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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: July 31, 2004
Commission File Number: 0-27002
INTERNATIONAL DISPLAYWORKS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3333649
-------- ----------
(State of or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 August 25, 2004 was 30,054,883.
INTERNATIONAL DISPLAYWORKS, INC.
INDEX
Part 1 Consolidated Financial Information Page Number
-----------
Item 1. Consolidated Financial Statements (Unaudited):
Balance Sheets at July 31, 2004 and October 31, 2003.............3
Statements of Operations for the
Three and nine months ended July 31, 2004 and 2003...............4
Statements of Cash Flows for the
Nine months ended July 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.........15
Item 4. Controls and Procedures...........................................16
Part II Other Information
Item 1. Legal Proceedings.................................................16
Item 2. Changes in Securities and Use of Proceeds.........................16
Item 3. Default Upon Senior Securities....................................17
Item 4. Submission of Matters to a Vote of Security Holders...............17
Item 5. Other Information.................................................17
Item 6. Exhibits..........................................................17
Signatures.................................................................18
Certifications.............................................................19
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
----------------- ----------------
ASSETS July 31, October 31,
------ 2004 2003
----------------- ----------------
Current assets:
Cash and cash equivalents
Cash in banks $ 6,662 $ 1,178
Cash in escrow for asset purchase 6,000 -
Commercial paper 7,998 -
----------------- ----------------
Total cash and cash equivalents 20,660 1,178
Accounts receivable,
net of allowance for doubtful accounts of $80 and $39 8,722 4,260
Inventories 4,773 2,465
Prepaid expense 1,803 1,361
----------------- ----------------
Total current assets 35,958 9,264
----------------- ----------------
Property and equipment at cost, net 5,315 4,796
----------------- ----------------
Total assets $ 41,273 $ 14,060
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 6,682 $ 4,770
Accrued liabilities 2,426 1,636
Line of credit 3,364 1,051
Current portion of long term debt - related parties - 50
Current portion of long term debt 496 452
----------------- ----------------
Total current liabilities 12,968 7,959
Long-term debt, net of current portion - related parties - 624
Long-term debt, net of current portion 73 1,253
----------------- ----------------
Total liabilities 13,041 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
30,054,883 and 20,984,913 shares issued and outstanding
at July 31, 2004 and October 31, 2003 respectively 65,271 41,806
Accumulated deficit (37,110) (37,653)
Cumulative translation adjustment 71 71
----------------- ----------------
Total shareholders' equity 28,232 4,224
----------------- ----------------
Total liabilities and shareholders' equity $ 41,273 $ 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)
For Nine Months Ended For Three Months Ended
-----------------------------------------------------------
July 31, 2004 July 31, 2003 July 31, 2004 July 31, 2003
-----------------------------------------------------------
Sales $ 32,073 $ 15,698 $ 11,654 $ 5,889
Cost of goods sold 25,095 11,970 9,220 4,584
-----------------------------------------------------------
Gross profit 6,978 3,728 2,434 1,305
-----------------------------------------------------------
Operating expenses:
General and administrative 3,579 2,676 1,234 1,017
Selling, marketing and customer service 1,507 1,323 633 382
Engineering, advanced design and product management 454 447 123 144
-----------------------------------------------------------
Total operating expenses 5,540 4,446 1,990 1,543
-----------------------------------------------------------
Operating income (loss) 1,438 (718) 444 (238)
-----------------------------------------------------------
Other income (expense):
Interest expense (net) (333) (256) (84) (95)
Other income (expense) (562) 56 10 19
-----------------------------------------------------------
Total other income (expense) (895) (200) (74) (76)
-----------------------------------------------------------
Income (loss) from continuing
operations before income taxes 543 (918) 370 (314)
-----------------------------------------------------------
Provision for income taxes - - - -
-----------------------------------------------------------
Net income (loss) $ 543 $ (918) $ 370 $ (314)
===========================================================
Basic and diluted loss per common share
Basic $ 0.02 $ (0.05) $ 0.01 $ (0.02)
===========================================================
Diluted $ 0.02 $ (0.05) $ 0.01 $ (0.02)
===========================================================
Weighted average common shares outstanding
Basic 24,730,165 19,294,921 29,960,175 19,318,246
Diluted 26,962,928 19,294,921 32,192,938 19,318,246
===========================================================
The accompanying notes are an integral part of these financial statements
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
------------------------------------
July 31, July 31,
2004 2003
------------------------------------
Cash flows from operating activities:
Net income (loss) $ 543 $ (918)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 696 625
Stock issued for services 58 -
Loss on disposal of fixed assets 9 40
------------------------------------
1,306 (253)
Changes in operating assets and liabilities, net of business
combinations:
Increase in accounts receivable (4,462) (1,025)
Increase in inventories (2,308) (398)
Increase in prepaid expenses and other current assets (442) (328)
Increase in accounts payable 1,912 1,190
Increase in accrued liabilities 790 27
------------------------------------
Net cash used in operating activities (3,204) (787)
Cash flows from investing activities:
Acquisition of property, plant and equipment (1,224) (295)
------------------------------------
Net cash used in investing activities (1,224) (295)
Cash flows from financing activities:
Proceeds from issuance of common stock 23,343 16
Proceeds from issuance of warrants 64 38
Proceeds from lines of credit, net 2,313 -
Proceeds from debt 166 (500)
(Payment) proceeds on debt - related parties (574) 40
(Payment) proceeds on debt (1,402) 616
------------------------------------
Net cash provided by financing activities 23,910 210
Increase (decrease) in cash and cash equivalents 19,482 (872)
Cash and cash equivalents at beginning of period 1,178 1,556
------------------------------------
Cash and cash equivalents at end of period $ 20,660 $ 684
====================================
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 nine month period ended July 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
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, are 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):
July 31, October 31,
2004 2003
-------------------------------
Finished goods $ 225 $ 687
Work-in-progress 1,656 752
Raw materials 3,379 1,537
Less: reserve for obsolete inventory (487) (511)
-------------------------------
Total inventory $ 4,773 $ 2,465
===============================
4. PREPAYMENTS
Prepaid expenses and other current assets consisted of the following (in thousands):
July 31, October 31,
2004 2003
------------------------------
Prepaid expenses $ 369 $ 377
Advances to suppliers 501 303
Prepaid asset acquisition costs 532 -
PRC - VAT recoverable 224 354
Other 177 327
------------------------------
Total prepaid expenses $ 1,803 $ 1,361
==============================
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
July 31, October 31,
2004 2003
------------------------------
Land and buildings $ 1,185 $ 1,185
Construction in progress 434 56
Furniture, fixtures and equipment 2,018 1,742
Machinery 5,272 4,865
Leasehold improvements 205 83
------------------------------
9,114 7,931
Less accumulated depreciation (3,799) (3,135)
------------------------------
Net property, plant and equipment $ 5,315 $ 4,796
==============================
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
July 31, October 31,
2004 2003
--------------------------------
Accrued payroll and related liabilities $ 723 $ 747
Accrued staff hostel expenses 184 219
Accrued inventory purchases 25 68
Accrued royalties 217 129
Accrued PRC government management fees 87 102
Customer deposits 89 -
Accrued commissions 184 -
Accrued VAT expense - -
Accrued litigation settlement cost 625 -
Other accrued liabilities 292 371
--------------------------------
Total accrued liabilities $ 2,426 $ 1,636
================================
7. LINE OF CREDIT
The Company has $5,000,000 asset based credit line with Wells
Fargo Business Credit, Inc. The credit line, which expires on March 9,
2006, has an interest rate of 1.25% per annum and is subject to a
minimum monthly interest payment of $10,000, includes certain
financial covenants, and is guaranteed by an officer of the Company.
At July 31, 2004 the outstanding balance is $3,364,000. Based on
eligible accounts receivable, there was approximately $1,400,000
available under the line at July 31, 2004.
8. STOCKHOLDERS' EQUITY
Stock Option Plans
During the nine months ended July 31, 2004, there were 115,000
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
539,125 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:
Nine Months Ended Three Months Ended
July 31 July 31
2004 2003 2004 2003
--------------------------------------------------------------------------
Net income (loss) as reported $ 543 $ (918) $ 370 $ (314)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards. (63) (36) (21) (12)
--------------------------------------------------------------------------
Pro forma net income (loss) $ 480 $ (954) $ 349 $ (326)
================= =============== ============== ===============
Earnings per share:
Basic - as reported $ 0.02 $ (0.05) $ 0.01 $ (0.02)
================= =============== ============== ===============
Diluted - as reported $ 0.02 $ (0.05) $ 0.01 $ (0.02)
================= =============== ============== ===============
Basic - pro forma $ 0.02 $ (0.05) $ 0.01 $ (0.02)
================= =============== ============== ===============
Diluted - pro forma $ 0.02 $ (0.05) $ 0.01 $ (0.02)
================= =============== ============== ===============
Common Stock Issued
During the nine months ended July 31, 2004, the Company issued
9,069,970 shares of common stock. Of these 3,333,335 shares of common
stock were issued in a private placement in December, 2003 at $1.50
per share with proceeds of $5,000,002 less expenses of $697,000 and
4,500,000 shares of common stock were issued in a private placement in
May 2004 at $4.50 per share with proceeds of $20,250,000 less expenses
of $1,770,000. The placement agent received an eight percent (8%) fee
based on gross proceeds. 55,000 shares of the Company's common stock
were issued as compensation to the Company's three independent
directors and 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. 629,510 shares of the Company's common stock
were issued through exercise of warrants at exercise prices from $0.16
to $1.50 per share. 539,125 shares of the Company's common stock were
issued through exercise of stock options issued under the Company's
stock option and incentive plans at exercise prices from $0.15 to
$2.50 per share.
9. COMMITMENT
On June 24, 2004 the Company entered into an Asset Purchase
Agreement 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 $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 $4,000,000.
In July 2004 the Company signed a lease for a new factory facility
located near its current campus. In July 2004 the Company placed
$6,000,000 in an escrow account at Hong Kong and Shanghai Banking
Corporation Limited for the completion of the purchase of the
equipment. This amount is shown on the Company's balance sheet as cash
in escrow under Cash and Cash Equivalents. The asset purchase is
expected to be completed in September 2004. The Company also entered
into a contract with Crown Worldwide (HK) Ltd. to relocate the
equipment purchased from Taiwan to the PRC. A deposit of $353,000 has
been made on this contract.
10. 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 Nine Months Ended: July 31, 2004 July 31, 2003
--------------------------------------------------------------------------------------------------------------
United States $ 13,720 $ 7,853
Hong Kong and China 8,604 4,486
Asia (excluding Hong Kong and China) 3,787 2,355
Europe 4,652 508
Other 1,310 496
------------------------ ------------------------
Total $ 32,073 $ 15,698
======================== ========================
--------------------------------------------------------------------------------------------------------------
Revenues for Three Months Ended: July 31, 2004 July 31, 2003
--------------------------------------------------------------------------------------------------------------
United States $ 5,680 $ 2,582
Hong Kong and China 2,681 1,767
Asia (excluding Hong Kong and China) 1,416 829
Europe 1,553 442
Other 324 269
------------------------ ------------------------
Total $ 11,654 $ 5,889
======================== ========================
--------------------------------------------------------------------------------------------------------------
"Long Lived" Assets July 31, 2004 July 31, 2003
--------------------------------------------------------------------------------------------------------------
United States $ 121 $ 149
Hong Kong and China 5,194 4,676
------------------------ ------------------------
Total $ 5,315 $ 4,825
======================== ========================
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 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 regarding the 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 nine month
period ended July 31, 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.
With the acquisition of a color LCD line and TFT assembly equipment and the
addition of 140,000 feet of manufacturing space, the Company will increase
capacity to offer existing and new customers an expanded color product line. The
focus will be to utilize our engineering and manufacturing competencies to fill
the added capacity in order to absorb overhead created by the expansion and
maintain acceptable margins. Production is expected to begin by the end of the
first quarter of fiscal 2005.
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.
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. On June 24, 2004, the Company entered into an agreement to
purchase the necessary equipment. In July 2004 the Company entered into a lease
agreement for additional factory space to provide us with continuous space for
the color LCD line as well as for other uses. Installation of the line is
scheduled to begin in late September 2004.
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
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 July 31, 2004, we had
approximately $8,827,000 of net operating loss carry forward available resulting
in approximately $3,531,000 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 Nine Months Ended July 31, 2004 and 2003.
Net Sales - Net sales were $11,654,000 and $5,889,000 for the quarters
ended July 31, 2004 and 2003 respectively, an increase of 96%. Net sales were
$32,073,000 and $15,698,000 for the nine months ended July 31, 2004 and 2003
respectively, an increase of 104%. The increase for the three months and the
nine months ended July 31, 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 79% and 78% of net sales for the
quarters ended July 31, 2004 and 2003, respectively. Though there was only a 1%
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 76%
for the nine months ended July 31, 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
21% to $1,234,000 from $1,017,000 for the quarters ended July 31, 2004 and 2003
respectively. As a percentage of sales General and Administrative expenses were
11% and 17% for the quarters ended July 31, 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. Significant elements of this expense include employee
related expenses of $594,000, and professional fees of $137,000 for the quarter
ended July 31, 2004. General and Administrative expenses increased 34% to
$3,579,000 from $2,676,000 for the nine months ended July 31, 2004 and 2003
respectively. As a percentage of sales General and Administrative expenses were
11% and 17% for the nine months ended July 31, 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. Significant elements of this expense include employee
related expenses of $1,737,000 and professional fees of $407,000 for the nine
months ended July 31, 2004.
Selling, Marketing and Customer Service - Selling, Marketing and Customer
Service expenses increased to $633,000 from $382,000 for the quarters ended July
31, 2004 and 2003 respectively, an increase of 66%. As a percentage of sales,
Selling, Marketing and Customer Service expenses were 5% and 7% for the quarter
ended July 31, 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 the Company's marketing plan 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 $195,000, commission expense of $300,000, rent of
$19,000 for sales offices, telephone expense of $11,000, and travel related
costs of $60,000 for the quarter ended July 31, 2004. Selling, Marketing and
Customer Service expenses increased to $1,507,000 from $1,323,000 for the nine
months ended July 31, 2004 and 2003 respectively, an increase of 14%. As a
percentage of sales Selling, Marketing and Customer Service expenses were 5% and
8% respectively for the nine months ended July 31, 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,
trade show, and travel expense. Significant elements of this expense consist of
employee related expenses of $523,000, commission expense of $672,000, rent of
$62,000 for sales offices, telephone expense of $58,000, and travel related
costs of $101,000 for the nine months ended July 31, 2004.
Engineering, Design, and Project Management - Engineering, design and
project management expenses were $123,000 and $144,000 for the quarters ended
July 31, 2004 and 2003 respectively, a decrease of 15%. The decrease is
attributable to decreased salary costs made possible by localization of labor in
the PRC. A significant element of this expense includes employee related
expenses of $96,000. Engineering, design and project management expenses were
$454,000 and $447,000 for the nine months ended July 31, 2004 and 2003
respectively, an increase of 2%. The increase is attributable to decreased
salary costs offset by an increase in rent expense. Significant element of this
expense includes employee related expenses of $422,000.
Interest Expense (net) - Interest expense (net of interest income of
$12,000) decreased 12% to $84,000 from $95,000 for the quarters ended July 31,
2004 and 2003 respectively. The Company repaid all outstanding notes totaling
$1,524,000 (of which $1,000,000 was borrowed in the fourth quarter of fiscal
2003) in May 2004 from the proceeds of the private placement resulting in little
change in expense from the comparative period last year. Interest expense (net
of interest income of $12,000) increased 30% from $256,000 to $333,000 for the
nine months ended July 31, 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. The Company repaid all outstanding notes
totaling $1,524,000 in May of 2004 eliminating the twelve percent (12%) interest
expense associated with the notes.
Other Income / Expense - Other income was $10,000 and $19,000 for the
quarters ended July 31, 2004 and 2003 respectively, a decrease of 47%. The
decrease was a result of normal operating activities. Other expense for the nine
months ended July 31, 2004 was $562,000 compared with other income of $56,000
for the nine months ended July 31, 2003. The $625,000 settlement of litigation
previously disclosed was the reason for this increase.
Net Income - Net income was $370,000 ($0.01 per share, basic and diluted)
for the quarter ended July 31, 2004. The net loss was $314,000 ($0.02 per share,
basic and diluted) for the quarter ended July 31, 2003. Increased sales are the
reason for increase in net income. The net income was $543,000 ($0.02 per share,
basic and diluted) for the nine months ended July 31, 2004. There was a loss of
$918,000 ($0.05 per share, basic and diluted) for the nine months ended July 31,
2003. Increase in sales offset by the settlement of the Company's previously
disclosed litigation was the major contributing factor to the increased net
income.
Liquidity and Capital Resources
Adjusted for non-cash items, net income for the nine months ended July 31,
2004 resulted in net cash inflows from operations of $1,306,000, compared to
$253,000 of net cash outflows for the nine months ended July 31, 2003. Cash
outflows as a result in changes in operating assets and liabilities were
$4,510,000 for the nine months ended July 31, 2004 primarily resulting from
increases in accounts receivable of $4,462,000, inventories of $2,308,000,
increases in prepaid expenses of $442,000, accounts payable of $1,912,000
(attributed to increased sales), and accrued liabilities of $790,000 (of which
$625,000 is an accrual for the settlement of previously disclosed litigation ,
compared to cash inflows of $534,000 for the nine months ended July 31, 2003.
Cash used in investing activities was $1,224,000 and $295,000 for the nine
months ended July 31, 2004 and 2003 respectively. These funds were used for
purchase of capital equipment. Cash provided by financing activities was
$23,910,000 for the nine months ended July 31, 2004, primarily from the issuance
of common stock in conjunction with two private placements in December 2003 and
May 2004 respectively and exercise of stock options and warrants, compared to
cash provided by financing activities of $210,000 for the nine months ended July
31, 2003. Cash and cash equivalents were $20,660,000 and $684,000 at July 31,
2004 and 2003 respectively. The increase was attributed to increased sales and
the sale of the Company's common stock in two private placements in December
2003 and May 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 May 17, 2004, we completed a $20,250,000 private placement through the
sale of 4,500,000 shares of our common stock providing net proceeds of
approximately $18,480,000. The Company plans to use the proceeds for the
acquisition and installation of a color LCD line, working capital, and to
liquidate debt.
Pursuant to mediation on June 9, 2004, all parties reached a mutually
agreeable, confidential settlement of the legal matter previously disclosed. 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 in
September 2004.
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.
On June 24, 2004, we entered into an Asset Purchase Agreement 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. In July 2004 the Company placed the $6,000,000 in an escrow account
at Hong Kong and Shanghai Banking Corporation Limited for the completion of the
purchase which is expected to conclude in September 2004.
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 Taiwan is subject to approval
from the export processing zone administration where they are located and is
expected to take place in early September. 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 have insured 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.
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.
On July 31, 2004, we had $569,000 of debt due within a year in addition to
$3,364,000 due on our credit line.
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, Chinese 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 floating
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. Due to the Chinese government control of the RMB, 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 have debt repayable on June 30, 2005, of RMB 3.33 million
(U.S. $400 thousand at current exchange rates), outstanding at the quarter ended
July 31, 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.
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 expenses of
$1,770,000 were $18,480,000. The placement agent received an eight percent (8%)
fee based on gross proceeds.
The sales and issuances of common stock in the private placement 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
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:
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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
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ITEM 5. OTHER INFORMATION
-NONE-
ITEM 6. EXHIBITS
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
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: September 6, 2004 /s/ Ian N. Bebbington
----------------- -------------------------------------------
Ian N. Bebbington, Chief Financial Officer
(Principal Accounting Officer and Principal
Financial Officer)