Back to GetFilings.com
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: April 30, 2003
Commission File Number: 0-27002
INTERNATIONAL DISPLAYWORKS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3333649
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
599 Menlo Drive, Suite 200, Rocklin, California 95765-3708
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(916) 415-0864
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the registrant's Common Stock, no par value,
as of June 9, 2003 was 19,318,246.
INTERNATIONAL DISPLAYWORKS, INC.
INDEX
Part 1 Financial Information Page Number
-----------
Item 1. Financial Statements (Unaudited):
Balance Sheets at April 30, 2003 and October 31, 2002..............3
Statements of Operations for the
Three and Six months ended April 30, 2003 and April 30, 2002.......4
Statements of Cash Flows for the
Three and Six months ended April 30, 2003 and April 30, 2002.......5
Notes to Financial Statements......................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation......................12
Item 3. Quantitative and Qualitative Disclosure About Market Risk...........16
Item 4. Controls and Procedures.............................................17
Part II Other Information
Item 1. Legal Proceedings...................................................17
Item 2. Changes in Securities...............................................18
Item 3. Default Upon Senior Securities......................................18
Item 4. Submission of Matters to a Vote of Security Holders.................18
Item 5. Other Information...................................................18
Item 6. Exhibits and Reports on Form 8-K....................................18
Signatures...................................................................19
Certifications...............................................................20
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
---------------- -----------------
ASSETS April 30, October 31,
------
2003 2002
---------------- -----------------
Current assets:
$ 698 $ 1,556
Cash and cash equivalents
Accounts receivable,
net of allowance for doubtful accounts of $397 and $341 2,765 3,064
Inventories 1,522 1,460
Prepaid expense 698 538
---------------- -----------------
Total current assets 5,683 6,618
---------------- -----------------
Property and equipment at cost, net 4,974 5,197
---------------- -----------------
Total assets $10,657 $ 11,815
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 3,328 $ 3,070
Accrued liabilities 1,121 1,365
Line of credit 490 1,056
Current portion of long term debt - related parties 110 150
Current portion of long term debt 502 502
---------------- -----------------
Total current liabilities 5,551 6,143
Long-term debt, net of current portion - related parties 424 424
Long-term debt, net of current portion 806 806
---------------- -----------------
Total liabilities 6,781 7,373
---------------- -----------------
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,
19,318,246 and 19,217,246 shares issued and outstanding
at February 28, 2003 and October 31, 2002 respectively 41,252 41,216
Accumulated deficit (37,447) (36,845)
Cumulative translation adjustment 71 71
---------------- -----------------
Total shareholders' equity 3,876 4,442
---------------- -----------------
Total liabilities and shareholders' equity $10,657 $ 11,815
================ =================
See accompanying notes to financial statements
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except Share and per share data)
For Six Months Ended For Three Months Ended
---------------------------------------------------------------------
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
---------------------------------------------------------------------
Sales $ 9,809 $ 10,195 $ 4,688 $ 5,584
Cost of goods sold 7,386 7,656 3,757 4,201
-------------- -------------- -------------- ---------------
Gross profit 2,423 2,539 931 1,383
-------------- -------------- -------------- ---------------
Operating expenses:
General and administrative 1,658 1,706 904 866
Selling, marketing and customer service 942 794 439 445
Engineering, advanced design and product
management 302 335 156 187
--------------- ------------- ----------- ---------------
Total operating expenses 2,902 2,835 1,499 1,498
--------------- -------------- ----------- ---------------
Operating income (loss) (479) (296) (568) (115)
--------------- -------------- ----------- ---------------
Other income (expense):
Interest expense (160) (286) (78) (105)
Other income (expense) 36 106 18 42
--------------- -------------- ----------- ---------------
Total other income
(expense) (124) (180) (60) (63)
--------------- -------------- ----------- ---------------
Income (loss) from
continuing operations
before income taxes (603) (476) (628) (178)
--------------- -------------- ----------- ---------------
Provision for income
taxes - - - -
--------------- -------------- ------------- -------------
Net income (loss) $ (603) $ (476) $ (628) (178)
=============== ============== ============= =============
Basic and diluted loss per common share $ (0.03) $ (0.02) (0.03) (0.01)
=============== ============== ============= =============
Weighted average common shares
outstanding basic and diluted 19,282,741 19,321,213 19,318,246 19,321,213
=============== ============== ============= =============
See Accompanying notes to financial statements
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year to date
-----------------------------------
April 30, April 30,
2003 2002
--------------- ----------------
Cash flows from operating activities:
Net income (loss) $ (603) $ (476)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation 415 601
Allowance for bad debts 61 -
Amortization of goodwill - 216
Loss on disposal of fixed assets 27 -
Loss (income) on foreign currency translation - (31)
--------------- ----------------
(100) 310
Changes in operating assets and liabilities, net
of business combinations
(Increase) decrease in:
Accounts receivable 238 (90)
Inventories (62) (188)
Prepaid expenses and other current assets (160) (191)
Accounts payable 258 1,041
Accrued liabilities (244) (199)
--------------- ----------------
Net cash provided by (used in)
operating activities (70) 683
Cash flows from investing activities:
Acquisitions of property, plant and equipment (218) (109)
--------------- ----------------
Net cash used in investing
activities (218) (109)
Cash flows from financing activities:
Proceeds from issuance of common stock 16 -
Proceeds from issuance of warrants 20 -
Payments on debt - related parties (40) -
Payments on debt - lines of credit (566) (309)
--------------- ----------------
Net cash provided by (used in) financing activities (570) (309)
Increase (decrease) in cash and cash equivalents (858) 265
Cash and cash equivalents at beginning of period 1,556 982
--------------- ----------------
Cash and cash equivalents at end of period $ 698 $ 1,247
=============== ================
See accompanying notes to financial statements
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
International DisplayWorks, Inc., and its subsidiaries (collectively referred to
as the "Company" or IDW"). The unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month period ended April
30, 2003 are not necessarily indicative of the results that may be expected for
the 2003 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, 2002.
The accompanying consolidated balance sheet at October 31, 2002, 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
The Company, incorporated in the State of Delaware, is headquartered in
Rocklin, California.
The Company is engaged in the design, manufacture and worldwide
distribution of liquid crystal displays (LCDs), modules, and assemblies for
major original equipment manufacturers (OEMs) applications in telecommunication,
automotive, industrial, medical, and consumer products.
The Company manufactures its products through its wholly owned subsidiaries
MULCD Microelectronics Company Ltd. ("MULCD") and IDW Shenzhen Technology
Development Company, Ltd. ("IDWT") collectively the "PRC Companies" which are
owned by International DisplayWorks (Hong Kong) Ltd. ("IDWHK") a wholly owned
subsidiary of IDW.
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
- -------------
In the three and six months ended April 30, 2003, the Company generated
losses of $628,000 and $603,000 respectively compared to losses of $178,000 and
$476,000 respectively for the three and six months ended April 30, 2002, which
included an amortization charge for goodwill of $108,000 and $216,000
respectively. There are no amortization charges for the three and six months
ended April 30, 2003 as all remaining goodwill was written off at the end of
fiscal 2002.
Liquidity remains tight with maturities of long-term debt falling due in
fiscal 2003 of $502,000 upon which the Company has not yet concluded
negotiations for rollover or extension. In addition, the Company has $490,000 of
short term borrowings on lines of credit secured by the Company's accounts
receivable.
In the quarter ended April 30, 2003 the Company has successfully
renegotiated the terms under which IDWT was granted its business license. The
terms with respect to the satisfaction of the capital injection have been
extended from April 30, 2003 to October 31, 2003. The terms have been further
modified to allow the requirement to be satisfied by working capital injection
rather than capital equipment procurement. Of the $1,779,000 required to be
infused by October 31, 2003 at April 30, 2003 the Company has satisfied $193,000
of the requirement. Subsequent to the end of the quarter ended April 30, 2003 an
additional $407,000 of the requirement has been satisfied for a total of
$600,000. The planned expansion of IDW and its subsidiaries has $2,400,000 of
planned capital expenditures, including the $1,779,000 required at IDWT, in
fiscal 2003 and 2004 to enhance existing production capabilities, assure product
quality and reduce costs. In addition, IDW will require additional working
capital to fund revenue growth and opportunities in fiscal 2003.
The Company believes that it has developed a viable plan to address these
issues through general operations and sales, and that its plan will enable the
Company to continue as a going concern for the next twelve months. The plan
includes the realization of revenues from the sale of products, the consummation
of debt or equity financing and the reduction of certain operating expenses as
required. The financial statements do not include any adjustments to reflect the
uncertainties related to the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the inability of
the Company to continue as a going concern. There is no assurance that the
Company will be able to achieve its sales projections or obtain additional
financing or that such events will be on terms favorable to the Company.
3. INVENTORY
Inventories consisted of the following (in thousands):
April 30, October 31,
2003 2003
---------- -----------
Finished goods $ 211 $ 165
Work-in-progress 441 250
Raw materials 1,263 1,414
Less: reserve for obsolete inventory (393) (369)
---------- -----------
Total inventory $ 1,522 $ 1,460
========== ===========
4. PREPAID EXPENSES
Prepaid expenses and other current assets consisted of the following (in
thousands):
April 30, October 31,
2003 2003
---------- -----------
Prepaid expenses $ 427 $ 206
Advances to suppliers 48 172
PRC - VAT tax refund 202 135
Other 21 25
---------- -----------
Total prepaid expenses $ 698 $ 538
========== ===========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
April 30, October 31,
2003 2002
---------- -----------
Land and buildings $ 1,185 $ 1,185
Furniture, fixtures and equipment 1,728 1,837
Machinery 4,845 4,720
Leasehold improvements 83 83
---------- -----------
7,841 7,825
Less accumulated depreciation (2,867) (2,628)
---------- -----------
Net property, plant and equipment $ 4,974 $ 5,197
========== ===========
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
April 30, October 31,
2003 2003
---------- -----------
Accrued payroll and related liabilities $ 486 $ 523
Accrued staff hostel expenses 121 247
Accrued inventory purchases - 165
Accrued PRC government management fees 58 115
Accrued commissions 77 102
Other accrued liabilities 379 213
---------- -----------
Total accrued liabilities $ 1,121 $ 1,365
========== ===========
7. LONG TERM DEBT
Maturities of long-term debt are as follows:
Year Ending
October 31, Related parties Third parties Total
- ----------- --------------- ------------- ------
2003 $ 110 $ 502 $ 612
2004 424 403 827
2005 - 403 403
--------------- ------------- ------
Totals $ 534 $1,308 $1,842
=============== ============= ======
On February 27, 2003, related parties agreed to extend the due date of
$424,000 of notes payable falling due on December 31, 2003 to June 30, 2004. In
conjunction with the extension of the due dates, 228,437 warrants to purchase
shares of the Company's common stock were issued at an exercise price between
$0.16 and $0.21 per share.
Certain liabilities of the Company's subsidiaries, including, but not
limited to the accounts receivable based lines of credit, have been guaranteed
by International DisplayWorks, Inc. as the parent.
8. STOCKHOLDERS' EQUITY
Stock Option Plans
------------------
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123
Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change of the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years ending after December 15,
2002. The expanded annual disclosure requirements and transition provisions are
effective for fiscal years beginning after December 15, 2002. The Company is
required to adopt SFAS No. 148 for its fiscal year beginning November 1, 2003.
Management does not expect the adoption of SFAS No. 148 to have a material
effect on the Company's financial position, results of operations, or cash
flows.
At April 30, 2003, the Company had one stock-based employee compensation
plans and one non-employee and director stock-based compensation plan. The
Company accounts for these plans under the recognition and measurement
principles of APB No. 25, "Accounting for Stock Issued to Employees", and the
related interpretations. Stock-based employee compensation costs are not
reflected in net income when options granted under the plan had an exercise
price equal to or greater than the market value of the underlying common stock
on the date of grant.
During the six months ended April 30, 2003, 92,000 options were granted at
a price equal to market value at the date of grant, 205,000 options were
cancelled or expired, and no options were exercised under the employee stock
option plans.
The following table illustrates the effect on net income (loss) and
earnings per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation:
Six Months Ended Three Months Ended
April 30 April 30
2003 2002 2003 2002
--------------------------- --------------------------
Net income (loss) as reported $ (603) $ (476) $ (628) $ (178)
Add: Stock-based employee compensation
expense included in reported net income. - - - -
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards. (20) (33) (10) (66)
--------- --------- -------- -------
Pro forma net income (loss) $ (623) $ (509) $ (638) $ (244)
========= ========= ======== =======
Earnings per share:
Basic and diluted - as reported $ (0.03) $ (0.03) $ (0.03) $(0.01)
========= ========= ======== =======
Basic and diluted - pro forma $ (0.03) $ (0.03) $ (0.03) $(0.01)
========= ========= ======== =======
Common Stock Shares Issued
--------------------------
During the six months ended April 30, 2003, the Company issued 100,000
shares of common stock as compensation to an outside consultant. The shares
were issued at $0.16, fair market value on the date of issue. The Company
also issued 1,000 shares of common stock as a retirement gift to an
employee. The shares were issued at $0.15, fair market value on the date of
issue. The value of the shares was charged to expense in both cases. During
the three months ended April 30, 2003, there was no stock issued.
9. 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 two major geographic territories where it sells and distributes
essentially the same products. These are the United States, and Hong Kong
(including China). The following represents geographical data for
continuing operations (in thousands):
Revenues for Six Months Ended:
April 30, April 30,
2003 2002
United States $ 5,521 $ 5,971
Hong Kong (including China) 2,681 3,695
Japan 495 44
ASEAN 984 196
Other 128 289
---------- ----------
$ 9,809 $ 10,195
========== ==========
Revenues for Three Months Ended
April 30, April 30,
2003 2002
United States $ 2,347 $ 3,137
Hong Kong (including China) 1,421 2,037
Japan 234 -
ASEAN 388 89
Other 298 321
----------- ----------
$ 4,688 $ 5,584
=========== ==========
"Long Lived" Assets
April 30, October 31,
2003 2002
United States $ 147 $ 162
Hong Kong (including China) 4,827 5,035
----------- ----------
$ 4,974 $ 5,197
=========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company consists of International DisplayWorks, Inc., a Delaware
corporation (IDW), International DisplayWorks (Hong Kong) Limited (IDWHK) and
IDW Technology (Shenzhen) Co., Ltd. (IDWT) and MULCD Microelectronics (Shenzhen)
Co., Ltd. (MULCD), collectively the PRC Companies, which manufacture and
distribute liquid crystal displays and assemblies.
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 2003, 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, 2002 and risk factors listed below:
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.
o IDW's ability to maintain costs on long-term contracts at a fixed
selling price.
o The potential long-term effect of SARS on the region.
Overview
The Company designs and manufactures a wide range of display products. The
display company, MULCD, produces the LCDs. The electronics company, IDWT,
designs and manufactures customized LCD modules adding value to the basic
displays with electronics, keypads, interface circuitry, back lighting and
mounting hardware. IDWT also produces assemblies without LCDs and has production
and design capability in module processes, including chip-on-glass ("COG"),
surface mount technology ("SMT"), chip-on-board ("COB"), tape automated bonding
("TAB"), keypads and back lighting.
A wide variety of factors will affect the Company's future 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 at sufficient margins to increase revenues and profitability.
Although the Company's products are incorporated in a wide variety of
communications, consumer and appliance products, most of the Company's total
sales in the six and three months ending April 30, 2003 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 a market 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.
SARS (Sudden Acute Respiratory Syndrome) Update
IDW was deeply concerned by the outbreak of SARS in the region of our factory
and is committed to do everything possible to protect the health and welfare of
its employees, customers and suppliers.
IDW instituted policies to manage its exposure to the risk of SARS, has reviewed
and updated Business Continuity and Disaster Recovery Plans, is working with
suppliers to insure continuity of supply and has appropriate travel restrictions
for company employees.
Current conditions are such that the threat has been reduced significantly and
most of the restrictions on employee movement have been lifted.
Results of Operations
Comparison of the Three and Six Months Ended April 30, 2003 and 2002.
Net Sales - Net sales was $4,688,000 and $5,584,000 for the quarters ended
April 30, 2003 and 2002 respectively, a decrease of 16%. The decrease can be
attributed primarily to a decrease in production for the Company's largest U.S.
customer and the effect of Chinese Lunar New Year which occurred during the end
of the first quarter and beginning of the second quarter. This customer
accounted for 38% and 33% of the Company's net sales in the quarters ended April
30, 2003 and 2002 respectively. Net sales were $9,809,000 and $10,195,000 for
the six months ended April 30, 2003 and 2002 respectively, a decrease of 4%. The
decrease can be attributed primarily to a decrease in production for the
Company's largest U.S. customer and the effect of Chinese Lunar New Year which
occurred during the end of the first quarter and beginning of the second
quarter. This customer accounted for 39% and 37% of the Company's net sales in
the six months ended April 30, 2003 and 2002, respectively.
Cost of Goods Sold - Cost of sales was 80% and 75% of net sales for the
quarters ended April 30, 2003 and 2002, respectively, an increase of 5%. This
increase can be attributed to costs incurred in the second quarter in
preparation for third quarter production for the Company's new large customer
and higher than expected plant maintenance costs related to the factory power
plant. Change in product mix was also a contributing factor. Cost of sales was
75% and 75% for the six months ended April 30, 2003 and 2002 respectively.
During the first quarter ended April 30, 2003 a release of a supplier accrual no
longer owed by the company accounted for 1% of total cost of goods sold. Without
this adjustment cost of sales would have been 76% and 75% for the six months
ended April 30, 2003, respectively.
General and Administrative - General and Administrative expenses increased
4% to $904,000 from $866,000 for the quarters ended April 30, 2003 and 2002
respectively. This increase can be attributed to increased costs in PRC pension
expense, bad debt expense, insurance costs, unfavorable currency exchange losses
and losses on disposal of fixed assets offset by the elimination of amortization
expense related to the goodwill which was written off at the end fiscal 2002.
Significant elements of this expense include employee related expenses of
$423,000, professional fees of $88,000, rent, telephone and utilities of
$62,000, insurance of $50,000, and local PRC government fees of $49,000 for the
quarter ended April 30, 2003. General and Administrative expenses decreased 3%
to $1,658,000 from $1,706,000 for the six months ended April 30, 2003 and 2002
respectively. The decrease can be attributed to a decrease in professional fees
and the elimination of amortization expense related to goodwill which was
written off at the end of fiscal 2002, offset by increases in PRC pension costs,
bad debt expense, increased insurance costs, losses on disposal of fixed assets
and unfavorable currency exchange losses. Significant elements of this expense
include employee related expenses of $801,000, professional fees of $128,000,
rent, telephone and utilities of $123,000, insurance of $102,000, and local PRC
government fees of $97,000 for the six months ended April 30, 2003.
Selling, Marketing and Customer Service - Selling, Marketing and Customer
Service expenses decreased to $439,000 from $445,000 for the quarters ended
April 30, 2003 and 2002 respectively, a decrease of 1%. The decrease can be
attributed to a decrease in commission expense caused by a decrease in sales
offset by increase in staff costs related to expansion into the European market
and trade show costs. Significant elements of this expense consist of employee
related expenses of $179,000, trade show expense of $13,000, commission expense
of $124,000, rent of $15,000, and travel related costs of $19,000 for the
quarter ended April 30, 2003. Selling, Marketing and Customer Service expenses
increased to $942,000 from $794,000 for the six months ended April 30, 2003 and
2002 respectively, an increase of 19%. The increase can be attributed to
increase in staff costs related to expansion into the European market, increases
in travel related costs and trade show costs offset by a decrease in commission
expense. Significant elements of this expense consist of employee related
expenses of $372,000, trade show expense of $48,000, commission expense of
$253,000, rent of $31,000, and travel related costs of $55,000 for the six
months ended April 30, 2003.
Engineering Advanced Design and Project Management - Engineering, advanced
design and project management expenses were $156,000 and $187,000 for the
quarters ended April 30, 2003 and 2002 respectively, a decrease of 17%. The
decrease is attributable to the replacement of expatriate engineers with local
PRC engineers. Significant elements of this expense include employee related
expenses of $144,000 and $7,000 for travel and related costs. Engineering,
advanced design and project management expenses were $302,000 and $335,000 for
the six months ended April 30, 2003 and 2002 respectively, a decrease of 10%.
The decrease is attributable to the replacement of expatriate engineers with
local PRC engineers. Significant elements of this expense include employee
related expenses of $282,000 and $11,000 for travel and related costs.
Operating Expenses - Operating expenses consist of general and
administrative, selling, marketing, customer service, and engineering. Operating
expenses were $1,499,000 and $1,498,000 for the quarters ended April 30, 2003
and 2002 respectively. As a percentage of sales, operating expenses were 32% and
27% for the quarters ended April 30, 2003 and 2002 respectively, an increase of
5%. Significant elements contributing to the increase in operating expenses were
an increase in selling expenses due to the additional sales staff and
participation in trade shows, both domestically and in Europe to better position
the company for growth in fiscal 2003 and 2004. Operating expenses were
$2,902,000 from $2,835,000 for the six months ended April 30, 2003 and 2002
respectively. As a percentage of sales, operating expenses were 30% and 28% for
the six months ended April 30, 2003 and 2002 respectively, an increase of 2%.
Significant elements contributing to the increase in operating expenses were an
increase in selling expenses due to the additional sales staff and participation
in trade shows, both domestically and in Europe to better position the company
for growth in fiscal 2003 and 2004.
Interest Expense - Interest expense decreased 25% to $78,000 from $105,000
for the quarters ended April 30, 2003 and 2002 respectively. The decrease can be
attributed to the reduction in amortization of warrant costs related to
financing activities and debt retirement. Interest expense decreased 44% to
$160,000 from $286,000 for the six months ended April 30, 2003 and 2002
respectively. The decrease can be attributed to the reduction in amortization of
warrant costs related to financing activities and debt retirement.
Net Loss - The net loss was $628,000 ($0.03 per share) and $178,000 ($0.01
per share) for the quarters ended April 30, 2003 and 2002 respectively. The
decrease in sales and lower profit margins were the major contributing factors
to the increased loss. The net loss was $603,000 ($0.03 per share) and $476,000
($0.02 per share) for the six months ended April 30, 2003 and 2002,
respectively. Decreased sales and lower profit margins were the major
contributing factors the increased loss.
Liquidity and Capital Resources
The Company requires capital to repay certain existing fixed obligations,
and to provide for additional working capital and investment in capital
equipment if it is to grow in accordance with its plan. As discussed below, the
Company intends to generate working capital to implement its current Business
Plan, but will require additional debt and/or equity to refinance its borrowing
and capital expenditure program.
The Company generated net losses from continuing operations of $628,000 and
$603,000 during the three and six months ended April 30, 2003, respectively and
had an accumulated deficit of $37,447,000, of which $23,773,000 is from
discontinued operations. The Company has shown a negative cash flow from
operations in the six months ended April 30, 2003 and a positive cash flow from
operations in the fiscal year ended October 31, 2002.
Net cash used in operating activities was $100,000 for the six months ended
April 30, 2003. Cash used in operating activities for the six months ended April
30, 2003 was $70,000 due to decreases in accounts receivable of $238,000,
increases in inventories of $62,000, increases in prepaid expenses of $160,000,
increases in accounts payable of $258,000 and decreases in accrued liabilities
of $244,000.
Net cash used in investing activities for the six months ended April 30,
2003 was $218,000 in capital expenditures for property and equipment.
Net cash used in financing activities for the quarter ended April 30, 2003
was $570,000 consisting primarily of fluctuations in short term borrowings.
Liquidity remains tight with maturities of long-term debt falling due in
fiscal 2003 of $502,000 upon which the Company has not yet concluded
negotiations for rollover or extension. In addition, the Company has $490,000 of
short term borrowings on lines of credit secured by the Company's accounts
receivable.
In the quarter ended April 30, 2003, the Company has successfully
renegotiated the terms of under which IDWT was granted its business license. The
terms with respect to the satisfaction of the capital injection have been
extended from April 30, 2003 to October 31, 2003. The terms have been further
modified to allow the requirement to be satisfied by working capital injection
rather than capital equipment procurement. Of the $1,779,000 required to be
infused by October 31, 2003 at April 30, 2003 the Company has satisfied $193,000
of the requirement. Subsequent to the end of the quarter ended April 30, 2003 an
additional $407,000 of the requirement has been satisfied for a total of
$600,000. The planned future expansion of IDW and its subsidiaries has
$2,400,000 of planned capital expenditures, including the $1,779,000 required at
IDWT, in fiscal 2003 and 2004 to enhance existing production capabilities,
assure product quality and reduce costs. In addition, IDW will require
additional working capital to fund revenue growth and opportunities in fiscal
2003.
The Company believes that it has developed a viable plan to address these
issues through general operations and sales, and that its plan will enable the
Company to continue as a going concern for the next twelve months. The plan
includes the realization of revenues from the sale of products, the consummation
of debt or equity financing and the reduction of certain operating expenses as
required. The financial statements do not include any adjustments to reflect the
uncertainties related to the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the inability of
the Company to continue as a going concern. There is no assurance that the
Company will be able to achieve its sales projections or obtain additional
financing or that such events will be on terms favorable to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inflation Risk
While inflation has remained low in recent years in the markets in which we
sell and is expected to remain so for the foreseeable future the general
inflation rate in the PRC 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.
Interest Rate Risk
The Company's principal exposure to interest rate changes is on the
factoring lines which are based on prime rates in the US and Hong Kong. Interest
on other financial obligations is fixed for the duration of the obligation.
Foreign Currency Exchange Risk
IDW derives the majority of its revenues in U.S. and Hong Kong dollars. The
Hong Kong dollar remained "pegged" to the U.S. dollar in the quarter and six
months ended April 30, 2003.
The Company incurs approximately 30% of its operating expenses in the PRC
currency, Renminbi Yuan ("RMB"). An increase in the value of the RMB against the
U.S. Dollar would result in an increase in operating costs incurred in the PRC
and a translation gain on cash balances held in RMB in anticipation of meeting
payment obligations. The Company generally does not hold more than two weeks of
RMB requirements and they are always less than total payment obligations.
The Company has long-term debt, repayable in installments over three years,
of RMB 10 million (US$ 1.2 million at current exchange rates), designated in
RMB. An increase in the value of the RMB against the US dollar would result in a
translation loss in US dollar terms which would be realized as US dollars from
sales revenues are utilized to meet the repayment obligation.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
Within the 90 days prior to the date of this Form 10-Q, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer along with the
Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief
Executive Officer along with the Company's Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company required to be
included in this Form 10-Q.
Changes in Internal Controls
There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to exposure to legal proceedings
and claims which arise in the ordinary course of business. In the opinion of
management, the amount of ultimate liability with respect to any such current
actions will not materially affect the financial position or results of
operations of the Company.
ITEM 2. CHANGES IN SECURITIES
On February 27, 2003, the Company issued in the aggregate 228,437 warrants
to purchase shares of common stock at an exercise of between $0.16 and $0.21 per
share for the extension of the maturity date on notes payable. There were no
broker or placement agents in this transaction. This issuance of the warrants to
purchase common stock was 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 a comparable exemption for sales to "accredited"
investors under state securities laws. The issuance was 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 were subject to transfer restrictions and 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
On February 27, 2003 related parties agreed to extend the due date of
$524,000 of notes payable falling due on December 31, 2003 to June 30, 2004. In
consideration for the extension of the unsecured notes payable, the Company
granted 228,437 warrants to purchase shares of common stock at an exercise of
between $0.16 and $0.21.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
99.1 Certification of Chief Executive and Chief Financial Officer
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(b) Form 8-K -
Date of Report Date of Event Item Reported
-------------- ------------- ----------------------------
March 4, 2003 March 10, 2003 Announced Management
Purchase of Common Stock
April 24, 2003 April 23, 2003 Entered into Supply Agreement
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: June 16, 2003 /S/ IAN N. BEBBINGTON
------------------- -------------------------------------------
Ian N. Bebbington, Chief Financial Officer
(Principal Accounting Officer and Principal
Financial Officer)
CERTIFICATION
I, Stephen C. Kircher, Chief Executive Officer for International DisplayWorks,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of International
DisplayWorks, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: June 13, 2003 /S/ STEPHEN C. KIRCHER
-------------------- -----------------------------
Stephen C. Kircher
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION
I, Ian Bebbington, Chief Financial Officer for International DisplayWorks, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of International
DisplayWorks, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: June 12, 2003 /S/ IAN N. BEBBINGTON
------------------ --------------------------------------------
Ian Bebbington
Chief Financial Officer
(Principal Financial and Accounting Officer)