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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: January 31, 2005
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 (I.R.S. Employer
of 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 February 16, 2005 was 31,485,206.
INTERNATIONAL DISPLAYWORKS, INC.
INDEX
Part 1 Consolidated Financial Information Page Number
-----------
Item 1. Consolidated Financial Statements (Unaudited):
Balance Sheets at January 31, 2005 and October 31, 2004...........3
Statements of Operations for the
Three months ended January 31, 2005 and 2004......................4
Statements of Cash Flows for the
Three months ended January 31, 2005 and 2004......................5
Notes to Financial Statements.....................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................11
Item 3. Quantitative and Qualitative Disclosure About Market Risk..........15
Item 4. Controls and Procedures............................................16
Part II Other Information
Item 1. Legal Proceedings..................................................16
Item 2. Changes in Securities and Use of Proceeds..........................16
Item 3. Default Upon Senior Securities.....................................16
Item 4. Submission of Matters to a Vote of Security Holders................16
Item 5. Other Information..................................................16
Item 6. Exhibits...........................................................17
Signatures..................................................................18
Certifications..............................................................19
2
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
------------------ ----------------
ASSETS January 31, October 31,
------ 2005 2004
------------------ ----------------
Current assets:
Cash and cash equivalents
Cash in banks $ 5,667 $ 8,187
Cash in commercial paper 2,498 1,999
------------------ ----------------
Total cash and cash equivalents 8,165 10,186
Accounts receivable,
net of allowance for doubtful accounts of $113 and $101 13,202 11,378
Inventories 5,471 5,780
Prepaid expenses and other current assets 1,414 1,160
------------------ ----------------
Total current assets 28,252 28,504
------------------ ----------------
Property and equipment at cost, net 18,091 16,418
------------------ ----------------
Total assets $ 46,343 $ 44,922
================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 8,698 $ 7,236
Accrued liabilities 2,495 3,588
Line of credit 3,062 4,398
Current portion of long term debt 496 496
------------------ ----------------
Total current liabilities 14,751 15,718
Long-term debt, net of current portion 47 70
------------------ ----------------
Total liabilities 14,798 15,788
------------------ ----------------
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
31,465,081 and 30,573,383 shares issued and outstanding
at January 31, 2005 and October 31, 2004 respectively 67,038 65,642
Accumulated deficit (35,564) (36,579)
Cumulative translation adjustment 71 71
------------------ ----------------
Total shareholders' equity 31,545 29,134
------------------ ----------------
Total liabilities and shareholders' equity $ 46,343 44,922
================== ================
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 Three Months Ended
---------------- ---------------
January 31, January 31,
2005 2004
---------------- ---------------
Sales $ 18,113 $ 9,796
Cost of goods sold 14,470 7,418
---------------- ---------------
Gross profit 3,643 2,378
---------------- ---------------
Operating expenses:
General and administrative 1,917 1,106
Selling, marketing and customer service 590 394
Engineering, advanced design and product management 83 142
---------------- ---------------
Total operating expenses 2,590 1,642
---------------- ---------------
Income from operations 1,053 736
---------------- ---------------
Other income (expense):
Interest expense (62) (138)
Other income 24 23
---------------- ---------------
Total other income (expense) (38) (115)
---------------- ---------------
Income before income taxes 1,015 621
---------------- ---------------
Provision for income taxes - -
---------------- ---------------
Net income $ 1,015 $ 621
================ ===============
Basic and diluted net income per common share
Basic $ 0.03 $ 0.03
================ ===============
Diluted $ 0.03 $ 0.02
================ ===============
Basic 30,914,999 22,819,624
Diluted 31,972,964 25,523,436
============== ===============
The accompanying notes are an integral part of these financial statements
4
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
---------------------------------------
For the Three Months Ended
January 31 January 31
2005 2004
------------------- -------------------
Cash flows from operating activities:
Net income $ 1,015 $ 621
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 275 218
Stock issued for services 214 58
Foreign currency translation - 1
Gain on disposal of fixed assets (50) -
------------------- -------------------
1,454 898
Changes in operating assets and liabilities, net of business
combinations:
Increase in accounts receivable (1,824) (2,528)
Decrease (increase) in inventories 309 (638)
(Decrease) increase in prepaid expenses and other current assets (253) 411
Increase in accounts payable 1,462 1,225
(Decrease) increase in accrued liabilities (1,093) 260
------------------- -------------------
Net cash provided by (used in) operating activities 55 (372)
Cash flows from investing activities:
Acquisitions of property, plant and equipment (1,950) (844)
Proceeds from disposal of fixed assets 51 -
------------------- -------------------
Net cash used in investing activities (1,899) (844)
Cash flows from financing activities:
Proceeds from issuance of common stock 1,182 4,407
Proceeds from issuance of warrants - 64
Payment on lines of credit, net (1,336) (649)
Proceeds on debt - related parties - (40)
Payment on debt (23) -
------------------- -------------------
Net cash (used in) provided by financing activities (177) 3,782
(Decrease) increase in cash and cash equivalents (2,021) 2,566
Cash and cash equivalents at beginning of period 10,186 1,178
------------------- -------------------
Cash and cash equivalents at end of period $ 8,165 3,744
=================== ===================
Supplemental disclosure:
Cash paid for interest $ 62 $ 138
=================== ===================
Cash paid for income taxes - -
=================== ===================
Non-cash financing activities:
Stock issued for services $ 214 $ 58
=================== ===================
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 three month period ended January 31, 2005
are not necessarily indicative of the results that may be expected for
the 2005 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, 2004.
The accompanying consolidated balance sheet at October 31, 2004,
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.
6
3. INVENTORY
Inventories consisted of the following (in thousands):
January 31, October 31,
2005 2004
------------------- --------------------
Finished goods $ 1,148 $ 917
Work-in-progress 1,674 1,820
Raw materials 3,052 3,510
Less: reserve for obsolete inventory (403) (467)
------------------- --------------------
Total inventory $ 5,471 $ 5,780
=================== ====================
4.PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following (in thousands):
January 31, October 31,
2005 2004
------------------- --------------------
Prepaid expenses $ 181 $ 259
Advances to suppliers 775 447
PRC - VAT recoverable 184 145
Other 274 309
------------------- --------------------
Total prepaid expenses and other current assets $ 1,414 $ 1,160
=================== ====================
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in
thousands):
January 31, October 31,
2005 2004
------------------- --------------------
Land and buildings $ 1,185 $ 1,185
Furniture, fixtures and equipment 2,669 2,503
Machinery 14,548 14,476
Leasehold improvements 1,845 410
Construction in progress 2,128 1,857
------------------- --------------------
22,375 20,431
Less accumulated depreciation (4,284) (4,013)
------------------- --------------------
Net property, plant and equipment $ 18,091 $ 16,418
=================== ====================
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
January 31, October 31,
2005 2004
------------------- --------------------
Accrued payroll and related liabilities $ 922 $ 1,335
Accrued staff hostel expenses 128 190
Accrued inventory purchases 29 27
Accrued royalties - 38
Accrued PRC government management fees 58 72
Accrued asset acquisition costs 803 1,560
Accrued commissions 319 -
Other accrued liabilities 236 366
------------------- --------------------
Total accrued liabilities $ 2,495 $ 3,588
=================== ====================
7
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 prime plus 1.25% per annum and is
subject to a minimum monthly interest payment of $10,000, includes
certain financial covenants, and is guaranteed by a former officer of
the Company. At January 31, 2005 the outstanding balance is
$3,062,000. Based on eligible accounts receivable, there was
approximately $44,700 available under the line at January 31, 2005.
8. STOCKHOLDERS' EQUITY
Stock Option Plans
During the three months ended January 31, 2005, there were
174,800 options granted at a price equal to or greater than market
price at the date of the grant. There were no options that were
cancelled or expired, and 519,875 options were exercised under the
employee stock option plans at prices that ranged from $0.15 to $6.70
per share.
The following table illustrates the effect on net income and
earnings per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation:
Three Months Ended
January 31
2005 2004
--------------------------------------------------
Net income as reported $ 1,015 $ 621
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards. (96) (18)
---------------------- -------------------------
Pro-forma net income $ 919 $ 603
====================== =========================
Earnings per share:
Basic - as reported $ 0.03 $ 0.03
====================== =========================
Diluted - as reported $ 0.03 $ 0.02
====================== =========================
Basic - pro forma $ 0.03 $ 0.03
====================== =========================
Diluted - pro forma $ 0.03 $ 0.02
====================== =========================
In December 2004, the FASB issued SFAS No. 123R that amends SFAS
No. 123 "Accounting for Stock-Based Compensation," to require public
entities (other than those filing as small business issuers) to report
stock-based employee compensation in their financial statements. The
Company will be required to comply with the provisions of SFAS No.
123R as of the first interim period that begins after June 15, 2005
(August 1, 2005 for the Company). The Company currently does not
record compensation expense related to its stock-based employee
compensation plans in its financial statements. The Company currently
makes a pro-forma disclosure of the expense related to its Stock-Based
compensation plans (See footnote No. 8 to the financial statements).
8
Common Stock Issued
-------------------
During the three months ended January 31, 2005, the Company
issued 891,698 shares of common stock. Of these 51,948 shares of the
Company's common stock were issued in accordance with the employment
agreement with the Company's Chairman and CEO as a signing bonus at a
share price of $3.85, the fair market value as of the date of the
agreement and 2,500 shares issued as a compensation to a consultant at
$5.45 per share, the fair market value as of the date of the
agreement. The expense related to the issuance of the shares to the
Company's Chairman and CEO was accrued in the fiscal year ended
October 31, 2004. The Company issued 317,375 shares of the Company's
common stock through exercise of warrants at exercise prices from
$0.16 to $0.75 per share. The Company issued 519,875 shares of the
Company's common stock through exercise of stock options issued under
the Company's stock option and incentive plans at exercise prices from
$0.15 to $6.70 per share.
9. COMMITMENT
On November 23, 2004 the Company entered into a lease for the
relocation of the Company's corporate headquarters. The lease will
begin on May 1, 2005 coinciding with expiration of the lease for the
premises that the Company currently occupies. The term of the lease is
five (5) years with an option to renew for two additional three-year
terms. The initial annual rent is $129,600.
10. SEGMENT AND GEOGRAPHIC INFORMATION
The Company produces displays and display modules for the end
products of OEM and EMS 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, China (including Hong Kong, Asia (excluding
China and Hong Kong) and Europe. The sales and assets by geographical
area were (in thousands):
----------------------------------------------------------------------------------------------------------
Revenues for Three Months Ended: January 31, 2005 January 31, 2004
----------------------------------------------------------------------------------------------------------
United States $ 4,501 $ 3,643
China (including Hong Kong) 1,956 3,400
Asia (excluding Hong Kong and China) 8,223 1,095
Europe 2,231 1,267
Other 1,202 391
------------------------ ------------------------
Total $ 18,113 $ 9,796
======================== ========================
-----------------------------------------------------------------------------------------------------------
"Long Lived" Assets January 31, 2005 October 31, 2004
-----------------------------------------------------------------------------------------------------------
United States $ 91 $ 110
China (including Hong Kong) 18,000 16,308
------------------------ ------------------------
Total $ 18,091 $ 16,418
======================== ========================
9
11. SUBSEQUENT EVENTS
On February 17, 2005, subsequent to the quarter end, the Company
entered into a one year eight day lease to relocate the Company's
office facility in Hong Kong. This lease replaces the lease on the
current premises which has expired. The annual rental is $9,076.
On February 18, 2005, subsequent to the quarter end, the Company
signed a commitment letter with The Wells Fargo HSBC Trade Bank N.A.
for a $20,000,000 revolving line of credit at an interest rate of
prime plus 0.50% per annum which includes certain financial covenants.
The transaction is expected to conclude by the end of March 2005. This
line will replace the Company's current asset-based line with Wells
Fargo Business Credit, Inc.
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 2005, 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, 2004 and the factor listed below regarding the equipment
acquisition.
The following discussion is presented on a consolidated basis, and analyzes
our financial condition and results of operations for the three month period
ended January 31, 2005 and January 31, 2004.
Overview
We manufacture LCDs and LCD modules and assemblies for major OEMs and EMSs
and offer design and engineering services related to those products. 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.
With the acquisition of a color LCD line and TFT assembly equipment and the
addition of 140,000 feet of manufacturing space, the Company has increased
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
second 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
11
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.
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 in the United States of
America ("US GAAP"). 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 in Financial Statements." 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.
12
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. In November 2004 the FASB issued Statement No. 151, Inventory, an
amendment of ARB No. 43, Chapter. While retaining the general principal of ARB
43, Chapter 4, it amends ARB to clarify that:
o abnormal amounts of idle facilities, freight, handling costs, and
spoilage should be recognized as charges of the current period and
o allocation of fixed production overheads to inventories should be
based on the normal capacity of the production facilities.
Implementation of FASB Statement No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005 and should be applied
prospectively. Early application is permitted. The Company does not expect that
implementation of FASB Statement No. 151 will have a material financial impact
on the results of operations.
Stock Based Compensation
In December 2004, the FASB issued SFAS No. 123R that amends SFAS No. 123
"Accounting for Stock-Based Compensation," to require public entities (other
than those filing as small business issuers) to report stock-based employee
compensation in their financial statements. The Company will be required to
comply with the provisions of SFAS No. 123R as of the first interim period that
begins after June 15, 2005 (August 1, 2005 for the Company). The Company
currently does not record compensation expense related to its stock-based
employee compensation plans in its financial statements. The Company does
currently makes a pro-forma disclosure of the expense related to its Stock-Based
compensation plans (See footnote No. 8 to the financial statements).
Income Taxes
Pursuant to Financial Accounting Standards Board ("FASB") Statement of
Financial Standards ("SFAS") No. 109, "Accounting for Income Taxes," income
taxes are recorded based on current year amounts payable or refundable, as well
as the consequences of events that give rise to deferred tax assets and
liabilities. We base our estimate of current and deferred taxes on the tax laws
and rates that are currently in effect in the appropriate jurisdiction. Changes
in laws or rates may affect the current amounts payable or refundable as well as
the amount of deferred tax assets or liabilities. At January 31, 2005, we had
approximately $9,336,000 of net operating loss carry forward available resulting
in approximately $3,734,000 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 Months Ended January 31, 2005 and 2004.
Net Sales - Net sales were $18,113,000 and $9,796,000 for the quarters
ended January 31, 2005 and 2004 respectively, an increase of 85%. The increase
can be attributed to the continuing success 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 76% of net sales for the
quarters ended January 31, 2005 and 2004, respectively. Sub-contracting charges
13
due to COG capacity that did not come on line in time to meet production
requirements accounted for 2% of the increase. The remainder is attributable to
increased raw material and transportation costs partly offset by decreased labor
overtime costs and decreased utility costs resulting from the switch to city
power from diesel self-generated power.
General and Administrative - General and Administrative expenses increased
73% to $1,917,000 from $1,106,000 for the quarters ended January 31, 2005 and
2004 respectively. As a percentage of sales, General and Administrative expenses
were 11% for both the quarters ended January 31, 2005 and 2004. This increase is
attributed to increased number of employees and employee related expenses,
increased professional fees, increased rent and utility expense for the
Company's new factory facility and increased currency exchange losses.
Significant elements of this expense include employee related expenses of
$832,000, rent and utility costs of $264,000 and professional fees of $339,000
for the quarter ended January 31, 2005.
Selling, Marketing and Customer Service - Selling, Marketing and Customer
Service expenses increased to $590,000 from $394,000 for the quarters ended
January 31, 2005 and 2004 respectively, an increase of 50%. As a percentage of
sales, Selling, Marketing and Customer Service expenses were 3% and 4% for the
quarters ended January 31, 2005 and 2004 respectively. The increased expense can
be attributed to increased commission expense (due to increased sales), travel
expense, and trade show expense. Significant elements of this expense consist of
employee related expenses of $162,000, commission expense of $292,000 for the
quarter ended January 31, 2005.
Engineering, Design, and Project Management - Engineering, design and
project management expenses were $83,000 and $142,000 for the quarters ended
January 31, 2005 and 2004 respectively, a decrease of 42%. The decrease is
attributable to decreased salary costs resulting from the retirement of the
Company's Chief Technical Officer. A significant element of this expense
includes employee salary and related expenses of $77,000.
Interest Expense (net) - Interest expense (net of interest income of
$14,000) decreased 55% to $62,000 from $138,000 for the quarters ended January
31, 2005 and 2004 respectively. The quarter on quarter decrease is attributable
to the Company's repayment of all outstanding notes totaling $1,524,000 (at a
12% interest rate) in May 2004 and the fact that the Company's current credit
facility is at a much lower rate of prime plus 1.25%.
Other Income / Expense - Other income was $24,000 and $23,000 for the
quarters ended January 31, 2005 and 2004 respectively. The primary component of
other income was rental income of $24,000.
Net Income - Net income was $1,015,000 ($0.03 per share, basic and diluted)
and $621,000 ($0.03 per share basic and $0.02 per share diluted) for the
quarters ended January 31, 2005 and 2004 respectively. Increased sales are the
reason for increase in net income.
Liquidity and Capital Resources
Adjusted for non-cash items, net income for the three months ended January
31, 2005 and 2004 resulted in net cash inflows from operations of $1,454,000 and
$898,000 respectively. Cash outflows as a result in changes in operating assets
and liabilities were $1,399,000 for the three months ended January 31, 2005
primarily resulting from increases in accounts receivable of $1,824,000,
decreases in inventories of $309,000, increases in prepaid expenses of $253,000,
increases in accounts payable of $1,462,000 (attributed to increased sales), and
decreases in accrued liabilities of $1,093,000, compared to cash outflows of
$1,270,000 for the three months ended January 31, 2004. Cash used in investing
activities was $1,899,000 and $844,000 for the three months ended January 31,
2005 and 2004 respectively. These funds were used primarily for tenant
improvements and equipment installation at the Company's north campus which
houses the new LCD line. Cash outflows from financing activities were $177,000
14
for the three months ended January 31, 2005 primarily from the issuance of
common stock for exercise of stock options of $1,182,000 offset by a decrease of
$1,336,000 in outstanding debt on the Company's line of credit. Cash inflows
from financing activities were $3,782,000 for the three months ended January 31,
2004 primarily from a private placement of the Company's common stock of
$4,407,000 in December 2003.
The Company requires capital to repay certain existing fixed obligations,
to provide for additional working capital and to invest in capital equipment to
grow in accordance with its business plan. Subsequent to the quarter ended
January 31, 2005, on February 18, 2005 the Company signed a commitment letter
with The Wells Fargo HSBC Trade Bank for a $20,000,000 revolving line of credit
to be secured by the Company's assets. This line will replace the Company's
current asset-based line of credit which only allows for borrowing against
eligible accounts receivable. The transaction is expected to be finalized by the
end of March 2005.
On January 31, 2005 we had $496,000 of debt due within a year in addition
to $3,062,000 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, 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 October 1983 at approximately HK$7.80 to
US$1.00 through the currency issuing banks in Hong Kong and accordingly has not
in the past presented a currency exchange risk. This could change in the future
as there has been discussion in some circles concerning the advantages of the
floating rate.
Effective January 1, 1994, China adopted a floating currency system whereby
the official exchange rate equaled the market rate. Since the market and
official RMB rates were unified, the value of the RMB against the U.S. dollar
has been stable. There is currently pressure being exerted by the U.S. and
others for the RMB to be permitted to float more freely but it is unclear
whether this would lead to an upward movement in the exchange rate between the
RMB and the U.S. dollar. It is not currently possible to hedge against movement
in the RMB exchange rate through conventional means. We are thus not hedged and
remain exposed to movement in the exchange rate. We incur approximately 30% of
our expenses in RMB and have negligible RMB revenue; an increase in the value of
the RMB would thus have an adverse affect on our operating margins and minimal
effect on our monetary assets denominated in RMB as cash holdings which broadly
equate to the remaining installment of RMB 3.3 million (US$ 403,000 at current
rates) due on a three mortgage repayable in June 2005.
We also incur liabilities in Japanese Yen from the purchase of raw
materials. We do not currently hedge against this exposure and are thus exposed
to exchange rate movement at present.
Interest Rate Risk
Our principal exposure to interest rate changes is on the asset based
lending line which is based on prime rates in the U.S.
15
Inflation Risk
Although inflation has remained low in recent years in the markets in which
we currently sell and expect to do so for the foreseeable future, the general
inflation rate in China is higher with wage inflation expected to run between
five and ten percent annually. Such inflation represents a risk to our
profitability if sustained and not compensated for by a movement in exchange
rates or productivity improvements.
ITEM 4. CONTROLS AND PROCEDURES
The Company'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 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
-NONE-
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-NONE-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-NONE-
ITEM 5. OTHER INFORMATION
-NONE-
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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
17
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: February 23, 2005 /s/ Jeffrey G. Winzeler
----------------- --------------------------------------------
Jeffrey G. Winzeler, Chief Financial Officer
(Principal Accounting Officer and Principal
Financial Officer)
18