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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, 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 September 8, 2003 was 19,318,246.
INTERNATIONAL DISPLAYWORKS, INC.
INDEX
Part 1 Financial Information Page Number
-----------
Item 1. Financial Statements (Unaudited):
Balance Sheets at July 31, 2003 and October 31, 2002............3
Statements of Operations for the
Three and Nine months ended July 31, 2003 and 2002..............4
Statements of Cash Flows for the
Three and Nine months ended July 31, 2003 and 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 July 31, October 31,
------
2003 2002
-------------- ----------------
Current assets:
Cash and cash equivalents $ 684 $ 1,556
Accounts receivable,
net of allowance for doubtful accounts of $144 and $341 4,089 3,064
Inventories 1,858 1,460
Prepaid expense 866 538
-------------- ----------------
Total current assets 7,497 6,618
-------------- ----------------
Property and equipment at cost, net 4,825 5,197
-------------- ----------------
Total assets $12,322 $11,815
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,260 $ 3,070
Accrued liabilities 1,392 1,365
Line of credit 1,172 1,056
Current portion of long term debt - related parties 90 150
Current portion of long term debt 502 502
-------------- ----------------
Total current liabilities 7,416 6,143
Long-term debt, net of current portion - related parties 524 424
Long-term debt, net of current portion 804 806
-------------- ----------------
Total liabilities 8,744 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 July 31, 2003 and October 31, 2002 respectively 41,270 41,216
Accumulated deficit (37,763) (36,845)
Cumulative translation adjustment 71 71
-------------- ----------------
Total shareholders' equity
3,578 4,442
-------------- ----------------
Total liabilities and shareholders' equity $12,322 $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 Nine Months Ended For Three Months Ended
---------------------------------------------------------
July 31, July 31, July 31, July 31,
2003 2002 2003 2002
---------------------------------------------------------
Sales $ 15,698 $ 15,510 $ 5,889 $ 5,316
Cost of goods sold 11,970 11,651 4,584 3,995
---------------------------------------------------------
Gross profit 3,728 3,859 1,305 1,321
---------------------------------------------------------
Operating expenses:
General and administrative 2,676 2,743 1,017 1,036
Selling, marketing and customer service 1,323 1,168 382 374
Engineering, advanced design and
project management 447 516 144 181
---------------------------------------------------------
Total operating expenses 4,446 4,427 1,543 1,591
---------------------------------------------------------
Operating income (loss) (718) (568) (238) (270)
---------------------------------------------------------
Other income (expense):
Interest expense (256) (380) (95) (94)
Other income (expense) 56 124 19 17
---------------------------------------------------------
Total other income (expense) (200) (256) (76) (77)
---------------------------------------------------------
Income (loss) from continuing operations
before income taxes (918) (824) (314) (347)
---------------------------------------------------------
Provision for income taxes - - - -
---------------------------------------------------------
Net income (loss) $ (918) $ (824) $ (314) $ (347)
=========================================================
Basic and diluted loss per common share $ (0.05) $ (0.04) $ (0.02) $ (0.02)
=========================================================
Weighted average common shares
outstanding basic and diluted 19,294,921 19,331,246 19,318,246 19,351,246
=========================================================
See accompanying notes to financial statements
International DisplayWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year to date
-------------------------------------------------
July 31, July 31,
2003 2002
-------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (918) $ (824)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 625 853
Allowance for bad debts 73 -
Impairment of goodwill - -
Amortization of goodwill - 324
Impairment of machinery - -
Loss on disposal of fixed assets 40 10
Translation adjustment - 35
----------------------- ---------------------
(180) 398
Changes in operating assets and
liabilities, net of business
combinations
(Increase) decrease in:
Accounts receivable (1,098) 28
Inventories (398) (328)
Prepaid expenses and other
current assets (328) (275)
Accounts payable 1,190 1,190
Accrued liabilities 27 (48)
----------------------- ---------------------
Net cash provided by (used
in) operating activities (787) 965
Cash flows from investing activities:
Acquisitions of property, plant and equipment (295) (185)
----------------------- ---------------------
Net cash used in investing
activities (295) (185)
Cash flows from financing activities:
Proceeds from issuance of common stock 16 11
Proceeds from issuance of warrants 38 -
Payments on debt - related parties 40 -
Proceeds on debt (500) (838)
Payments on debt 616 -
----------------------- ---------------------
Net cash provided by (used in) financing
activities 210 (827)
Increase (decrease) in cash and cash equivalents (872) (47)
Cash and cash equivalents at beginning of period 1,556 982
----------------------- ---------------------
Cash and cash equivalents at end of period $ 684 $ 935
======================= =====================
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 nine month period ended July
31, 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 (Shenzhen) Company Ltd. ("MULCD") and IDW Technology
(Shenzhen) Company, Ltd. ("IDWT") collectively the "PRC Companies" which are
owned by International DisplayWorks (Hong Kong) Ltd. ("IDWHK") a wholly owned
subsidiary of IDW.
Going Concern
-------------
In the three and nine months ended July 31, 2003, the Company generated
losses of $314,000 and $918,000 respectively compared to losses of $347,000 and
$824,000 respectively for the three and nine months ended July 31, 2002, which
included an amortization charge for goodwill of $108,000 and $324,000
respectively. There are no amortization charges for the three and nine months
ended July 31, 2003 as all remaining goodwill was written off at the end of
fiscal 2002.
In the quarter ended July 31, 2003 the Company began a program to raise
additional working capital in the form of note and equity instruments. As of
July 31, 2003 the Company has raised $500,000 through the issuance of long term
notes due December 31, 2004 and warrants. Subsequent to the quarter ended July
31, 2003 the Company has raised an additional $315,000 through issuance of long
term notes due December 31, 2004 and warrants and $500,000 through the issuance
of equity in the form of the Company's common stock.
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. 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):
July 31, 2003 October 31, 2002
------------------- --------------------
Finished goods $ 531 $ 165
Work-in-progress 425 250
Raw materials 1,295 1,414
Less: reserve for obsolete inventory (393) (369)
------------------- --------------------
Total inventory $ 1,858 $ 1,460
=================== ====================
4. PREPAID EXPENSES
Prepaid expenses and other current assets consisted of the following (in
thousands):
July 31, 2003 October 31, 2002
------------------- --------------------
Prepaid expenses $ 445 $ 206
Advances to suppliers 66 172
PRC - VAT tax refund 314 135
Other 41 25
------------------- --------------------
Total prepaid expenses $ 866 $ 538
=================== ====================
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
July 31, 2003 October 31, 2002
------------------- --------------------
Land and buildings $ 1,185 $ 1,185
Furniture, fixtures and equipment 1,728 1,837
Machinery 4,842 4,720
Leasehold improvements 83 83
------------------- --------------------
7,838 7,825
Less accumulated depreciation (3,013) (2,628)
------------------- --------------------
Net property, plant and equipment $ 4,825 $ 5,197
=================== ====================
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
July 31, 2003 October 31, 2002
------------------- --------------------
Accrued payroll and related liabilities $ 661 $ 523
Accrued staff hostel expenses 158 247
Accrued inventory purchases 50 165
Accrued PRC government management fees 87 115
Accrued commissions 106 102
Accrued royalty expenses 104 19
Accrued construction retention 67 24
Other accrued liabilities 159 170
------------------- --------------------
Total accrued liabilities $ 1,392 $ 1,365
=================== ====================
7. LONG TERM DEBT
Maturities of long-term debt are as follows:
Year Ending
October 31, Related parties Third parties Total
- --------------------- ------------------------ --------------------- --------------------
2003 $ 90 $ - $ 90
2004 - 502 502
2005 524 804 1,328
------------------------ --------------------- --------------------
Totals $ 614 $ 1,306 $ 1,920
======================== ===================== ====================
On July 17, 2003, related parties agreed to extend the due date of $424,000
of notes payable falling due on June 30, 2004 to December 31, 2004. In addition,
in July 2003 an additional $500,000 was borrowed, $400,000 from unrelated
parties and $100,000 from a related party. The notes carry an interest rate of
12% per annum payable monthly in arrears and are due on December 31, 2004. In
conjunction with issue of the notes, note holders received warrants to purchase
100,000 shares of the Company's common stock at an exercise price of $0.35
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 ending after December 15, 2002. The Company is
required to adopt SFAS No. 148 for its fiscal year beginning November 1, 2002.
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 July 31, 2003, the Company had one stock-based employee compensation
plan 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 nine months ended July 31, 2003, 217,000 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:
Nine Months Ended Three Months Ended
July 31 July 31
2003 2002 2003 2002
---------------------------- ------------------------------
Net income (loss) as reported $ (918) $ (824) $ (314) $ (347)
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. (36) (97) (12) (32)
-------------- ---------- -------------- --------------
Pro forma net income (loss) $ (954) $ (921) $ (326) $ (379)
============== ========== ============== ==============
Earnings per share:
Basic and diluted - as reported $ (0.05) $ (0.04) $ (0.02) $ (0.01)
============== ========== ============== ==============
Basic and diluted - pro forma $ (0.05) $ (0.05) $ (0.02) $ (0.02)
============== ========== ============== ==============
Common Stock Shares Issued
--------------------------
During the nine months ended July 31, 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 July
31, 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 Nine Months Ended:
July 31, July 31,
2003 2002
----------------------------------------
United States $ 7,853 $ 8,211
Hong Kong (including China) 4,486 6,094
Japan 773 161
ASEAN (except Thailand) 1,109 42
Thailand 473 365
Europe 508 -
Other 496 637
----------------------------------------
$ 15,698 $ 15,510
=================== ================
Revenues for Three Months Ended:
July 31, July 31,
2003 2002
----------------------------------------
United States $ 2,582 $ 2,294
Hong Kong (including China) 1,767 2,401
Japan 301 116
ASEAN (except Thailand) 449 39
Thailand 79 169
Europe 442 -
Other 269 297
----------------------------------------
$ 5,889 $ 5,316
=================== ================
"Long Lived" Assets
July 31, October 31,
2003 2002
----------------------------------------
United States $ 149 $ 162
Hong Kong (including China) 4,676 5,035
----------------------------------------
$ 4,825 $ 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 (see Item 3, Quantitative and Qualitative Disclosures About
Market Risk, Foreign Currency Exchange Risk), 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;
o Competition and competitive pressure on prices;
o IDW's ability to maintain costs on long-term contracts at a fixed
selling price; and
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 nine and three months ending July 31, 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.
Results of Operations
Comparison of the Three and Nine Months Ended July 31, 2003 and 2002.
Net Sales - Net sales were $5,889,000 and $5,316,000 for the quarters ended
July 31, 2003 and 2002 respectively, an increase of 11%. The increase can be
attributed primarily to the commencement of production for a new European
customer. This customer accounted for 9% of the Company's sales for the quarter
ended July 31, 2003. Net sales were $15,698,000 and $15,510,000 for the nine
months ended July 31, 2003 and 2002 respectively, an increase of 1%. The
increase can be attributed primarily to the commencement of production of
products for a new European customer in the quarter ended July 31, 2003 offset
by sales decreases in the second quarter of fiscal 2003 caused by the effects of
SARS, the Iraq war and a general worldwide economic downturn.
Cost of Goods Sold - Cost of sales was 78% and 75% of net sales for the
quarters ended July 31, 2003 and 2002, respectively, an increase of 3%. This
increase can be attributed to higher labor costs incurred in the quarter due to
the commencement of production for the Company's new European customer. Cost of
sales was 75% and 76% for the nine months ended July 31, 2003 and 2002
respectively. During the second 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 76%
for the nine months ended July 31, 2003, respectively.
General and Administrative - General and Administrative expenses decreased
2% to $1,017,000 from $1,036,000 for the quarters ended July 31, 2003 and 2002
respectively. This decrease can be attributed the elimination of amortization
expense related to the goodwill which was written off at the end fiscal 2002
offset by increased costs in PRC pension expense, bad debt expense, insurance
costs, unfavorable currency exchange losses and losses on disposal of fixed
assets. Significant elements of this expense include employee related expenses
of $454,000, professional fees of $92,000, rent, telephone and utilities of
$48,000, insurance of $56,000, and local PRC government fees of $49,000 for the
quarter ended July 31, 2003. General and Administrative expenses decreased 2% to
$2,676,000 from $2,743,000 for the nine months ended July 31, 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 $1,255,000, professional fees of $220,000,
rent, telephone and utilities of $135,000, insurance of $158,000, and local PRC
government fees of $146,000 for the nine months ended July 31, 2003.
Selling, Marketing and Customer Service - Selling, Marketing and Customer
Service expenses increased to $382,000 from $374,000 for the quarters ended July
31, 2003 and 2002 respectively, a increase of 2%. The increase can be attributed
to a decrease in commission expense caused by a decrease in commissionable sales
offset by increases in travel and courier costs related to expansion into the
European market. Significant elements of this expense consist of employee
related expenses of $117,000, commission expense of $114,000, rent of $14,000,
and travel related costs of $19,000 for the quarter ended July 31, 2003.
Selling, Marketing and Customer Service expenses increased to $1,323,000 from
$1,168,000 for the nine months ended July 31, 2003 and 2002 respectively, an
increase of 13%. 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 due to a
decrease in commissionable sales. Significant elements of this expense consist
of employee related expenses of $490,000, trade show expense of $48,000,
commission expense of $366,000, rent of $45,000, and travel related costs of
$75,000 for the nine months ended July 31, 2003.
Engineering Advanced Design and Project Management - Engineering, advanced
design and project management expenses were $144,000 and $181,000 for the
quarters ended July 31, 2003 and 2002 respectively, a decrease of 20%. The
decrease is attributable to the replacement of expatriate engineers with local
PRC engineers. Significant elements of this expense include employee related
expenses of $133,000 and travel and related costs of $10,000. Engineering,
advanced design and project management expenses were $447,000 and $516,000 for
the nine months ended July 31, 2003 and 2002 respectively, a decrease of 13%.
The decrease is attributable to the replacement of expatriate engineers with
local PRC engineers. Significant elements of this expense include employee
related expenses of $414,000 and $21,000 for travel and related costs.
Operating Expenses - Operating expenses consist of general and
administrative, selling, marketing, customer service, and engineering. Operating
expenses were $1,543,000 and $1,591,000 for the quarters ended July 31, 2003 and
2002 respectively. As a percentage of sales, operating expenses were 26% and 30%
for the quarters ended July 31, 2003 and 2002 respectively, a decrease of 4%.
Significant elements contributing to the decrease in operating expenses were
decreases in general and administrative expenses and engineering expenses offset
by 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
$4,446,000 and $4,427,000 for the nine months ended July 31, 2003 and 2002
respectively. As a percentage of sales, operating expenses were 28% and 29% for
the nine months ended July 31, 2003 and 2002 respectively, a decrease of 1%.
Significant elements contributing to the decrease in operating expenses were
decreases in general and administrative expenses and engineering expenses offset
by 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 increased 1% to $95,000 from $94,000
for the quarters ended July 31, 2003 and 2002 respectively. The increase can be
attributed to the increased utilization of the Company's lines of credit.
Interest expense decreased 32% to $256,000 from $380,000 for the nine months
ended July 31, 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 $314,000 ($0.02 per share) and $347,000 ($0.02
per share) for the quarters ended July 31, 2003 and 2002 respectively. The
increase in sales offset by lower profit margins was the major contributing
factors to the decreased loss. The net loss was $918,000 ($0.05 per share) and
$824,000 ($0.04 per share) for the nine months ended July 31, 2003 and 2002,
respectively. Decreased sales in the second quarter ended April 30, 2003 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 business 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 financing to
finance its borrowing and implement its capital expenditure program.
The Company generated net losses from continuing operations of $314,000 and
$918,000 during the three and nine months ended July 31, 2003, respectively and
had an accumulated deficit of $37,692,000, of which $23,773,000 is from
discontinued operations. The Company has shown a negative cash flow from
operations in the nine months ended July 31, 2003 and a positive cash flow from
operations in the fiscal year ended October 31, 2002.
Net cash used in operating activities was $180,000 for the nine months
ended July 31, 2003. Cash used in operating activities for the nine months ended
July 31, 2003 was $787,000 due to increases in accounts receivable of
$1,098,000, increases in inventories of $398,000, increases in prepaid expenses
of $328,000, increases in accounts payable of $1,190,000 and increases in
accrued liabilities of $27,000.
Net cash used in investing activities for the nine months ended July 31,
2003 was $295,000 in capital expenditures for property and equipment.
Net cash used in financing activities for the quarter ended April 30, 2003
was $210,000 consisting primarily of fluctuations in short term borrowings.
In the quarter ended July 31, 2003 the Company began a program to raise
additional working capital in the form of note and equity instruments. As of
July 31, 2003 the Company has raised $500,000 through the issuance of long term
notes due December 31, 2004 and warrants. Subsequent to the quarter ended July
31, 2003 the Company has raised an additional $315,000 through issuance of long
term notes due December 31, 2004 and warrants and $500,000 through the issuance
of equity in the form of the Company's common stock.
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. The planned future expansion of IDW
and its subsidiaries has $2,400,000 in 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 (as discussed above) 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 U.S. 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 nine
months ended July 31, 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 two years,
of RMB 6.7 million (approximately US$ .8 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
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.
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
During the quarter ended July 31, 2003, the Company issued in the warrants
to purchase 100,000 shares of the Company's common stock at an exercise of 0.35
per share in conjunction with the issuance of long term 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
At the Annual Meeting of Shareholders held on July 30, 2003 at the
Company's corporate headquarters in Rocklin, California the shareholders elected
the following directors of the Company:
- -----------------------------------------------------------------------------------------------------
Name Votes For Votes Votes Abstention Broker
- ---- --------- ------- -------- ---------- ---------
Against Withheld Non-Votes
- -----------------------------------------------------------------------------------------------------
Stephen C. Kircher 12,783,088 0 75,397 0 0
- -----------------------------------------------------------------------------------------------------
Anthony G. Genovese 12,782,988 0 75,497 0 0
- -----------------------------------------------------------------------------------------------------
Ronald Cohan 12,782,698 0 75,787 0 0
- -----------------------------------------------------------------------------------------------------
Timothy Nyman 12,782,988 0 75,497 0 0
- -----------------------------------------------------------------------------------------------------
William Hedden 12,783,088 0 75,397 0 0
- -----------------------------------------------------------------------------------------------------
The Shareholders approved the amendment to the Company's 2000 Employee
Equity Incentive Plan increasing the number of shares under the plan by 750,000
shares.
- --------------------------------------------------------------------------------
Votes For Votes Against Abstention Broker Non-Votes
- --------------------------------------------------------------------------------
12,570,675 262,605 25,205 0
- --------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
On July 17, 2003, related parties agreed to extend the due date of $424,000
of notes payable, previously disclosed, falling due on June 30, 2004 to December
31, 2004. No additional consideration was given and there was no other changes
to the terms of the notes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
32. Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
(b) Reports on Form 8-K
Date of Report Date of Event Item Reported
-------------- ------------- -------------
06/18/2003 06/17/2003 Press release announcing second
quarter results
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report, Form 10Q for the period ended July
31, 2003, to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERNATIONAL DISPLAYWORKS, INC.
Date: September 15, 2003 /S/ Ian N. Bebbington
-------------------- ------------------------------------------
Ian N. Bebbington, Chief Financial Officer
(Principal Accounting Officer and Principal
Financial Officer)