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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, 2002
Commission File Number: 0-27002
INTERNATIONAL DISPLAYWORKS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3333649
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
- ------------------------ ------------------------------------
599 Menlo Drive, Suite 200, Rocklin, California 95765-3708
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(916) 415-0864
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[x] yes [ ] no
The number of shares outstanding of the registrant's Common Stock, no par value,
as of September 6, 2002 was 19,351,246.
INTERNATIONAL DISPLAYWORKS, INC.
INDEX
Part 1 Financial Information Page Number
-----------
Item 1. Financial Statements (Unaudited):
Balance Sheets at July 31, 2002 and October 31, 2001..................1
Statements of Operations for the
Three and Nine months ended July 31, 2002 and September 30, 2001......2
Statements of Cash Flows for the
Nine months ended July 31, 2002 and September 30, 2001................3
Notes to Financial Statements.........................................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation..........................9
Item 3. Quantitative and Qualitative Disclosure About Market Risk............14
Part II Other Information
Item 1. Legal Proceedings....................................................15
Item 2. Changes in Securities................................................15
Item 3. Default Upon Senior Securities.......................................15
Item 4. Submission of Matters to a Vote of Security Holders..................15
Item 5. Other Information....................................................15
Item 6. Exhibits and Reports on Form 8-K.....................................15
Signatures....................................................................17
Certifications................................................................18
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS July 31, October 31,
2002 2001
------------- ------------
Current assets:
Cash and cash equivalents $ 935 $ 982
Accounts receivable,
net of allowance for doubtful accounts of $178 and $196 3,215 3,231
Inventories 1,650 1,322
Prepaid expense 665 391
Other current assets 12 12
Net current assets of discontinued operations - 12
------------- ------------
Total current assets 6,477 5,950
------------- ------------
Property and equipment at cost, net 5,711 6,389
------------- ------------
Other assets:
Goodwill, net 5,395 5,719
------------- ------------
Total other assets 5,395 5,719
------------- ------------
Total assets $ 17,583 $ 18,058
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,140 $ 1,950
Accrued liabilities 1,210 1,258
Current portion of long term debt 1,814 2,653
------------ ------------
Total current liabilities 6,164 5,861
------------ ------------
Long-term debt, net of current portion 807 807
------------ ------------
Total liabilities 6,971 6,668
Commitments and contingencies - -
Shareholders' equity
Preferred stock, no par, 10,000,000 shares authorized
no shares issued or outstanding
- -
Common stock, no par, 40,000,000 shares authorized,
19,351,213 and 19,321,213 shares issued and outstanding
at July 31, 2002 and October 31, 2001 respectively 41,216 41,205
Accumulated deficit (30,724) (29,903)
Cumulative translation adjustment 120 88
------------ ------------
Total shareholders' equity 10,612 11,390
------------ ------------
Total liabilities and shareholders' equity $ 17,583 $ 18,058
============ ============
The accompanying notes are an integral part of these consolidated 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, September July 31, 2002 September 30,
2002 30, 2001 2001
------------------------ -----------------------------------
Net sales $ 15,510 $ 13,531 $ 5,316 $ 4,579
Cost of goods sold 11,651 10,372 $ 3,995 3,604
---------- --------- ----------- -----------
Gross profit 3,859 3,159 1,321 975
---------- --------- ----------- -----------
Operating expenses:
Selling, marketing & customer service 1,168 1,132 374 414
Engineering, advance design and product
management 516 255 181 95
General and administrative 2,743 3,480 1,036 1,148
---------- --------- ----------- -----------
Total operating expenses 4,427 4,867 1,591 1,657
---------- --------- ----------- -----------
Operating loss (568) (1,708) (270) (682)
---------- --------- ----------- -----------
Other income (expense):
Interest expense (380) (466) (94) (202)
Other income (expense) 76 51 7 24
---------- --------- ----------- -----------
Total other income (expense) (304) (415) (87) (178)
---------- --------- ----------- ------------
Loss from continuing operations before income taxes (872) (2,123) (357) (860)
Income tax benefit - - - -
---------- --------- ----------- -----------
Loss from continuing operations (872) (2,123) (357) (860)
---------- --------- ----------- -----------
Income (loss) on discontinued snowboard operations 48 15 10 (1)
---------- --------- ----------- -----------
Loss from discontinued snowboard and apparel
operations, net of taxes 48 15 10 (1)
---------- --------- ----------- -----------
Net loss $ (824) $ (2,108) $ (347) (861)
========== ========= =========== ===========
Net loss per common share:
Loss from continuing operations - basic $ (0.04) $ (0.11) $ (0.02) $ (0.04)
Loss from continuing operations - diluted $ (0.04) $ (0.11) $ (0.02) $ (0.04)
Loss from discontinued operations - basic $ 0.00 $ 0.00 $ 0.00 $ 0.00
Loss from discontinued operations - diluted $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net loss - basic $ (0.04) $ (0.11) $ (0.02) $ (0.04)
Net loss - diluted $ (0.04) $ (0.11) $ (0.02) $ (0.04)
Weighted average number of shares used in computing per share amounts:
Basic 19,331,246 19,150,540 19,351,246 19,150,540
========== ========== =========== ===========
Diluted 19,331,246 19,150,540 19,351,246 19,150,540
========== ========== =========== ===========
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year to date
-----------------------------------
July 31, September 30,
2002 2001
------------- ---------------
Cash flows from operating activities:
Net loss $ (824) $ (2,108)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation
853 584
Amortization of goodwill 324 324
Provision for bad debts - 13
Write-of of fixed assets 10 -
Other non-cash expenses - 42
Decrease (increase) in accounts receivable 16 (33)
Decrease (increase) in inventories (328) 405
Decrease (increase) in prepaid expenses (275) (174)
Decrease in other assets 12 77
Increase (decrease) in accounts payable 1,190 (759)
(Decrease) increase in accrued liabilities (48) (476)
Increase (decrease) in translation adjustment 35 -
Increase in put options - (102)
-------------- --------------
Net cash provided by (used in) operating activities 965 (2,207)
-------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (185) (74)
-------------- --------------
Net cash (used in) provided by investing activities (185) (74)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance stock 11 82
Payments on long term debt (838) -
Net proceeds from issuance of long-term debt - 2,390
-------------- --------------
Net cash (used in) provided by financing activities (827) 2,472
Increase (decrease) in cash and cash equivalents (47) 191
Cash and cash equivalents at beginning of period 982 885
-------------- --------------
Cash and cash equivalents at end of period $ 935 $ 1,076
============== ==============
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 (individually and
collectively referred to as the "Company"). 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 and nine month period
ended July 31, 2002 are not necessarily indicative of the results that may
be expected for the 2002 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,
2001.
Fiscal Year
The Company changed its fiscal year end from a 52/53 week fiscal year
ending the last Saturday closest to December 31st to October 31st effective
October 31, 2001. Management has determined that it is not practicable to
present financial statements for quarterly periods of the prior year that
correspond to the new quarterly periods. Accordingly, management has
elected to present financial statements for quarterly periods of the prior
year that correspond to the new quarterly periods. The results of
operations for the three and nine months ended September 30, 2001, the data
most nearly comparable with the three and nine months ended July 31, 2002,
have been presented. Management has included a discussion of factors that
could affect comparability of this information.
The accompanying consolidated balance sheet at October 31, 2001, has been
derived from the audited consolidated financial statements at that date,
but does not include all disclosures required by generally accepted
accounting principles.
Goodwill and Other Long-Lived Assets
The Company today comprises the former corporation of Morrow Snowboards,
Inc. which was renamed Granite Bay Technologies, Inc. and International
DisplayWorks, Inc. with which it merged effective October 31, 2001.
For the purpose of this exposition, explaining the accounting policy with
respect to the goodwill in the current balance sheet of $6,474,000 the
original top company is referred to as Morrow and the acquired subsidiary
is referred to as IDW, Inc.
In June 2001, the Financial Accounting Standards Board (the "FASB") adopted
SFAS No. 141 and SFAS No. 142 Accounting for Business Combinations and
Goodwill and Intangible Assets. SFAS No. 141 addresses the methods used to
account for business combinations and requires the purchase method of
accounting for all combinations after June 30, 2001. SFAS 142 addresses the
methods used to amortize intangible assets and to assess impairment of
those assets, including goodwill resulting from business combinations
accounted for under the purchase method. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001 thus the Company is required
to adopt FAS No. 142 effective November 1, 2002. Included in our assets at
July 31, 2002 is goodwill with a net carrying value of $5,395,000.
Beginning on November 1, 2002, we will no longer amortize this goodwill
decreasing our amortization expense by approximately $432,000 per year, and
we will be required to assess the goodwill for impairment based on the new
standard established in SFAS No. 142. We will not be able to determine the
full effect of the new standard on our financial position or our results of
operations until we are able to complete our impairment analysis using the
new standards. Under existing accounting standards, our assessment of
goodwill indicated that no impairment existed as of July 31, 2002. In the
event our analysis under the new standards indicates this goodwill is
impaired, we will be required to record a charge in our financial
statements effective with our fiscal year beginning November 1, 2002. We
will be required to assess the impact of SFAS 142 on an annual basis on an
annual basis going forward.
The acquisition of the PRC Companies, as detailed in Section 2 -
Organization under the section entitled Acquisition, was two stage process;
Morrow acquired IDW, Inc. on January 31, 2000 and IDW, Inc., through its
subsidiary IDWHK, acquired the PRC Companies on February 1, 2000.
The acquisition of IDW, Inc. was accounted for by the purchase method of
accounting with the acquisition cost being allocated between the tangible
assets and goodwill giving rise to goodwill of $6,474,000 which is
currently being amortized over 15 years using the straight-line method and
recorded net of accumulated amortization of $1,079,000 at July 31, 2002 and
$755,000 at October 31, 2001. The adoption of SFAS 141 and 142 on November
1, 2002 will effect the accounting treatment of this goodwill.
Management, in preparing its appraisal for implementation of SFAS 142 has
become aware that if a value were to be assigned, on January 31, 2000, to
the contractual right of IDW, Inc. to acquire the PRC Companies, the amount
of goodwill would be lower and the carrying value of the fixed assets
acquired from the PRC Companies would have been higher by the value
assigned to the contract. This will affect the amount of goodwill to be
considered upon the implementation of SFAS 142. The Company will be seeking
an appraisal of the valuation of the contractual right acquired with IDW,
Inc. on January 31, 2000 as part of its implementation of SFAS 142.
2. ORGANIZATION
International DisplayWorks, Inc. and subsidiaries (the "Company or IDW")
are headquartered in Rocklin, California. The Company was originally
organized in October of 1989 as Morrow Snowboards, Inc, an Oregon
corporation, which merged into its subsidiary, Granite Bay Technologies,
Inc., a California corporation, which then merged into its subsidiary, IDW,
a Delaware corporation. The Company is engaged in the design, manufacture
and worldwide distribution of liquid crystal displays (LCD's), modules, and
assemblies for major original equipment manufacturers (OEMs) applications
in telecommunication, automotive, industrial, medical, and consumer
products.
Acquisition
On January 31, 2000, Morrow Snowboards, Inc. acquired 100% of the
outstanding shares of IDW, a Delaware corporation headquartered in Rocklin,
California, through issuance of 2,680,000 shares of common stock. The
acquisition was accounted for using the purchase method of accounting
giving rise to goodwill of $6,474,000. On February 1, 2000, IDW through its
wholly owned subsidiary, International DisplayWorks (Hong Kong) Ltd.
("IDWHK") acquired 100% of the shares of MULCD Microelectronics Company
Ltd. ("MULCD") and IDW Shenzhen Technology Development Company, Ltd.
("IDWT"). MULCD and IDWT are engaged in the manufacturing and assembly of
LCDs and modules in Peoples Republic of China ("PRC Companies"). The PRC
Companies manufacture LCDs and assemblies for the USA, Europe, and Far East
markets. The acquisition, which was accounted for by the purchase method of
accounting, was completed with the final payment made on April 11, 2001 and
required a total payment of approximately $8,481,000.
As a result of the acquisitions, the principal companies in the
organization are IDW acting as holding company and sales organization for
the United States and Europe, IDWHK the sales organization for the Far
East, and the PRC Companies as the manufacturing and assembly organization.
During the quarter ended July 31, 2002 and since the acquisition of the PRC
companies on February 1, 2000 the Company has operated in a single business
segment of electronic equipment and parts.
Going Concern
The Company incurred net losses from continuing operations of $872,000
during the nine months ended July 31, 2002 and had an accumulated deficit
of $30,724,000, of which $23,773,000 is from discontinued operations, at
July 31, 2002. The Company has shown a positive cash flow from operations
in fiscal 2002.
The Company, for the nine months ended July 31, 2002 has generated losses
of $824,000 compared to losses of $2,108,000 for the nine months ended
September 30, 2001.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might result should
the Company be unable to continue as a going concern.
3. INTERNATIONAL DISPLAYWORKS, INC.
Merger
On September 28, 2000, by approval of the stockholders, Morrow Snowboards
merged into its wholly owned subsidiary, Granite Bay Technologies, Inc.,
changing its state of incorporation to California. On October 31, 2001, by
approval of the shareholders, Granite Bay Technologies, Inc. merged into
its wholly owned subsidiary, IDW and changed its state of incorporation to
Delaware.
4. INVENTORY
Inventories consisted of the following (in thousands):
July 31, October 31,
2002 2001
----------------- -----------------
Finished goods $ 170 $ 326
Work-in-process 580 126
Raw Materials 1,397 1,455
Less: reserve for obsolete inventory (497) (585)
----------------- -----------------
Total inventories, net $ 1,650 $ 1,322
================= =================
5. NOTES PAYABLE
Notes payable consisted of the following (in thousands):
July 31, October 31,
2002 2001
----------------- -----------------
Notes payable, interest only payments due in monthly installments
of $3,993 at 12% interest; principal balance due and payable in
full December 31, 2002, collateralized by all shares of the
Company's common stock, and the accounts receivable, inventory,
equipment and other tangible assets of the Company $ 299 $ 399
Notes payable, interest only payments due in monthly installments
of $1,585 at 12.68% interest; principal balance due and payable
in full October 26, 2001, collateralized by all shares of the
Company's common stock, and the accounts receivable, inventory,
equipment and other tangible assets of the Company. On November
15, 2001 and January 7, 2002 $50,000 and $100,000 respectively
was paid in full satisfaction of this note. --- 150
Notes payable, interest only payments due in monthly installments
of $2,642 at 12.68% interest; principal balance due and payable
in full April 1, 2002, collateralized by all shares of the
Company's common stock, and the accounts receivable, inventory,
equipment and other tangible assets of the Company. On May 15,
2002, $250,000 was paid in full satisfaction of this note. --- 250
Notes payable, interest only payments due in monthly installments
of $2,906 at 12.68% interest; principal balance due and payable
in full December 31, 2002, collateralized by all shares of the
Company's common stock, and the accounts receivable, inventory,
equipment and other tangible assets of the Company 275 275
Notes payable, interest only payments due in monthly installments
of $1,057 at 12.68% interest; principal balance due and payable
in full October 15, 2002, collateralized by all shares of the
Company's common stock, and the accounts receivable, inventory,
equipment and other tangible assets of the Company 100 100
Factoring line, at 2.25% over Hong Kong Dollar prime
collateralized by accounts receivable (approximately 9.25% at
July 31, 2002). 346 488
Credit line at 3% over U.S. prime collateralized by the accounts
receivable, inventory, equipment and other tangible assets of the
Company with minimum interest charge of $7,813 per month
(approximately 12% at July 31, 2002). 391 588
Mortgage Loan, at 8.3% interest, to be repaid in three annual
installments, collateralized by the three factory buildings in
Shenzhen, PRC 1,210 1,210
--------------- ------------
2,621 3,460
Less: due within one year (1,814) (2,653)
--------------- ------------
Due after one year $ 807 $ 807
=============== ============
Notes payable are due as follows:
Due in fiscal year October 31, 2002 $ 50
Due in fiscal year October 31, 2003 2,168
Due in fiscal year October 31, 2004 403
---------
$ 2,621
=========
6. STOCKHOLDERS' EQUITY
Stock Option Plans
During the nine months ended July 31, 2002, there were 515,000 options
granted under the employee stock option plans. During the same period,
68,000 options have been cancelled or have expired and 30,033 options
were exercised at a value of $7,500.
Stock Warrants
The Company from time to time, has issued stock warrants as payments
for fees, interest and services rendered. During the nine months ended
July 31, 2002 there were 15,000 warrants issued by the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Accounting for Acquisition of International DisplayWorks, Inc., MULCD
Microelectronics Company Ltd., and IDW Shenzhen Technology Development company,
Ltd.
As previously disclosed in the Company's prior reports, on January 31,
2000, the Company acquired 100% of the outstanding shares of International
DisplayWorks, Inc., (IDW) a Delaware corporation, through the issuance of
2,680,000 shares of common stock. On February 1, 2000, IDW through its wholly
owned subsidiary, International DisplayWorks (Hong Kong) Ltd. (IDW HK), acquired
100% of the shares of MULCD Microelectronics Company Ltd. (MULCD) and IDW
Shenzhen Technology Development Company, Ltd. (IDWT). MULCD and IDWT are engaged
in the manufacturing and assembly of LCDs and modules in Peoples Republic of
China (PRC Companies). The PRC Companies manufacture LCDs and assemblies for the
USA, Europe and Far East markets. The PRC Companies' acquisition required a
total payment of approximately $8,481,000. The acquisitions of IDW and the PRC
Companies were treated as separate transactions and both were accounted for
using the purchase method of accounting.
In light of the requirement of the Company to adopt and implement FASB
Statement 142, Accounting for Business Combinations and Goodwill and Intangible
Assets from November 1, 2002, the Company has decided to seek a third party
appraisal of IDW, Inc. at January 31, 2000 (i.e. after acquisition but
immediately prior to its acquisition of the PRC Companies) in an attempt to
further analyze the purchase accounting treatment and to further evaluate
whether the allocation of the purchase price to intangible assets and goodwill
is accurately reflected. The decision to obtain an appraisal was made after
management's consultation with the Company's audit committee. The Company's
financial statements for the three and nine months ended July 31, 2002 which
have been prepared on a basis consistent with prior filings, and reflect the
allocation of the original purchase price between intangible assets and goodwill
for IDW and the PRC Companies. After the appraisal, adjustment to the allocation
of the purchase price to intangible assets and goodwill for IDW and, and
possible re-allocation to assets in the PRC Companies, if any, will be reflected
in the Company's financial statements for the year ending October 31, 2002 (for
further information please refer to Note 1 of the consolidated financial
statements).
Forward-Looking Statements
This report contains forward-looking statements, which are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The forward-looking statements involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements.
When used in this report, the words "anticipate," "believe," "estimate,"
"expect" and similar expressions as they relate to the Company or its
management, including without limitation, the Company's subsidiaries, are
intended to identify such forward-looking statements. The Company's actual
results, performance or achievements could differ materially from the results
expressed in, or implied by these forward-looking statements. The Company wishes
to caution readers to consider the important factors, among others, that in some
cases have affected and in the future could affect the Company's actual results
and could cause actual consolidated results for fiscal year 2002, and beyond, to
differ materially from those expressed in any forward-looking statements made by
or on behalf of the Company. These factors include without limitation, the
Company's change in business lines, the ability to obtain capital and other
financing in the amounts and times needed, realization of forecasted income and
expenses by the PRC Companies (as defined herein), initiatives by competitors,
price pressures, changes in the political climate for business in the People's
Republic of China, the loss of one or more of our significant customers, and
other risk factors listed from time to time in the Company's SEC reports
including in particular, the factors and discussion in the Company's Form 10-K
for the year ended October 31, 2001 and risk factors listed below.
Other factors, many of which could be beyond the IDW's control, include the
following:
o IDW's ability to maintain sales, including sales of higher margin
products and sales in Far East, Europe and the United States;
o IDW's ability to expand sales into other industries that have significant
growth potential and to establish strong and long-lasting relationships
with companies in those industries;
o IDW's ability to provide significant design and manufacturing services
for those companies in a timely and cost-efficient manner;
o IDW's ability to raise sufficient capital to fund operations and growth;
o Over the long run, IDW's ability to raise additional capital to buy
equipment and expand plant facilities needed to maintain capacity and
respond to technical changes;
o IDW's success in maintaining customer satisfaction with its design and
manufacturing services and its products' performance and reliability;
o Customer order patterns, changes in order mix, and the level and timing
of orders placed by customers that IDW can complete in a calendar
quarter;
o Market acceptance and demand for our products and the product life;
o The availability and effective utilization of manufacturing capacity;
o The quality, availability and cost of raw materials, equipment and
supplies;
o The cyclical nature of the electronics industries;
o Technological changes and technological obsolescence; and
o Competition and competitive pressure on prices.
Overview
We design and manufacture a wide range of display products including LCDs
and LCD modules, turnkey assemblies, front panel display systems, printed
circuit board assemblies for use in end products of OEMs and products
incorporating LCDs for use in telecommunications and other electronics
equipment, including appliance controllers and personal communications devices.
Our major business operations are conducted through our wholly-owned subsidiary,
IDWHK, a company organized under the laws of Hong Kong SAR, and its wholly-owned
subsidiaries, (i) MULCD and (ii) IDWT. The Company, IDWHK and the PRC Companies
operate as an integrated business.
A wide variety of factors will affect the Company's operating results and
could adversely impact its net sales and profitability. Significant factors in
IDW's success will be its ability to establish and maintain, design and
manufacturing relationships with key OEM customers that will generate sufficient
orders, including orders of higher margin products, to increase revenues and
profitability. Although the Company's products are incorporated in a wide
variety of communications, consumer and appliance products, most of its total
sales in 2001 were for display modules used in the consumer appliance industry.
A slowdown in demand for types of products that utilize the Company's
devices as a result of economic or other conditions and the market served by the
Company or other factors could adversely affect the Company's operating results.
The Company's products are sold into an industry characterized by increasingly
rapid product turnaround, increasingly shorter lead times, product obsolescence,
order cancellation and other factors that make it difficult to forecast future
orders, production and personnel needs and other resource requirements with a
high level of certainty. The Company's ability to anticipate such factors and
respond to them in a timely fashion will affect its ability to utilize its
manufacturing capacity effectively, maintain a proper product mix and avoid
downtimes due to product conversions and other factors. Such uncertainty also
creates difficulties in maintaining adequate supplies of raw materials to meet
shifting customer needs and customer orders placed on short notice.
Results of Operations
Comparison of the Three and Nine Months Ended July 31, 2002 and September 30,
2001.
The Company changed its fiscal year end to October 31st for the fiscal
period ended October 31, 2001. Under Rule 13a-10 the Company has elected to
compare its fiscal 2002 third quarter results (May 1, 2002 through July 31,
2002) to the second quarter of fiscal 2001 results (July 1, 2001 through
September 30, 2001) and the nine months for fiscal 2002 (November 1, 2001
through July 31, 2002) results to the nine months of fiscal 2001 (January 1,
2001 through September 30, 2001) results.
Continuing Operations - The Company's continuing operations consist of the
Company, IDWHK and the PRC Companies, which manufacture and distribute liquid
crystal displays and assemblies.
Net Sales - Net sales for the quarter ended July 31, 2002 were $5,316,000
and for the quarter ended September 30, 2001 were $4,579,000, an increase of
16%. Net sales for the nine month period ended July 31, 2002 were $15,510,000
and for the nine months ended September 30, 2001 were $13,531,000, an increase
of 15%. These increases can be attributed the Company's reorganization of its
sales and marketing efforts in the latter part of fiscal 2001.
Cost of Goods Sold - Cost of sales was 75% of net sales for the quarter
ended July 31, 2002 and 79% for the quarter ended September 30, 2001. As a
percentage of net sales, cost of sales for the nine month period July 31, 2002
were 75% a decrease of 2% from the nine month period ended September 30, 2001.
This can be attributed to the Company's ability to maintain yields and the
continuation of overall cost reduction measures implemented in fiscal 2001 and
absorption of fixed overhead over a larger sales base in an economy of continued
price pressure from the market place.
Operating Expenses - Operating expenses consist of selling, marketing,
customer service, engineering, and general and administrative expenses.
Operating expenses decreased 4% to $1,591,000 for the quarter ended July 31,
2002 from $1,657,000 for the quarter ended September 30, 2001. As a percentage
of sales, operating expenses were 30% for the quarter ended July 31, 2002
compared to 36% for the quarter ended September 30, 2001, a decrease of 6%.
Operating expenses decreased 9% to $4,427,000 for the nine month period ended
September 30, 2002 from $4,867,000 for the nine month period ended September 30,
2002. As a percentage of sales, operating expenses were 29% for the nine month
period ended July 31, 2002 compared to 36% for the nine month period ended
September 30, 2001, a decrease of 7%. This decrease can be attributed to the
Company's overall cost containment measures and reorganization begun in fiscal
year 2001. The reduction in general and administrative expenses has allowed the
Company to reallocate resources to engineering and design to support new sales
and development opportunities.
Selling, Marketing and Customer Service - Selling, Marketing and Customer
Service expenses decreased 10% to $374,000 for the quarter ended July 31, 2002
from $414,000 for the quarter ended September 30, 2001. Significant elements of
this expense consist of employee related expenses of $151,000, commission
expense of $128,000 and rent of $16,000 for the quarter ended July 31, 2002.
Selling, Marketing and Customer Service expenses increased 3% to $1,168,000 for
the nine month ended July 31, 2002 from $1,132,000 for the nine month period
ended September 30, 2001. Significant elements of this expense consist of
employee related expenses of $444,000, commission expense of $434,000 and rent
of $54,000 for the nine month period ended July 31, 2002. The decrease in this
category can be primarily attributed to a decrease in salaries and commission
expense.
Engineering Advanced Design and Project Management - Engineering, advanced
design and project management expenses increased 91% to $181,000 for the quarter
ended July 31, 2002 from $95,000 for the quarter ended September 30, 2001.
Significant elements of this expense include employee related expenses of
$167,000 for travel and lodging compared to $11,000 for the quarter ended July
31, 2002. Engineering, advanced design and project management expenses increased
102% to $516,000 for the nine month period ended July 31, 2002 from $255,000 for
the nine month period ended September 30, 2001. Significant elements of this
expense include employee related expenses of $478,000 for travel and lodging
compared to $33,000 for the six month period ended September 30, 2002. Increases
in this category are related to the increased staffing of the engineering
department in the PRC to support sales and product development opportunities.
Resources created by the cost reductions in general and administrative expenses
were used to enhance the design capabilities of the Company.
General and Administrative - General and Administrative expenses decreased
10% to $1,036,000 for the quarter ended July 31, 2002 from $1,148,000 for the
quarter ended September 30, 2001. Significant elements of this expense include
employee related expenses of $420,000, professional fees of $74,000,
amortization of goodwill of $108,000, rent, telephone and utilities of $52,000,
insurance of $49,000, and local PRC government fees of $49,000 for the period
ended July 31, 2002. General and Administrative expenses decreased 21% to
$2,743,000 for the nine month period ended July 31, 2002 from $3,480,000 for the
nine month period ended September 30, 2001. Significant elements of this expense
include employee related expenses of $1,083,000, professional fees of $312,000,
amortization of goodwill of $324,000, rent, telephone and utilities of $122,000,
insurance of $144,000, and local PRC government fees of $146,000 for the nine
month period ended September 30, 2002. The decrease can be attributed to the
downsizing of the Rocklin and Hong Kong administrative functions. Resources
created by the reductions in costs were used to expand the engineering and
design capabilities of the Company to support increased sales and product
development.
Interest Expense - Interest expense decreased 53% to $94,000 for the
quarter ended July 31, 2002 from $202,000 for the quarter ended September 30,
2001. The decrease can be attributed to the reduction in amortization of warrant
costs related to financing activities and debt retirement. Interest expense
increased 18% for the nine month period ended July 31, 2002 to $380,000 from
$466,000 for the nine month period ended September 30, 2001. Debt outstanding at
July 31, 2002 and September 30, 2001 was $2,621,000 and $2,892,000 respectively.
Earnings before Interest, Income Taxes, Depreciation and Amortization -
Earnings before interest, income taxes, depreciation and amortization were
$68,000 for the quarter ended July 31, 2002 compared to a loss of $414,000 for
the quarter ended September 30, 2001. Earnings before interest, income taxes,
depreciation and amortization was $696,000 for the nine month period ended July
31, 2002 compared to a loss of $732,000 for the nine month period ended
September 30, 2001. This 60% improvement is attributed to the Company's increase
in revenues of $737,000.
Depreciation, amortization and interest for the quarter ended July 31, 2002
were $314,000, $108,000, and $94,000 respectively. Depreciation, amortization
and interest for the quarter ended September 30, 2001 were $135,000, $108,000,
and $202,000 respectively. Depreciation, amortization and interest for the nine
months ended July 31, 2002 were $816,000, $324,000, and $380,000 respectively.
Depreciation, amortization and interest for the nine months ended September 30,
2001 were $584,000, $324,000, and $466,000 respectively. The Company did not
incur income tax expense for either period.
Net Loss - The net loss for the quarter ended July 31, 2002 was $347,000
compared to $861,000 for the quarter ended September 30, 2001. The net loss for
the nine month period ended July 31, 2002 was $834,000 compared to $2,108,000
for the month period ended September 30, 2001. This 61% improvement is
attributed to the Company's increase in revenues of $1,979,000 and a decrease in
General and Administrative expense of $737,000 which allowed the company to
allocate additional resources to new product development.
Liquidity and Capital Resources
IDW requires capital to pay certain existing fixed obligations, provide
working capital for the PRC Companies, and cover administrative overhead and
certain costs related to being a public company. As discussed below, IDW intends
to generate working capital to implement its current Business Plan.
Net cash provided by operating activities was $965,000 for the nine month
period ended July 31, 2002. Significant elements of net cash provided by
operations include: a net loss of $824,000 offset decreases in accounts
receivable of $16,000, increases in inventories of $328,000, increases in
prepaid expenses of $275,000, increases in accounts payable of $1,190,000, and
decreases in accrued liabilities of $48,000. The net cash used in operating
activities was $2,207,000 for the nine month period ended September 30, 2001
resulting primarily from a net loss of $2,108,000, increases in accounts
receivable of $33,000, decreases in inventories of $405,000, increases in
prepaid expenses of $174,000, decreases in accounts payable of $759,000, and
decreases in accrued liabilities of $476,000.
Net cash used in investing activities for the nine month period ended July
31, 2002 was $185,000, which represents acquisition of property and equipment.
Net cash used in investing activities for the nine month period ended September
30, 2001 was $74,000, which represents acquisition of property and equipment of
$74,000.
Net cash used in financing activities for the nine month period ended July
31, 2002 was $839,000 consisting of payments on long-term debt. Net cash
provided by financing activities for the nine month period ended September 30,
2001 was $2,472,000 consisting primarily of proceeds of $2,390,000 from the
issuance of long term debt.
The planned future expansion of IDW and its subsidiaries to enhance
existing production capabilities, assure future product quality and reduce costs
will require additional capital expenditures during fiscal 2002. IDW plans
continued use of its credit facilities and extension of related party short-term
debt. Events such as non-renewal of credit facilities or requirements to repay
short-term debt could affect the Company's ability to fund capital expenditures
and working capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company derives the majority of its cash from sales in U.S. dollars and
Hong Kong dollars (which is currently pegged to the U.S. Dollar, but incurs
significant expenses in RMB. The Company never converts RMB to U.S. dollars, but
does convert U.S. dollars and Hong Kong dollars to RMB to fund its RMB operating
expenses. This gives rise to RMB cash balances although they rarely exceed one
month's requirement.
These balances expose the Company to fluctuations in foreign currency
exchange rates. The Company currently holds foreign currencies, which translate
into $137,000 using the quarter-end exchange rate. The potential cash loss in
fair value resulting from an adverse change in quoted foreign currency exchange
rates of 10% would amount to $14,000.
Since the Company incurs approximately 30% of its operating expense in RMB,
an appreciation in the RMB against the U.S. dollar could have a significant
detrimental effect on operating profit. The Company does not hold other market
sensitive instruments and therefore does not expect to be affected by any
adverse changes in commodity prices or marketable equity security prices. The
Company may be exposed to future interest rate changes on its debt. The Company
does not believe that a hypothetical 10 % change in interest rates would have a
material effect on the Company's cash flow.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of operations, the Company may have disagreements or
disputes with vendors or employees. These disputes are seen by the Company's
management as a normal part of business. There are no changes to pending actions
previously reported and no additional current or threatened actions that
management believes would have a significant material impact on the Company's
financial position, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES
During the third quarter ended July 31, 2002, the Company issued warrants
to purchase 15,000 shares of common stock at $0.32 per share to creditors in
exchange for the extension of the due dates of loans that come due. There were
no broker or placement agents in these transactions. The sales and issuances of
the warrants to purchase common stock were made in a private placement in
reliance upon the exemptions from registration provided under Section 4(2) of
the Securities Act of 1933, as amended, and Rule 506 of Regulation D,
promulgated by the SEC under federal securities laws and 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 the Company or any person
acting on our behalf; the securities sold were subject to transfer restrictions,
and the warrant agreements contained an appropriate legend stating that they had
not been registered under the Securities Act and may not be offered or sold
absent registration or pursuant to an exemption there from.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-NONE-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-NONE-
ITEM 5. OTHER INFORMATION
-NONE-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Sarbanes-Oxley Act Certification of CEO
99.2 Sarbanes-Oxley Act Certification of CFO
(b) Reports on Form 8-K
Date of Report Date of Event Item Reported
-------------- ------------- -------------
June 28, 2002 June 25, 2002 Change in the Company's
Independent Auditors
July 28, 2002 June 25, 202 Additional information
regarding the change in
the Company's Independent
Auditors
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERNATIONAL DISPLAYWORKS, INC.
Date: September 20, 2002 /S/ IAN N. BEBBINGTON
------------------------------------------
Ian N. Bebbington, Chief Financial Officer
(Principal Accounting Officer and Principal
Financial Officer)
Exhibit 99.1
CERTIFICATION
I, Stephen C. Kircher, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International
DisplayWorks, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
Date: September 20, 2002
/S/ STEPHEN C. KIRCHER
-----------------------,
Chief Executive Officer
Exhibit 99.2
CERTIFICATION
I, Ian Bebbington, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International
DisplayWorks, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
Date: September 20, 2002
/S/ IAN BEBBINGTON
-----------------------,
Chief Financial Officer