2
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
------------------- -----------------
ASSETS April 30, October 31,
------ 2004 2003
------------------- -----------------
Current assets:
Cash and cash equivalents $ 4,789 $ 1,178
Accounts receivable,
net of allowance for doubtful accounts of $79 and $39 7,589 4,260
Inventories 2,988 2,465
Prepaid expense 984 1,361
------------------- -----------------
Total current assets 16,350 9,264
------------------- -----------------
Property and equipment at cost, net 5,330 4,796
------------------- -----------------
Total assets $21,680 $14,060
=================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 6,060 $ 4,770
Accrued liabilities 2,365 1,636
Line of credit 1,657 1,051
Current portion of long term debt - related parties 524 50
Current portion of long term debt 1,404 452
------------------- -----------------
Total current liabilities 12,010 7,959
Long-term debt, net of current portion - related parties - 624
Long-term debt, net of current portion 407 1,253
------------------- -----------------
Total liabilities 12,417 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
25,317,508 and 20,984,913 shares issued and outstanding
at April 30, 2004 and October 31, 2003 respectively 46,671 41,806
Accumulated deficit (37,481) (37,653)
Cumulative translation adjustment 73 71
------------------- -----------------
Total shareholders' equity 9,263 4,224
------------------- -----------------
Total liabilities and shareholders' equity $21,680 $14,060
=================== =================
The accompanying notes are an integral part of these financial statements
3
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except Share and per share data)
For Six Months Ended For Three Months Ended
---------------------------------------------------
April 30, April 30, April 30, April 30,
2004 2003 2004 2003
---------------------------------------------------
Sales $20,420 $ 9,809 $10,624 $ 4,688
Cost of goods sold 15,875 7,386 8,456 3,757
---------------------------------------------------
Gross profit 4,545 2,423 2,168 931
---------------------------------------------------
Operating expenses:
General and administrative 2,345 1,658 1,239 904
Selling, Marketing and customer service 875 942 481 439
Engineering, advanced design and management
product management 331 302 190 156
---------------------------------------------------
Total operating expenses 3,551 2,902 1,910 1,499
---------------------------------------------------
Operating income (loss) 994 (479) 258 (568)
---------------------------------------------------
Other income (expense):
Interest expense (249) (160) (111) (78)
Other income (expense) (573) 36 (596) 18
---------------------------------------------------
Total other income (expense) (822) (124) (707) (60)
---------------------------------------------------
Income (loss) from operations
before income taxes 172 (603) (449) (628)
---------------------------------------------------
Provision for income taxes - - - -
---------------------------------------------------
Net income (loss) $ 172 $ (603) $ (449) $ (628)
===================================================
Basic and diluted earnings (loss) per common share
Basic $ 0.01 $ (0.03) $ (0.02) $ (0.03)
===================================================
Diluted $ 0.01 $ (0.03) $ (0.02) $ (0.03)
===================================================
Weighted average common shares outstanding
Basic 23,675,562 19,282,741 24,906,508 19,318,246
Diluted 26,117,449 19,282,741 27,348,39 19,318,246
===================================================
The accompanying notes are an integral part of these financial statements
4
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
---------------------------------------
April 30, April 30,
2004 2003
---------------------------------------
Cash flows from operating activities:
Net income (loss) $ 172 $ (603)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation 444 415
Stock issued for services 58 -
Loss on disposal of fixed assets - 27
Loss (income) on foreign currency translation 2 -
---------------------------------------
676 (161)
Changes in operating assets and liabilities, net
of business combinations
(Increase) decrease in accounts receivable (3,329) 299
Increase in Inventories (523) (62)
Decrease (increase) in prepaid expenses and other current assets 377 (160)
Increase in accounts payable 1,290 258
Increase (decrease) in accrued liabilities 729 (244)
---------------------------------------
Net cash provided by (used in)
operating activities (780) (70)
Cash flows from investing activities:
Acquisitions of property, plant and equipment (978) (218)
---------------------------------------
Net cash used in investing activities (978) (218)
Cash flows from financing activities:
Proceeds from issuance of common stock 4,743 16
Proceeds from issuance of warrants 64 20
Proceeds (Payment) on lines of credit, net 606 (566)
Proceeds from debt 6 -
Payment on debt - related parties (50) (40)
---------------------------------------
Net cash provided by (used in) financing activities 5,369 (570)
Increase (decrease) in cash and cash equivalents 3,611 (858)
Cash and cash equivalents at beginning of period 1,178 1,556
---------------------------------------
Cash and cash equivalents at end of period $ 4,789 $ 698
=======================================
The accompanying notes are an integral part of these financial statements
5
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 six month period ended April 30, 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
June 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, utilities, automotive, industrial,
medical, and consumer products.
The Company's manufacturing operations are in Shenzhen, People's
Republic of China (PRC) where we 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").
The Company also provides 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.
3. INVENTORY
Inventories consisted of the following (in thousands):
April 30, October 31,
2004 2003
------------------- ----------------
Finished goods $ 331 $ 687
6
Work-in-progress 1,031 752
Raw materials 2,113 1,537
Less: reserve for obsolete inventory (487) (511)
------------------- ----------------
Total inventory $ 2,988 $ 2,465
=================== ================
4. PREPAYMENTS
Prepaid expenses and other current assets consisted of the
following (in thousands):
April 30, October 31,
2004 2003
------------------- ----------------
Prepaid expenses $ 417 $ 377
Advances to suppliers 97 303
PRC - VAT recoverable 231 354
Other 239 327
------------------- --------------------
Total prepaid expenses $ 984 $ 1,361
=================== ====================
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in
thousands):
April 30, October 31,
2004 2003
------------------- ---------------
Land and buildings $ 1,185 $ 1,185
Construction in progress - 56
Furniture, fixtures and equipment 1,868 1,742
Machinery 5,673 4,865
Leasehold improvements 183 83
------------------- ---------------
8,909 7,931
Less accumulated depreciation (3,579) (3,135)
------------------- ---------------
Net property, plant and equipment $ 5,330 $ 4,796
=================== ===============
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
April 30, October 31,
2004 2003
------------------- ---------------
Accrued payroll and related liabilities $ 664 $ 747
Accrued staff hostel expenses 184 219
Accrued inventory purchases 20 68
Accrued royalties 188 129
Accrued PRC government management fees 87 102
Customer deposits 131 -
Accrued commissions 160 -
Accrued VAT expense 21 -
Accrued litigation settlement cost 625 -
Other accrued liabilities 285 371
------------------- --------------
Total accrued liabilities $ 2,365 $ 1,636
=================== ==============
7
7. LINE OF CREDIT
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.
8. STOCKHOLDERS' EQUITY
Stock Option Plans
------------------
During the six months ended April 30, 2004, there were 105,000
options granted at a price equal to market price at the date of the
grant, there were no options that were cancelled or expired, and
456,750 options were exercised under the employee stock option plans
at prices that ranged from $0.15 to $2.50 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:
Six Months Ended Three Months Ended
April 30 April 30
2004 2003 2004 2003
----------------------------------------------------------------------------
Net income (loss) as reported $ 172 $ (603) $ (449) $ (628)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards. (41) (20) (21) (10)
------------------ --------------- --- --------------- ---------------
Pro forma net income (loss) $ 131 (623) (470) (638)
================== =============== =============== ===============
Earnings per share:
Basic - as reported $ 0.01 $ (0.03) $ (0.02) $ (0.03)
================== =============== =============== ===============
Diluted - as reported $ 0.01 $ (0.03) $ (0.02) $ (0.03)
================== =============== =============== ===============
Basic - pro forma $ 0.01 $ (0.03) $ (0.02) $ (0.03)
================== =============== =============== ===============
Diluted - pro forma $ 0.01 $ (0.03) $ (0.02) $ (0.03)
================== =============== =============== ===============
Common Stock Issued
During the six months ended April 30, 2004, the Company issued
4,332,595 shares of common stock. 3,333,335 shares of common stock
were issued in a private placement. The shares were issued at $1.50
per share with proceeds of $5,000,002 less expenses of approximately
$697,000. 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. 474,510 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 $1.50 per share. 456,750 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 $2.50 per share.
Subsequent to the quarter ended April 30, 2004, on May 17, 2004,
the Company issued 4,500,000 shares of common stock in a private
placement. The shares were issued at $4.50 per share with proceeds,
net of estimated expenses of $1,820,000 were $18,430,000. The
placement agent received an eight percent (8%) fee based on gross
proceeds.
8
9. COMMITMENT
On April 17, 2004 the Company entered into a binding Memorandum
of Understanding to purchase a color LCD line and related equipment
from a company located in Taiwan at a purchase price of $6,000,000.
While there is space in our existing factory, there is insufficient
continuous space to install the color LCD line, thus additional
factory facilities are required for this equipment. Removal of the
equipment from Taiwan and reinstallation in the PRC is expected to
cost an additional $2,000,000, and outfitting the new factory
facility, which will provide us with the continuous space needed for
the CSTN line as well as additional capacity for other uses, is
expected to cost an additional $4,000,000.
10. SUBSEQUENT EVENTS
Subsequent to the end of the quarter, on May 17, 2004, the
Company completed a $20,250,000 private placement through the sale of
$4,500,000 shares of the Company's common stock providing net proceeds
of approximately $18,430,000. The Company plans to use the proceeds
for acquisition of a color LCD line, working capital, and to liquidate
debt.
Subsequent to the end of the quarter, on May 20, 2004, the
Company repaid notes due on December 31, 2004, bearing an annual
interest rate of 12%, in the amount of $1,524,000. There was no
prepayment penalty for early payment.
Subsequent to the end of the quarter the Company reached
agreement in the case of Nicolas Steenolsen vs. Squaw Valley Ski
Corporation, Granite Bay Technologies, Inc., Morrow Snowboards, Inc.,
International DisplayWorks, Inc., et al., Superior Court of
California, Los Angeles County, Case No. BC243817. The case was a
complaint for personal injuries, which arose from the plaintiff's use
of a snowboard and the resulting injury that occurred on January 30,
2000. The complaint sought unspecified general damages and unspecified
past and future medical expenses. Pursuant to mediation on June 9,
2004, all parties reached a mutually agreeable, confidential
settlement of the matter. As part of the global settlement, the
Company agreed to pay the sum of $625,000 above insurance coverage for
release of any potential liability and dismissal of the action and all
cross-complaints with prejudice. The action will be dismissed upon
entering into the definitive settlement agreement and payment by all
parties of settlement funds, which the Company anticipates will occur
within 90 days. For the fiscal year ended October 31, 2003, the
Company was advised by its litigation counsel that the chances of loss
in this litigation were remote. Therefore, in accordance with the
provisions of SFAS No. 5 "Contingencies" the Company determined that
no accrual or disclosure related to this litigation was necessary.
However, in light of the recent mediation it was determined by
management, on the advice of counsel, that settlement was in the best
interest of the Company and would result in mitigation of any risk to
the Company. Therefore, in accordance with the provisions of SFAS No.
5 the Company provided an accrual for the settlement amount in its
financial statements for the quarter ended April 30, 2004 for the
settlement amount of $625,000.
9
11. 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 and China, Asia (excluding Hong Kong and
China) and Europe. The sales and assets by geographical area were (in
thousands):
- ----------------------------------------------------------------------------------------------------------------------
Revenues for Six Months Ended: April 30, 2004 April 30, 2003
- ----------------------------------------------------------------------------------------------------------------------
United States $ 8,019 $ 5,521
Hong Kong and China 3,142 2,681
Asia (excluding Hong Kong and China) 4,231 984
Europe 3,729 -
Other 1,299 623
------------------------- ------------------------
Total $ 20,420 $ 9,809
========================= ========================
- ----------------------------------------------------------------------------------------------------------------------
Revenues for Three Months Ended: April 30, 2004 April 30, 2003
- ----------------------------------------------------------------------------------------------------------------------
United States $ 4,347 $ 2,347
Hong Kong and China 1,555 1,421
Asia (excluding Hong Kong and China) 2,181 388
Europe 1,903 -
Other 638 532
------------------------- ------------------------
Total $ 10,624 $ 4,688
========================= ========================
- ----------------------------------------------------------------------------------------------------------------------
"Long Lived" Assets April 30, 2004 April 30, 2003
- ----------------------------------------------------------------------------------------------------------------------
United States $ 109 $ 147
Hong Kong and China 5,221 4,827
------------------------- ------------------------
Total $ 5,330 $ 4,974
========================= ========================
10
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. We wish to caution readers to consider the important
factors, among others, that in some cases have affected and in the future could
affect our actual results and could cause actual consolidated results for fiscal
year 2004, 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 our 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 our
Form 10-K for the year ended October 31, 2003 and the factor listed below under
the heading "Subsequent Events," regarding planned equipment acquisition.
The following discussion is presented on a consolidated basis, and analyzes
our financial condition and results of operations for the three and six month
period ended April 30, 2004 and 2003.
Overview
We manufacture LCDs and LCD modules and assemblies and provide design and
engineering services related to those products primarily to OEMs. Our target OEM
customers operate in the telecommunications, utilities, automotive, medical,
computing, office equipment, home appliance and consumer electronics industries.
Our components and modules are used in various electronic products in these
industries. Developments in our industry over the years have resulted in lower
costs for displays. As a result of the decreased costs for LCDs, new display
designs and applications are being incorporated into products in new market
segments.
Historically we 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. 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. This focus has steadily improved our capacity utilization and resulted
in the acquisition of major accounts providing significant volume increase,
while broadly maintaining margins.
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. As
our industry experiences an overall upswing in its economic cycle we are
increasingly exposed to possible supply shortages of certain key components for
which alternative sources are not always available.
10
We are ISO certified and emphasize our quality and manufacturing processes,
and we are generally pre-qualified through quality inspections by our major
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 have previously announced our intention to move into production of Color
STN and TFT modules. We have entered unto a memorandum of understanding to
purchase the necessary equipment (see additional note on subsequent event).
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. 104 "Revenue Recognition." SAB No. 104 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
11
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 April 30, 2004, we had
approximately $9,197,000 of net operating loss carry forward available resulting
in approximately $3,679,000 of deferred tax assets which are not included in our
balance sheet due to uncertainty of realizing them.
Results of Operations
Comparison of the Three and Six Months Ended April 30, 2004 and 2003.
Net Sales - Net sales were $10,624,000 and $4,688,000 for the quarters
ended April 30, 2004 and 2003 respectively, an increase of 127%. Net sales were
$20,420,000 and $9,809,000 for the six months ended April 30, 2004 and 2003
respectively, an increase of 108%. The increase for the three months and the six
months ended April 30, 2004 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 80% and 80% of net sales for the
quarters ended April 30, 2004 and 2003, respectively. Though there was no change
in the Cost of Goods sold as a percentage of sales, the Company experienced a
decrease in the cost of raw materials due to a favorable change in product mix
offset by an decrease in the recoverability of VAT in the PRC due to a change in
the legislation effective this year. Cost of sales was 78% and 75% for the six
months ended April 30, 2004 and 2003 respectively. The increase is due to higher
raw material costs caused, in part, by unfavorable currency exchange rates and
VAT recoverability offset by absorption of overhead over greater utilization of
capacity.
General and Administrative - General and Administrative expenses increased
37% to $1,239,000 from $904,000 for the quarters ended April 30, 2004 and 2003
respectively. As a percentage of sales General and Administrative expenses were
12% and 19% for the quarters ended April 30, 2004 and 2003 respectively. This
increase is attributed to increased number of employees and employee related
expenses, increased professional fees, increased insurance costs, and increased
currency exchange losses. The Company expects that these costs will remain
consistent with revenue growth. Significant elements of this expense include
employee related expenses of $627,000, and professional fees of $156,000 for the
quarter ended April 30, 2004. General and Administrative expenses increased 41%
to $2,345,000 from $1,658,000 for the six months ended April 30, 2004 and 2003
respectively. As a percentage of sales General and Administrative expenses were
12% and 17% for the six months ended April 30, 2004 and 2003 respectively. The
company expects that these costs will remain consistent with revenue growth.
This increase is attributed to increased number of employees and employee
related expenses, increased professional fees, increased insurance costs, costs
attributable to implementation of Sarbanes-Oxley regulations, and increased
currency exchange losses. Significant elements of this expense include employee
related expenses of $1,142,000, professional fees of $278,000, rent, telephone
and utilities of $86,000, insurance of $151,000, and local PRC government fees
of $97,000 for the six months ended April 30, 2004.
Selling, Marketing and Customer Service - Selling, Marketing and Customer
Service expenses increased to $481,000 from $439,000 for the quarters ended
12
April 30, 2004 and 2003 respectively, an increase of 10%. As a percentage of
sales Selling, Marketing and Customer Service expenses were 5% and 9% for the
quarter ended April 30, 2004 and 2003 respectively. The increase can be
attributed to increases in commission expense (due to increased sales) and trade
show expense offset by decreases in salary and related costs due to the maturity
of the Company's marketing plan, that focuses on fewer high volume customers,
which caused a reduction in the actual number of customers to be serviced.
Significant elements of this expense consist of employee related expenses of
$169,000, commission expense of $207,000, rent of $19,000 for sales offices,
telephone expense of $32,000, and travel related costs of $19,000 for the
quarter ended April 30, 2004. Selling, Marketing and Customer Service expenses
decreased to $875,000 from $942,000 for the six months ended April 30, 2004 and
2003 respectively, a decrease of 7%. As a percentage of sales Selling, Marketing
and Customer Service expenses were 4% and 10% respectively for the six months
ended April 30, 2004 and 2003 respectively. The decrease is attributable 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 offset by increases in commission expense. Significant elements of this
expense consist of employee related expenses of $328,000, commission expense of
$372,000, rent of $42,000 for sales offices, telephone expense of $47,000, and
travel related costs of $41,000 for the six months ended April 30, 2004.
Engineering, Design, and Project Management - Engineering, design and
project management expenses were $190,000 and $156,000 for the quarters ended
April 30, 2004 and 2003 respectively, an increase of 22%. The increase is
attributable to increased salary costs resulting from the addition of an
employee to manage in the Company's newly created equipment design department.
Significant element of this expense includes employee related expenses of
$155,000. Engineering, design and project management expenses were $331,000 and
$302,000 for the six months ended April 30, 2004 and 2003 respectively, an
increase of 10%. The increase is attributable to increased salary costs
resulting from the addition of an employee to manage the Company's newly created
equipment design department. Significant element of this expense includes
employee related expenses of $293,000.
Interest Expense - Interest expense increased 42% to $111,000 from $78,000
for the quarters ended April 30, 2004 and 2003 respectively. The increase can be
attributed to the issuance of an additional $1,000,000 of notes for working
capital in the fourth quarter of fiscal 2003. Interest expense increased 56%
from $160,000 to $249,000 for the six months ended April 30, 2004 and 2003
respectively. The increase can be attributed to the issuance of $1,000,000 of
notes for working capital in the fourth quarter of fiscal year 2003. $1,524,000
of loan notes were repaid in full, subsequent to the end of the quarter, in May
of 2004 subsequent to the quarter end eliminating the twelve percent (12%)
interest expense associated with the notes.
Other Income / Expense - Other expense was $596,000 for the quarter ended
April 30, 2004 compared to other income of $18,000 for the quarter ended April
30, 2003. Other expense for the quarter ended April 30, 2004 was $625,000
accrued as settlement of litigation previously disclosed offset by $29,000 of
other income. Other expense for the six months ended April 30, 2004 was $573,000
compared with other income of $36,000 for the six months ended April 30, 2003.
The $625,000 settlement of litigation previously disclosed was the reason for
this increase.
Net Income - The net loss was $449,000 ($0.02 per share, basic and diluted)
and $628,000 ($0.03 per share, basic and diluted) for the quarter ended April
30, 2004 and 2003, respectively. The settlement of the Company's previously
disclosed litigation in the amount of $625,000 was the reason for the loss
occurrence (see Part II-Item 1. - Legal Proceedings). The net income was
$172,000 ($0.01 per share, basic and diluted) for the six months ended April 30,
2004 and a loss of $603,000 ($0.03 per share, basic and diluted) for the six
months ended April 30, 2003. Increase in sales offset by the settlement of the
Company's previously disclosed litigation (see Part II-Item 1. - Legal
Proceedings) was the major contributing factor to the increased net income.
Liquidity and Capital Resources
Adjusted for non-cash items, net income for the six months ended April 30,
2004 resulted in net cash inflows from operations of $676,000, compared to
$161,000 of net cash outflows for the six months ended April 30, 2003. Cash
outflows as a result in changes in operating assets and liabilities were
$1,456,000 for the six months ended April 30, 2004 primarily resulting from
increases in accounts receivable of $3,329,000 accounts payable of $1,290,000
(attributed to increased sales), and accrued liabilities of $729,000 (of which
13
$625,000 is an accrual for the settlement of previously disclosed litigation
(see Part II-Item 1 - Legal Proceedings), compared to cash inflows of $91,000
for the six months ended April 30, 2003. Cash used in investing activities was
$978,000 and $218,000 for the six months ended April 30, 2004 and 2003
respectively. These funds were used for purchase of capital equipment. Cash
provided by financing activities was $5,369,000 for the six months ended April
30, 2004, primarily from the issuance of common stock in conjunction with a
private placement in April and exercise of stock options and warrants, compared
to cash used in financing activities of $570,000 for the six months ended April
30, 2003. Cash equivalents were $4,789,000 and $698,000 at April 30, 2004 and
2003 respectively. The increase was attributed to increased sales and the sale
of the Company's common stock in a private placement in April 2004.
On December 23, 2003 we completed a $5,000,000 private placement through
the sale of 3,333,335 shares of our common stock with proceeds net of expenses
of approximately $4,303,002. The proceeds were used primarily for working
capital.
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.
On April 30, 2004, we had $1,928,000 of debt due within a year and a
further $407,000 due thereafter in addition to $1,657,000 due on our credit
lines.
Subsequent to the end of the quarter, on May 17, 2004, we completed a
$20,350,000 private placement through the sale of $4,500,000 shares of our
common stock providing net proceeds of approximately $18,430,000. The Company
plans to use the proceeds for acquisition of a color LCD line, working capital,
and to liquidate debt.
Subsequent to the end of the quarter, on May 20, 2004, the Company repaid
notes due on December 31, 2004, bearing an annual interest rate of 12%, in the
amount of $1,524,000. There was no prepayment penalty for early payment.
Subsequent Events
In April 2004, we entered into a binding Memorandum of Understanding
("MOU") to purchase a color LCD line and additional equipment currently located
in Taiwan for Liquid Crystal Modules ("LCM") production for a purchase price of
$6,000,000 on an "as is" basis. The MOU, as amended; calls for the contract to
be executed by June 17, 2004. The assets are subject to primary and secondary
security interests underlying loans to the seller, and the net amount still due
from the seller to the security holders is in excess of the agreed selling
price. We have granted the seller extensions to the MOU deadline to allow the
seller to negotiate with the financial institutions in order to provide us with
clean title.
The equipment, which allows us to produce color LCD products, is a more
advanced technology than monochrome and subject to lower yields. Thus, our
ability to produce with an acceptable yield will remain unproven until the line
has been commissioned and production has commenced.
In addition, the removal of the assets from the Taiwan is subject to
approval from the export processing zone administration where they are located.
Moreover, the assets are also subject to import approval by the customs
authorities of China. These approvals cannot be obtained until IDW has purchased
the assets.
Although we are seeking to insure the transportation of the equipment,
there could still be certain losses not protected. The equipment and components
are to be shipped in numerous containers. There is a risk of loss associated
with the packing and transportation of the equipment. If the equipment or
components are damaged or do not arrive intact, we could face less than optimal
utilization of the equipment as it may be difficult or require some time to
obtain replacement components or equipment.
14
We will also require additional factory facilities to install the
equipment. Although we have identified a tentative location for the assets, we
have not made any contractual commitments and will not do so until the closing
of the transaction and delivery date for the equipment is certain. We may
therefore have insufficient time to prepare the new facility prior to the
arrival of the equipment, which could result in significant storage charges.
Removal of the equipment from Taiwan, reinstallation in the PRC is expected
to cost an additional $2,000,000 and outfitting the new factory facility, which
will provide us with the continuous space needed for the CSTN line as well as
additional capacity for other uses, is expected to cost an additional
$4,000,000.
We also have not accepted any firm orders from customers for color displays
to be manufactured from this line due to the uncertainty as to when it will be
available. As a result, we may find that when we are ready to go into
production, the assets will be underutilized, and the initial start-up costs may
exceed revenues from operating the equipment to produce new products.
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 debt, repayable in two installments, June 30, 2004 and
2005, of RMB 3.33 million (U.S. $800 thousand at current exchange rates),
outstanding at the quarter ended April 30, 2004. 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. The amount held is
sufficient 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.
15
We also incur liabilities in Japanese Yen from the purchase of raw
materials. We do not currently hedge against this exposure and thus are 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 we expect it 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. Additionally the recent upward movement in the price of oil will
directly affect the cost of diesel required to power our generators and may
prove a stimulus to general inflation in the PRC in the short term while
possibly slowing the economy in the longer term.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management with the participation of principal executive and
financial officers evaluated the effectiveness of the Company's disclosure
controls and procedures as defined by Rule 13a-15(e) of the Exchange Act as of
the end of the period covered by this report. The Company's disclosure controls
and procedures are designed to ensure that information required to be disclosed
by the Company in reports it files or submits under the Exchange Act are
recorded, processed, summarized and reported on a timely basis. Based upon their
evaluation, the Company's principal executive and financial officers concluded
that the Company's disclosure controls and procedures are effective to
accumulate and communicate to the Company's management as appropriate to allow
timely decisions regarding disclosure.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any legal proceedings except as described below, and
there are no material legal proceedings pending with respect to our property,
though from time to time, we may be involved in routine litigation incidental to
our business. The following matter pertains to our predecessor entities, Morrow
Snowboards, Inc. and Granite Bay Technologies, Inc., with regard to our
predecessor's discontinued snowboard business:
Nicolas Steenolsen vs. Squaw Valley Ski Corporation, Granite Bay
Technologies, Inc., Morrow Snowboards, Inc., International DisplayWorks, Inc.,
et al., Superior Court of California, Los Angeles County, Case No. BC243817. The
case was a complaint for personal injuries, which arose from the plaintiff's use
of a snowboard and the resulting injury that occurred on January 30, 2000. The
snowboard was allegedly manufactured by Morrow Snowboards, Inc. The complaint
sought unspecified general damages and unspecified past and future medical
expenses. Pursuant to mediation on June 9, 2004, all parties reached a mutually
agreeable, confidential settlement of the matter. As part of the global
settlement, the Company agreed to pay the sum of $625,000 above insurance
coverage for release of any potential liability and dismissal of the action and
all cross-complaints with prejudice. The action will be dismissed upon entering
into the definitive settlement agreement and payment by all parties of
settlement funds, which the Company anticipates will occur within 90 days.
16
ITEM 2. CHANGES IN SECURITIES
On March 1, 2004, the Company entered into a Consulting agreement with a
public relations firm whereby the Company agreed to issue warrants to purchase
40,000 shares of common stock for the performance of services. To date, the
Company has issued 20,000 three year warrants exercisable at $4.35 per share.
The company will issue the additional 10,000 warrants at the closing price 120
days after March 1, 2004 and 10,000 warrants at the closing price 200 days after
March 1, 2004. The warrants will vest on February 28, 2005 and expire on
February 28, 2008.
Subsequent to the end of the second quarter, on May 17, 2004, the Company
completed a private financing of 4,500,000 shares of common stock at $4.50 per
share. Proceeds, net of estimated expenses of $1,820,000 were $18,430,000. The
placement agent received an eight percent (8%) fee based on gross proceeds.
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
Subsequent to the quarter end, at the Annual Meeting of Shareholders held
on May 19, 2004 at Howard Johnson Inn in Rocklin, California the shareholders
elected the following directors of the Company:
------------------------------------------------------------------------
Votes
-------------------------------------------------------------------------------------------------------
Name For Against Withheld Abstention Broker Non-Votes
-------------------------------------------------------------------------------------------------------
William Hedden 21,179,605 0 28,411 0 0
-------------------------------------------------------------------------------------------------------
Stephen Kircher 20,973,725 0 234,291 0 0
-------------------------------------------------------------------------------------------------------
Anthony G. Genovese 20,973,675 0 234,341 0 0
-------------------------------------------------------------------------------------------------------
Timothy Nyman 21,180,705 0 27,311 0 0
-------------------------------------------------------------------------------------------------------
Ronald Cohan 21,179,305 0 28,711 0 0
-------------------------------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
-NONE-
17
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
(b) Reports on Form 8-K
Date of Report Date of Event Item Reported
-------------- ------------- ------------
02/13/2004 02/06/2004 Press release announcing
results for fiscal 2003 and a
revenue estimate for Q1 2004
03/18/2004 03/15/2004 Press release 1st quarter
results
04/13/2004 04/13/2004 Press release announcing
proposed equipment
acquisition
05/13/2004 05/13/2004 Press release and private
placement documents for
financing agreement
05/18/2004 05/15/2004 Press release announcing
completion of financing
18
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: June 13, 2004 /s/ Ian N. Bebbington
----------------------- ------------------------------------------
Ian N. Bebbington, Chief Financial Officer
(Principal Accounting Officer and Principal
Financial Officer)
19