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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year Ended: October 31, 2004
Commission File Number: 0-27002
INTERNATIONAL DISPLAYWORKS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3333649
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(State of Incorporation) (I.R.S. Employer Identification No.)
599 Menlo Drive, Suite 200, Rocklin, California 95765
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(Address of principal executive offices) (Zip Code)
(916) 415-0864
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock
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 twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by a checkmark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K, (ss.229,405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of the
Form 10-K or any amendment of this Form 10-K. [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X] Yes [ ] No
Aggregate Market Value of the voting stock held by non-affiliates of the
registrant based on the closing sale price as reported by the OTCBB on December
16, 2004 was $240,672,138.90.
The number of shares of the registrant's common stock, $0.001 par value,
outstanding on December 22, 2004 was 30,759,357.
Documents incorporated by reference: Certain portions of Registrant's definitive
proxy statement to be filed pursuant to Regulation 14A in connection with the
annual meeting of stockholders:
Part III: Items 10, 11, 12, 13 and 14 of this report
TABLE OF CONTENTS
PART I
ITEM 1. Business 1
ITEM 2. Properties 12
ITEM 3. Legal Proceedings 13
ITEM 4. Submission of Matters to a Vote of Security Holders 13
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters and Issuer Purchases of Equity
Securities 13
ITEM 6. Selected Consolidated Financial Data 15
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
RISK FACTORS
ITEM 7A. Quantitative and Qualitative Disclosures About Market
Risk 37
ITEM 8. Financial Statements and Supplementary Data F1
ITEM 9. Changes in and Disagreements With Accountants and
Financial Disclosure 39
ITEM 9A. Controls and Procedures 39
ITEM 9B. Other Information 39
PART III
ITEM 10. Directors and Executive Officers of the Registrant 39
ITEM 11. Executive Compensation 39
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management 39
ITEM 13. Certain Relationships and Related Transactions 39
ITEM 14. Principal Accounting Fees and Services 40
PART IV
ITEM 15. Exhibits, Financial Statement Schedules 40
Signatures 44
Exhibits Index
Exhibit 31.1
Exhibit 31.2
Exhibit 32
PART I
ITEM 1. BUSINESS
With the exception of historical facts stated herein, the matters discussed
in this report on Form 10-K are "forward looking" statements that involve risks
and uncertainties that could cause actual results to differ materially from
projected results. Such "forward looking" statements include, but are not
necessarily limited to statements regarding anticipated levels of future
revenues and earnings from the operations of International DisplayWorks, Inc.
and its subsidiaries, (the "Company," "we," or "us"), projected costs and
expenses related to our operations, liquidity, capital resources, and
availability of future equity capital on commercially reasonable terms. Factors
that could cause actual results to differ materially are discussed under "Item 7
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors." Readers of this report are cautioned not to put
undue reliance on "forward looking" statements, which, by their nature, are not
reliable indicators of future performance. We disclaim any intent or obligation
to publicly update these "forward looking" statements, whether as a result of
new information, future events or otherwise.
Overview
We design and manufacture liquid crystal display, or LCD, products and are
a supplier to several Fortune 500 companies, major Japanese and other Asian and
European corporations and smaller companies operating in a variety of discrete
markets. We work as an outsourced manufacturer or provider of design,
manufacturing and assembly services. Our target OEM and EMS customers operate in
the telecommunications, automotive, medical, computing, office equipment, home
appliance and consumer electronics industries. Our components and modules are
used in various electronic products, including cellular phones and other
wireless communication devices. We are also targeting areas for new
applications, including audio, point-of-sale systems, irrigation controls and
personal digital assistants.
We assist OEM and EMS customers in the design and development of their
products and furnish full turnkey manufacturing services. Our services include
design, component purchasing, assembly into finished products or electronic
subassemblies and post-assembly testing. We provide custom design and
manufacturing services, for which we design and develop proprietary products
that are sold by our OEM and EMS customers to their end customers using their
brand names.
Our corporate headquarters are located in Rocklin, California. The design
and manufacture of our products is located at our facility in China, where we
employ approximately 2,000 people. We were originally a private company that was
acquired by Morrow Snowboards, Inc., a public company incorporated in Oregon in
October 1989 that was engaged in a different line of business. Through a series
of transactions, we assumed the reporting obligations of Morrow Snowboards, Inc.
and its successor, Granite Bay Technologies, Inc. Our operations are
concentrated primarily in our subsidiaries, MULCD Microelectronics (Shenzhen)
Co., Ltd. and IDW Technology (Shenzhen) Co., Ltd., both of which are organized
under the laws of China. We refer to International Display Works, Inc., a
Delaware corporation, and these subsidiaries collectively as "we" or "us"
throughout this report. Our operating structure is described graphically below:
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[GRAPH OMITTED]
Our website is located at www.idwlcd.com. Through our website, we make
available free of charge our annual report on Form 10-K, our proxy statement,
our quarterly reports on Form 10-Q, our current reports on Form 8-K, amendments
to reports filed under the Securities Exchange Act and earnings press releases.
Industry Overview
Displays
Display Technology
Prior to the 1970s, most commonly used displays and indicators had
substantial limitations as to their use, especially in terms of size, life and
power consumption. LCDs were developed in the 1970s in response to these
limitations, especially the demand for greater information content and less
power consumption than was possible using light emitting diode, or LED,
technology. LCDs provide high-information content displays at competitive
prices. LCDs now appear in products throughout the communications, office
automation, industrial, medical and consumer electronics industries. LCDs are
one of the fastest growing of the established display industry segments.
An LCD modifies light that passes through or is reflected by it, rather
than emitting light like an LED. An LCD consists of a layer of liquid
crystalline material suspended between two glass plates. The liquid crystals
align themselves in a predictable manner when an electrical charge is applied in
accordance with the graphical design and instructions from the associated
integrated circuit chip (driver). LCDs display these images or characters in
black and white or in a wide range of color combinations. The graphical image of
an LCD is produced in rows and columns that can be selectively energized to form
letters or pictures. A principal advantage of LCDs over other display
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technologies, such as LEDs, is the ability to include thousands or even millions
of pixels in a single display, which allows for greater information content.
There are two types of LCDs: passive matrix and active matrix. We
manufacture passive matrix LCD displays, which are less complex and less
expensive to manufacture. Currently, passive matrix LCDs are used in
applications such as mobile handsets and PDAs, as well as in office equipment,
data collection terminals, point-of-sale equipment, medical devices,
transportation instrumentation and industrial instruments and controls and
consumer electronics. Active matrix LCD, otherwise known as thin film
transistor, or TFT, displays are relatively complex semi-conductor devices.
Other display technologies such as organic light emitting diodes, or OLEDs,
liquid-crystal-on-silicon, or LCOS and plasma, along with other promising
display technologies, are also available or in development.
Display Markets
Displays are becoming a ubiquitous feature in many consumer, commercial and
industrial products. OEMs and EMSs increasingly believe that a display interface
is important because it can make products more useful and easier to operate. In
addition, the increasing complexity and functionality of handheld products, such
as wireless computing and communication devices, require OEMs and EMSs to
increase the visual performance and information content of the displays
incorporated into their products. At the same time, the market continues to
demand that OEMs and EMSs incorporate displays with reduced power requirements
and lower costs. Custom LCDs address these requirements for high performance,
increased information content, low power and low cost.
OEMs and EMSs often include in their products unique display modules and
features as a means of differentiating their products from those of competitors.
OEMs and EMSs then make decisions about whether to use standard or custom
display devices and whether to design and produce these devices in-house versus
outsourcing design and/or production. OEMs and EMSs often recognize that their
greatest strengths are market recognition of their brand names, market research
and product development expertise, as well as effective sales and distribution
channels. OEMs and EMSs also recognize that the time constraints and limitations
of available resources often preclude them from maintaining the specialized
in-house expertise and equipment necessary to design and manufacture custom
devices. As a result, many OEMs and EMSs outsource to us the design and
production of display devices and components to focus their own resources on the
areas where they have the greatest expertise and leverage of resources.
Outsourcing allows them to gain access to specialized design and manufacturing
technology and expertise, accelerate the design process, and reduce their own
investment in equipment, facilities, and the personnel necessary for specialized
design and production. These advantages allow OEM and EMS customers to maximize
profitability and reduce risk and time to market, while capitalizing on
economies of scale. In some cases, the outsourced functions include the original
design of products.
Our internal estimates show the small form factor LCD market, where we
currently focus our business, is estimated to be approximately $11 billion. The
size of the LCD module market may be upwards of $100 billion annually and
addresses growth areas such as cellular telephones, medical instruments and
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hand-held data collection devices, as well as benefits from the increased
digitalization of data displays across many applications.
Industry Structure
We purchase from raw material manufacturers (e.g., glass), component
manufacturers and from Integrated Circuit (chip or driver chip) manufacturers or
their distributors. Sometimes the chip has been designed by a "fabless" chip
design company which has contracted a chip foundry to manufacture the chip to
their design. Chips are not usually interchangeable without design changes that
may require re-qualification with the customer and / or the customer's approval.
We supply to OEMs (Original Equipment Manufacturers) - these normally have
a recognized brand name, or EMSs (Electronic Manufacturing Service providers)
which assembles our display and module into the final product. EMSs are
contracted by OEMs who sometimes nominate us as their chosen display module
supplier.
Our Strategy
We are focused on expanding our position as a provider of LCD manufacturing
services to major OEMs and EMSs in two ways. We are dedicating significantly
greater efforts to develop custom design and manufacture of LCD displays and
display modules for our customers, areas in which profit margins are greater
than standard LCDs and where we can exhibit our greatest strengths. We are also
improving the range of technologies that we offer, such as the recent addition
and subsequent expansion of Chip-on-Glass technologies. To achieve these
objectives, we intend to continue to pursue the following strategies:
o Target and establish close relationships with strong customers who have
high-volume and multiple product needs. We target strong companies that we
believe would benefit from our design and manufacturing services and seek to
develop multiple programs for different product groups for those customers. Our
sales and engineering staffs integrate their knowledge and expertise to
demonstrate the benefits from working with us. We emphasize global account
management to establish long-lasting customer relationships that emphasize
complete product life-cycle solutions and to anticipate customer needs. To these
ends, we have recently restructured our sales organization for greater
efficiency and resource utilization.
o Introduce new technologies that leverage our core competencies and result in
near-term realizable revenue. We identify and utilize new technologies with
near-term application by our customers. Our investments in new technologies are
therefore customer-driven. We leverage our library of design, manufacturing and
assembly processes. Our LCD capabilities include: twisted nematic, or TN, high
performance twisted nematic, or HTN, supertwisted nematic, or STN, color
supertwisted nematic, or CSTN, film compensated supertwisted nematic, or FSTN,
and black mask color, in conjunction with assembly capabilities that include
Surface Mount Technology, or SMT, Chip-on-Board, Chip-on-Flex and Chip-on-Glass,
each of which assists in the production of complex components.
o Maximize utilization of manufacturing capacity. We have been following a
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strategy of soliciting customers who respond to competitive pricing by placing
large volume repeat orders with us, thus reducing our overhead absorption rates
as we recover fixed capacity costs over a larger revenue base and incur fewer
order setup costs. We are promoting shortened lead times and competitive pricing
to win new business thereby optimizing our manufacturing capacity. Our larger
and recurring orders lower our engineering, administrative and sales expenses.
o Maintain low-cost manufacturing in China. All of our manufacturing facilities
are located in China. China provides us with one of the lowest cost engineering
and production work forces in the world, which in turn, allows us to pass on
significant cost advantages to our customers and provides us the platform to
compete with others manufacturing in China and other "low-cost" locations.
o Produce high value-added electronic components and modules. We produce not
only LCDs, but also LCD modules that are incorporated into different types of
electronic products. As a result of our focus on high value-added subassemblies
or modules that are integrated into complex products, we are able to achieve
higher gross margins.
o Produce high quality products at competitive prices. Given the intensely price
sensitive nature of our industry, our goal is to manufacture high quality
products at low cost for our customers. We believe that the quality of our
manufacturing services is central to maintaining customer trust and loyalty, and
we therefore strive to ensure that our design and production processes are of
world-class standards. We have consistently met the stringent quality demands of
our OEM customers. We are certified under ISO 9001, the International
Organization for Standardization's highest quality standards in respect of our
existing monochrome line and module operations. We are also QS9000 certified,
which is the established standard for the automotive industry. Our existing
manufacturing facilities located in Shenzhen are also certified under ISO 14001,
the latest recognized quality standard, which provides a structured basis for
environmental management and control. We are in the process of obtaining
certification for our new facility where we have installed the recently
purchased color line.
o Develop improved production techniques in collaboration with customers. We
focus on collaborating with our customers to refine and improve the production
methods employed for complex, yet proven, production technologies rather than on
the initial development of components or assemblies for which there is no
established market. By doing this, we help our OEM customers enhance their
product design, lower costs and improve yields. This strategy allows us to
strengthen our relationships with our OEM customers. As a result, our customers
allow us to use their proprietary production technologies in our assembly
operations. These relationships allow us to focus our research and development
efforts on process improvement and help limit our risks associated with new
product introductions.
Our Customers
OEM and EMS customers continue to adopt outsourcing strategies. We believe
the main causes for this are:
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o Reduction of total production cost. OEMs and EMSs continually need to reduce
costs to remain competitive. Providers of components and modules manufacture
products at reduced total costs to OEMs and EMSs because higher volumes of
manufacturing capacity lead to economies of scale, access to leading-edge
procurement and inventory management capabilities, proficiency in purchasing
materials and an emphasis on improvements to the entire supply chain. Contract
manufacturing also enables OEMs and EMSs to take advantage of producing in
low-cost geographical regions.
o Access to leading technologies. OEMs and EMSs continually seek access to
engineering expertise and manufacturing technologies necessary to build their
increasingly complex products. OEMs are motivated to work with component
manufacturers to gain access to their expertise in product design, assembly,
manufacturing and testing technologies.
o Acceleration of time-to-market. OEMs and EMSs face the demands of increasingly
shorter product life-cycles. OEMs and EMSs can significantly improve product
development cycles and shorten time-to-market by utilizing the expertise and
manufacturing infrastructure of outsourced manufacturers, including capabilities
relating to design and development.
o Reduction of capital investment and shifting of fixed costs to variable costs.
As electronics products have become more technologically advanced, the
manufacturing process is requiring greater levels of investment in capital
equipment. Outsourcing allows OEMs and EMSs to lower their investment in
inventory and manufacturing assets and shift more of their fixed costs to
variable costs, thereby increasing their return on assets. As a result, OEMs can
react more quickly to changing market conditions and allocate capital to other
core activities such as sales and marketing and research and development.
We derive approximately 85% of our business from 17 customers.
Historically, we have had substantial recurring sales from one customer. Sales
to that customer for the year ended October 31, 2004, the year ended October 31,
2003 and the year ended October 31, 2002, accounted for approximately 16%, 29%
and 30%, respectively, of total sales. Sales to our five largest customers
accounted for 62%, 48% and 51% of our net sales during the periods ended
October 31, 2004, 2003 and 2002, respectively.
Sales to our OEM and EMS customers are primarily based on purchase orders
we receive from time to time rather than firm, long-term purchase commitments.
Although it is our general practice to purchase raw materials only upon
receiving a purchase order, for certain customers we will occasionally purchase
raw materials based on such customers' rolling forecasts or anticipated orders.
Uncertain economic conditions and our general lack of long-term purchase
commitments from our customers make it difficult for us to accurately predict
revenue over the longer term. Even in those cases where customers are
contractually obligated to purchase products from us or repurchase unused
inventory from us, we may elect not to enforce our contractual rights because of
the long-term nature of our customer relationships and for other business
reasons, and instead may negotiate with customers regarding particular
situations.
6
Our Products and Services
Our customers seek product differentiation. Custom-designed display modules
provide them with the opportunity to differentiate their products on a
cost-effective basis. We apply our design, manufacturing and assembly
capabilities to develop custom displays and display modules, and together with
our customers, create and implement engineering and product solutions with quick
design turnaround and rapid prototyping. We are involved early with our
customers' product development cycles and continue with them through
manufacturing, testing, logistics and distribution. We add value for our
customers through our ability to integrate the design and production processes.
Our products consist of TN, HTN, STN, CSTN and FSTN LCDs and subassemblies,
ranging from basic LCDs for calculators, watches and electronic games, to more
complex products. These more complex devices are used in cellular telephones,
electronic appliances, office equipment, hand held computers, automotive
equipment and medical electronics and may be used in applications that require
high multiplex rates and wide viewing angles. We are currently developing wide
temperature LCD displays for automotive, appliance and outdoor utility meters;
high density graphic displays for handheld computers, cellular phones and
personal digital assistants; cold cathode and white LED backlighting for black
and white, half-tone and color displays; and custom Chip-on-Glass displays for
consumer electronics and appliances. We design and manufacture value-added
display modules with electronics, keypads, interface circuitry, back lighting
and mounting hardware.
Our Design and Manufacturing Capabilities
The typical cycle for an LCD product to be designed, manufactured and sold
to an OEM customer varies substantially, ranging from a few days to several
months, including the design, proof and production period. Initially, an OEM and
EMS customer gathers data from its sales personnel for products in which there
is market interest, including features and anticipated unit costs. The OEM and
EMS customer then contacts us and possibly other prospective manufacturers, with
forecasted total production quantities and design specifications or renderings.
From that information, we then determine estimated component and materials
costs. We then advise our OEM and EMS customer of the development costs,
manufacturing charges (including molds and tooling, if applicable) and unit cost
based on the forecasted production quantities desired during the expected
production cycle.
After we agree with the OEM and EMS customer on the quotation for the
development and unit cost, we begin the LCD product development. The costs of
LCD product development are either paid by the customer prior to development or
built into the costs of manufacturing the product. Upon completion of the
tooling, we produce samples of the product for the customer's quality testing,
and, once approved, commence mass production of the product. We expect to
recover the development costs by the forging of a long-term customer
relationship and through mass production, which allows us to amortize these
costs over a period of time and over a production quantity.
We manufacture LCDs using glass, liquid crystal solution and polarizer. A
TN type LCD is the most conventional and economical and is suitable for most
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common devices such as calculators and watches. TN type LCDs allow for clearer
visibility and wider viewing angles than STN type LCDs. STN LCDs are suitable
for use in devices such as pocket games and personal digital assistants. Our
original fully automated front-end processing line is capable of producing a
monthly quantity of 35,000 panels measuring 14" by 16" each. Our newly acquired
color line is capable of producing 45,000 panels per month measuring 12" by 14"
each. Unit output varies depending on the size of the LCD and the quantity per
panel. This usually is between 10 and 120 displays per panel. We also utilize
the following production techniques:
o Chip on Glass, or COG. COG is a process that connects integrated circuits
directly to LCD panels without the need for wire bonding. We apply this
technology to produce advanced LCD modules for high-end electronic
products, such as cellular phones and PDAs. At October 31, 2004, we had
four COG lines. These machines provide a total production capacity of up to
550,000 chip bonds per month. We recently acquired additional COG capacity
of approximately 1,250,000 chip bonds per month bringing total COG capacity
to approximately 1,800,000 chip bonds per month.
o Chip on Board, or COB. COB is a technology that utilizes wire bonding to
connect large-scale integrated circuits directly to printed circuit boards.
We use COB in the assembly of consumer products such as calculators,
personal organizers and electronic appliances. At October 31, 2004, we had
nine COB machines. These machines are fully automatic and use ultrasonic
mounting technology and have a total production capacity of up to 400,000
chips per month.
o Tape Automated Bonding with Anisotropic Conductive Film, or TAB with ACF.
TAB with ACF is an advanced heat sealing technology that connects a liquid
crystal display component with an integrated circuit in very small LCD
modules, such as those used in cellular phones and pagers. At October 31,
2004, we had six systems of TAB with ACF machines. The machines provide a
total production capacity of up to 500,000 seals per month.
o Fine Pitch Heat Seal Technology or FPHS. FPHS technology allows us to
connect LCD displays to printed circuit boards produced by COB that enables
very thin connections. This method is highly specialized and is used in the
production of finished products such as PDAs. At October 31, 2004, we had
12 machines utilizing FPHS technology. The machines provide a total
production capacity of up to 500,000 seals per month.
o Surface Mount Technology or SMT. SMT is a process by which electronic
components are mounted directly on both sides of a printed circuit board,
increasing board capacity, facilitating product miniaturization and
enabling advanced automation of production. We use SMT for products such as
electronic appliances. At October 31, 2004, we had three SMT production
lines. Our total mounting capacity is 20,000,000 components per month.
Environmental Laws
Our manufacturing processes result in the creation of small amounts of
hazardous and/or toxic wastes, including various gases, epoxies, inks, solvents
and other organic wastes. We are subject to Chinese governmental regulations
related to the use, storage and disposal of such hazardous wastes. We also have
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our own standby electrical power generation plant that operates on diesel fuel.
The amounts of our hazardous waste are expected to increase in the future as our
manufacturing operations increase, and therefore, our cost of compliance is
likely to increase. In addition, sewage produced by dormitory facilities which
house our labor force is coming under greater environmental legislation. We
believe that all hazardous and/or toxic waste is being stored, used and disposed
of in accordance with applicable laws.
Suppliers
A substantial portion of our product costs stem from the purchase of
components and raw materials. Raw materials are principally comprised of glass,
liquid crystal solution and polarizer. Components include integrated circuits,
printed circuit boards, resistors, capacitors, molded plastic parts and
packaging materials. These are purchased from a variety of suppliers. We are
dependent on certain key suppliers for sole source supplies of customer
specified items. We generally base component orders on received purchase orders
in an effort to minimize our inventory risk by ordering components and products
only to the extent necessary. However, for certain customers and because of lead
times, we may occasionally purchase components and/or a raw material based on
such customer's rolling forecasts or anticipated orders following a risk
assessment.
Certain components may be subject to limited allocation by certain of our
suppliers. In our industry, supply shortages and delays in deliveries of
particular components have resulted in curtailed production, or delays in
production of assemblies using scarce components or higher component costs.
These supply shortages may contribute to an increase in our inventory levels
and/or a reduction in our margins. We expect that shortages and delays in
deliveries of some components will continue to impact our industry, and we are
striving to develop multiple sources of supply where possible.
Competition
General competition in the outsourced manufacturing industry is intense and
characterized by price erosion, rapid technological change and global
competition from numerous companies. This highly competitive environment has
resulted in pricing pressures that have reduced margins. We believe that the
principal competitive factors in our targeted markets are product quality,
pricing, flexibility and timeliness in responding to design and schedule
changes, reliability in meeting product delivery schedules, technological
sophistication and geographic location. The services we provide are available
from many independent sources as well as from current and potential customers
with in-house manufacturing capabilities or the resources to design and
manufacture similar products themselves.
We consider our primary competitors to be BYD, Data Image, Data Vision,
Hantronics, Ocular, Optrex, Tian Ma, Truly Semiconductors Limited, Varitronix
Ltd., Wintek Corporation, and other similar companies.
Quality Control
We maintain strict quality control programs for our products, including the
use of total quality management systems, or TQM, and advanced testing and
9
calibration equipment. We audit our suppliers for quality and control, and our
quality control personnel test incoming raw materials and components. During the
production stage, our quality control personnel also test the quality of
work-in-progress at several points in the production process. Finally, after the
assembly stage, we conduct testing of finished products. We provide office space
at our principal manufacturing facilities for representatives of some of our
major customers to permit them to monitor production of their products, as well
as to provide them access to our manufacturing personnel.
We are certified under ISO 9001, the International Organization for
Standardization's highest quality standards in respect of our existing
monochrome line and module operations. We are also QS9000 certified, which is
the established standard for the automotive industry. Our existing manufacturing
facility located in Shenzhen is also certified under ISO 14001, the latest
recognized quality standard, which provides a structured basis for environmental
management and control. We are in the process of obtaining certification for our
new facility where we have installed the recently purchased color line. "ISO" is
a Geneva-based organization dedicated to the development of worldwide standards
for quality management guidelines and quality assurance. ISO 9001, which was the
first quality system standard to gain worldwide recognition, requires an entity
to gather, analyze, document and monitor its quality systems and make
improvements where needed. Our certification under an ISO 9001 quality standard
demonstrates that our manufacturing operations meet the most demanding of the
established world standards. We are also certified with QS 9000 for automotive
products, which qualify us to work with North American automakers. In addition,
we receive numerous customer qualification audits each year, many of which make
additional recommendations and suggestions based on third-party experiences,
which we evaluate and often subsequently adopt.
Sales and Marketing
We focus on developing close relationships with our customers at the
development and design phases and continuing throughout all stages of
production. Sales and marketing operations are integrated processes involving a
network of representatives, direct salespersons, sales engineers and senior
executives covering North America, Asia and Europe. We direct our sales
resources and activities at several management and staff levels within our
customers and prospective customers. We receive inquiries through our sales
representatives, word of mouth, from public relations activities, our website
and through referrals from current customers. We evaluate these opportunities
against our customer selection criteria and assign either a representative or a
direct salesperson.
Seasonality
Our business does not experience seasonality.
Backlog
As of December 1, 2004, we had a backlog of orders of approximately $21.0
million, as compared with a backlog of $13.3 million as of December 31, 2003.
Our backlog consists of product orders for which confirmed purchase orders have
been received and that are scheduled for shipment within 12 months. Orders are
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given with an average of 12 weeks lead time though there is considerable
variation. Most orders are subject to rescheduling or cancellation by the
customer with limited penalties. Because of the possibility of customer changes
in delivery schedules or cancellations and potential delays in product
shipments, our backlog as of a particular date may not be indicative of net
sales for any succeeding period.
Research and Development
We currently invest in research and development for design, development,
manufacturing and assembly technology when we can identify near-term market
applications that stem directly from such investments. New, customer-driven
technologies provide us with the potential to offer better and more
technologically advanced services to our OEM and EMS customers while providing
returns on the investments. We plan to continue acquiring advanced design
equipment and to enhance our technological expertise through continued training
of our engineers and further hiring of qualified system engineers. These
improvements are intended to enhance the speed, efficiency and quality of our
assembly processes.
Intellectual Property
We rely upon a combination of trade secrets, industry expertise,
confidential procedures and contractual provisions to protect our intellectual
property. Our core business is not dependent on any material patents, licenses
or trademarks.
Geographic Markets
The approximate percentages of our net sales to customers by geographic
area are based upon shipping destination of product and are set forth below for
the periods indicated:
Revenues Fiscal Period Ended October 31
- --------------------------------------------------------------------------------
2004 2003 2002
------------------------------------
United States $ 19,615 $ 10,824 $ 11,266
China (including Hong Kong) 8,440 4,916 6,753
Asia (excluding Hong Kong and
China) 10,152 4,538 2,183
Europe 7,051 1,690 566
Other 1,119 878 160
------------------------------------
$ 46,377 $ 22,846 $ 20,928
========= ======== =========
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"Long-lived Assets"
------------------------------
2004 2003
-------------------------------
United States $ 112 $ 109
China (including Hong Kong) 16,306 4,687
Asia (excluding Hong Kong and
China) - -
Europe - -
Other - -
-------------------------------
$16,418 $4,796
===============================
Employees
As of October 31, 2004, we employed approximately 2,000 persons, 11 of whom
are based in the U.S., one in the U.K. and the remainder in China and Hong Kong.
We consider our relationships with employees to be good and believe that the
compensation provided to our employees is comparable to similar employers in the
same geographic market and industry. We are not a party to any material labor
contracts. We have experienced no significant labor stoppages. This situation
may not continue in the future and any labor difficulties could lead to
increased costs and/or interruptions in our production. We are subject to labor
laws in each location and have to expend certain resources in order to comply
with local legislation and regulations. In China in particular, these laws may
change or the interpretation may change over time and could have a material
impact on our profitability.
ITEM 2. PROPERTIES.
We now have two manufacturing facilities, ten minutes from each other and
both are 30 minutes from the center of the city of Shenzhen and about one hour
from Hong Kong. Our South campus manufacturing facilities consist of three
buildings totalling approximately 270,000 square feet situated on four acres of
leased land in an industrial suburb of Shenzhen, Southern China known as Heng
Gang. Our North campus facility (housing our newly installed color LCD line)
consists of one building totalling approximately 140,000 square feet. The North
Campus facility has just been leased on a ten-year lease commencing in November
2004 and expiring in 2014 with an option to renew for an additional ten years at
the same terms and rate. The annual rental expense is $283,100. The South campus
buildings are approximately 13 years old, and the LCD production line is
approximately six years old. Only the state may own land in China. Therefore, we
lease the land under our South Campus facility, and our lease agreement gives us
the right to use the land for 50 years at an annual rent of $2,200, subject to
certain periodic rent increases, and will expire in 2049. At the end of the
lease term, all improvements we have made will revert to the lessor. We also
lease dormitory facilities for our production employees on adjacent properties
and ancillary accommodations in the area for senior staff at a current cost of
$256,800 per year from the Heng Gang Village.
12
Our corporate headquarters are located in an industrial park in Rocklin,
California in a space of 4,700 square feet. The lease expires in April 2005, and
the rent is currently $73,000 per year for the remainder of the lease. We pay a
proportionate share of operating expenses for the facilities of approximately
$12,400 per year. We lease an office in Hong Kong. The rent and management fee
is $22,000 per year and the lease expires in February 2005. We also lease office
space on short-term leases for our sales offices in Saline, Michigan and Woking,
Surrey, United Kingdom.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any legal proceedings and there are no material legal
proceedings pending with respect to our property, though from time to time, we
may be involved in routine litigation incidental to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of our security holders during
the fourth quarter ended October 31, 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the OTC Bulletin Board under the symbol
"IDWK." As of December 16, 2004, there were approximately 2,600 registered
holders of our common stock. As many of the shares of common stock are held in
street name, there may be additional beneficial holders of our common stock. As
of December 12, 2004, a total of 3,343,214 shares of our common stock underlie
outstanding options and warrants.
The following table shows the range of high and low bid as reported by the
OTC Bulletin Board for the time periods indicated. Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
Low High
--- ----
Fiscal 2004:
- ------------
Fourth Quarter (to October 31) $3.09 $5.12
Third Quarter (to July 31) $3.84 $5.89
Second Quarter (to April 30) $2.56 $6.26
First Quarter (to January 31) $0.48 $2.56
13
Fiscal 2003:
- ------------
Fourth Quarter (to October 31) $0.26 $0.51
Third Quarter (to July 31) $0.24 $0.40
Second Quarter (to April 30) $0.16 $0.51
First Quarter (to January 31) $0.14 $0.35
Dividends
We have paid no dividends on our common stock since our inception and may
not do so in the future. For the foreseeable future, we expect any earnings will
be retained to finance the growth of the Company.
Recent Sales of Unregistered Securities
During the fiscal year ended October 31, 2004, we have sold and issued the
following securities:
1. In December 2003, the Company completed a private financing of 3,333,335
shares of common stock at $1.50 per share. The Company's net proceeds from the
offering were $5,000,002. Roth Capital Partners, LLC acted as the placement
agent for the financing and received an eight percent (8%) fee based on gross
proceeds and a five (5) year warrant to purchase 166,666 shares of common stock
at $1.75 per share.
2. In May 2004, the Company completed a private financing of 4,500,000
shares of common stock at $4.50 per share. The net proceeds from the offering
were $20,250,000. Roth Capital Partners, LLC acted as the placement agent for
the financing and received an eight percent (8%) fee based on gross proceeds.
The sales and issuances of common stock, debt instruments and warrants to
purchase common stock in private placements listed above were made by us in
reliance upon the exemptions from registration provided under Section 4(2) and
4(6) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D,
promulgated by the SEC under federal securities laws and comparable exemptions
for sales to "accredited" investors under state securities laws. The offers and
sales were made to accredited investors as defined in Rule 501(a) under the
Securities Act, no general solicitation was made by us or any person acting on
our behalf; the securities sold were subject to transfer restrictions, and the
certificates for those shares contained an appropriate legend stating that they
had not been registered under the Securities Act and may not be offered or sold
absent registration or pursuant to an exemption there from.
14
Repurchases of Stock
The Company did not repurchase any of its stock during the fiscal year
ended October 31, 2004.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
We derived the consolidated statements of income and balance sheet data
presented below as of and for the years ended October 31, 2004, 2003 and 2002,
the ten months ended October 31, 2001 and the eleven months ended December 31,
2000, from our audited consolidated financial statements. We began our current
operations on February 1, 2000. You should read this summary of consolidated
financial information with the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and our Consolidated
Financial Statements and Notes thereto appearing elsewhere in this report.
(in thousands, except per share data)
October 31, October 31, October 31,
October 31, 2004 2003 (twelve 2002 (twelve 2001 (ten December 30, 2000
(twelve months) months) months) months) (eleven months)
Net sales $ 46,377 $ 22,846 $ 20,928 $ 14,658 $ 17,804
Cost of goods sold 36,266 17,600 15,730 11,468 12,593
-----------------------------------------------------------------------------------------
Gross Profit 10,111 5,246 5,198 3,190 5,211
-----------------------------------------------------------------------------------------
Operating expenses:
General and administrative 5,403 3,637 4,036 4,071 5,124
Selling, marketing and customer
service 2,096 1,655 1,562 1,231 1,545
Engineering, advanced design and
product management 625 593 691 901 570
Impairment of machinery - - 270 - -
Impairment of goodwill - - 5,287 - -
------------------------------------------------------------------------------------------
Total operating expenses 8,124 5,885 11,846 6,203 7,239
------------------------------------------------------------------------------------------
Operating income (loss) 1,987 (639) (6,648) (3,013) (2,028)
------------------------------------------------------------------------------------------
Other income (expenses):
Interest (396) (389) (464) (530) (442)
Loss on investment - - - - (1,000)
Other income 108 220 170 972 (29)
Litigation settlement (625) - - - -
------------------------------------------------------------------------------------------
(913) (169) (294) 442 (1,471)
------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes 1,074 (808) (6,942) (2,571) (3,499)
Provision for income taxes - - - - -
------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 1,074 (808) (6,942) (2,571) (3,499)
Loss from discontinued operations,
net of income taxes - - - - (581)
------------------------------------------------------------------------------------------
Net income (loss) $ 1,074 (808) (6,942) (2,571) (4,080)
==========================================================================================
15
Net income (loss) per share -
continuing operations
Basic $ 0.04 $ (0.04) $ (0.36) $ (0.14) $ 0.20
==========================================================================================
Diluted $ 0.04 $ (0.04) $ (0.36) $ (0.14) $ 0.20
==========================================================================================
Net income (loss) per share -
discontinued operations
Basic $ - $ - $ - $ - $ (0.03)
==========================================================================================
Diluted $ - $ - $ - $ - $ (0.03)
==========================================================================================
Net income (loss) per share
Basic $ 0.04 $ (0.04) $ (0.36) $ (0.14) $ (0.23)
==========================================================================================
Diluted $ 0.04 $ (0.04) $ (0.36) $ (0.14) $ (0.23)
==========================================================================================
Weighted average number of shares
used in computing per share amounts
Basic 25,647,763 19,448,718 19,207,246 19,192,611 17,482,583
==========================================================================================
Diluted
27,511,228 19,448,718 19,207,246 19,192,611 17,482,583
==========================================================================================
October 31, October 31, October 31,
October 31, 2004 2003 2002 2001 December 30, 2000
-------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data
Cash and cash equivalents $ 10,186 $ 1,178 $ 1,556 $ 982 $ 885
Net current assets from continuing
operations 28,504 9,264 6,618 5,950 6,151
Property, plant and equipment, net 16,418 4,796 5,197 6,389 7,297
Total assets from continuing
operations 34,736 14,060 11,815 18,058 19,543
Current liabilities 15,718 7,959 6,093 5,861 5,631
Long-term debt and capital lease
obligations, net of current portion 70 1,877 1,280 807 201
Stockholders' equity 29,134 4,224 4,442 11,390 13,735
16
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
(In thousands)
Diluted Basic
Earnings Earnings
Net Earnings (Loss) Per (Loss) Per
2004 Sales Gross Profit (Loss) Share Share
---- ------- ------------ ------------ ------ ---------
First Quarter $ 9,796 $ 2,378 $ 621 $ 0.03 $ 0.02
Second Quarter 10,624 2,168 (449) (0.02) (0.02)
Third Quarter 11,654 2,434 370 0.01 0.01
Fourth Quarter 14,303 3,131 532 0.02 0.02
--------------------------------------------------------------------------------
Total $46,377 $ 10,111 $ 1,074 $ 0.04 $ 0.04
================================================================================
2003
----
First Quarter $ 5,121 $ 1,492 $ 24 $ - $ -
Second Quarter 4,688 931 (628) (0.03) (0.03)
Third Quarter 5,889 1,305 (314) (0.02) (0.02)
Fourth Quarter 7,148 1,518 110 0.01 0.01
--------------------------------------------------------------------------------
Total $22,846 $ 5,246 $ (808) $(0.04) $ (0.04)
================================================================================
2002
----
First Quarter $ 4,611 $ 1,155 $ (299) $(0.02) $ (0.02)
Second Quarter 5,584 1,383 (178) (0.01) (0.01)
Third Quarter 5,316 1,321 (347) (0.02) (0.02)
Fourth Quarter 5,417 1,339 (6,118) (0.32) (0.32)
--------------------------------------------------------------------------------
Total $20,928 $ 5,198 $(6,942) $(0.36) $ (0.36)
================================================================================
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Except for statements of historical facts, this section contains
forward-looking statements involving risks and uncertainties. You can identify
these statements by forward-looking words including "believes," "considers,"
"intends," "expects," "may," "will," "should," "forecast," or "anticipates," or
the negative equivalents of those words or comparable terminology, and by
discussions of strategies that involve risks and uncertainties. Forward-looking
statements are not guarantees of our future performance or results, and our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors." This section should be read in conjunction with our
consolidated financial statements.
The following discussion is presented on a consolidated basis, and analyzes
our financial condition and results of operations for the years ended October
31, 2004, October 31, 2003, and October 31, 2002.
17
Overview
We manufacture LCDs and LCD modules and assemblies for major OEMs and EMSs,
and offer design and engineering services related to those products. Our target
OEM customers operate in the telecommunications, automotive, medical, computing,
office equipment, home appliance and consumer electronics industries. Our
components and modules are used in various electronic products, in these
industries. Developments in our industry over the past years have resulted in
lower costs for displays. As a result of the decreased costs and thus prices for
LCDs, new display designs and applications are being incorporated into products
in new market segments.
We have been focusing on development of new key customers with high volume,
multi-product needs for displays and display modules and have strengthened our
core engineering competencies and manufacturing processes, enabling us to
maintain our contribution margins, predominantly through higher yields in the
manufacturing process. We also began to engage our customers at the design phase
and emphasized our engineering design capability and product quality to
facilitate product changes and the effective rollout of new products for our
customers. More recently, with our expanded base of strong customers, our focus
has begun to shift to servicing those customers through continual product
changes and development of new products. We believe that our emphasis on
engineering and process manufacturing will allow us to continue to maintain high
yields that will translate into competitive pricing and maximization of margins.
This year we have completed the acquisition of a second LCD line. This
line, unlike our existing line which produces monochrome displays only, is able
to produce both monochrome and color displays. Installation was completed in
December 2004 and we expect to be producing samples for prospective customers'
evaluation in the very near future. This line and the additional module
equipment acquired with it will provide us with enhanced technical and
productive capacity with which to service the needs of our targeted customer
base.
Our production is typically based on purchase orders received from
customers. However, for certain customers we may purchase raw materials based on
non-binding forecasts or in anticipation of orders for products, consistent with
our involvement with the customer. We generally do not obtain long-term
commitments from our customers and economic changes in a customer's industry
could impact our revenue in any given period. One of our risks in manufacturing
results from inventory that may become obsolete due to customer product changes
and discontinuation of old products for next generation products. We manage this
risk through customer forecasts and our involvement in product changes and
engineering. Our design and engineering services also allow us to better
understand and meet our customers' needs and anticipate industry changes that
might impact our inventory and purchasing decisions. Although increases in labor
costs and other charges may impact cost of sales, our yield rate is one of the
most significant factors affecting our manufacturing operations and results.
We are ISO-certified for our module business and existing monochrome line
and we emphasize our quality and manufacturing processes, and we are generally
pre-qualified through quality inspections by our significant customers. We are
18
in the process of obtaining ISO certification for our new color line. We
emphasize incoming quality inspection and in-process inspection to improve yield
and reduce warranty claims and product returns. We believe that our quality and
manufacturing processes are our core strengths. We do not anticipate any
significant change in our practices and consider our investment in our
engineering and quality departments as a continuing cost of doing business. We
believe our current facilities and resources are adequate to sustain higher
sales volume and growth.
With the increase in key customers that we anticipate will result in high
volume sales, we intend to emphasize our design engineering, process engineering
and quality efforts to drive increased sales in conjunction with our sales and
marketing efforts, often working with our customers in teams that will include
engineering input and support at early phases.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition presented in this
section are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles, or GAAP, in the U.S.
During the preparation of our financial statements we are required to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates and judgments,
including those related to sales returns, pricing concessions, bad debts,
inventories, investments, fixed assets, intangible assets, income taxes,
pensions and other contingencies. We base our estimates on historical experience
and on various other assumptions that we believe are reasonable under current
conditions. Actual results may differ from these estimates under different
assumptions or conditions.
Revenue Recognition
We recognize revenue from product sales in accordance with Staff Accounting
Bulletin (SAB) No. 104 "Revenue Recognition in Financial Statements." SAB No.
104 requires that revenue be recognized when all of the following conditions are
met:
o Persuasive evidence of an arrangement exists;
o Delivery has occurred or services have been rendered;
o Price to the customer is fixed or determinable; and
o Collectability is reasonably assured.
We recognize revenue from the sale of our products when the products are
shipped from our factories in China, provided collectability is reasonably
assured from the customer. Sales revenue is recorded net of discounts and
rebates except for prompt payment discounts, which are accounted for as an
operating expense. Returns and adjustments are booked as soon as they have been
assessed for validity.
Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability or unwillingness of our customers to make required
19
payments. We determine the adequacy of this allowance by regularly evaluating
individual customer receivables and considering a customer's financial
condition, credit history and current economic conditions.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on the weighted average-cost basis. Costs included in the valuation of inventory
are labor, materials (including freight and duty) and manufacturing overhead.
Provisions are made for obsolete or slow moving inventory based on management
estimates.
Depreciation
Depreciation has not been recorded on the new color LCD line purchased in
June 2004 or on improvements to the new manufacturing facility as installation
was not completed at the year end.
Income Taxes
Pursuant to Financial Accounting Standards Board ("FASB") Statement of
Financial Standards ("SFAS") No. 109, "Accounting for Income Taxes," income
taxes are recorded based on current year amounts payable or refundable, as well
as the consequences of events that give rise to deferred tax assets and
liabilities. We base our estimate of current and deferred taxes on the tax laws
and rates that are currently in effect in the appropriate jurisdiction. Changes
in laws or rates may affect the current amounts payable or refundable as well as
the amount of deferred tax assets or liabilities. At October 31, 2004, we had
approximately $10,351,000 of net operating loss carry forward available for use
resulting in approximately $4,192,000 of deferred tax assets. We have provided a
valuation allowance of 100% of the $4,192,000 based primarily on our history of
losses.
Results of Operations
Comparison of the year ended October 31, 2004 to the year ended October 31, 2003
Net sales - Net sales for the fiscal year ended October 31, 2004 increased
103% to $46,377,000 from $22,846,000. As we stated last year, our goal was to
restructure our sales operation to focus on specific multinational customers in
expanded geographic markets. We have achieved this goal adding four such
customers representing 98% of our 103% sales growth.
Cost of sales - Cost of sales increased 1.2% to 78.2% of net sales for the
fiscal year ended October 31, 2004 from 77.0% of net sales for the fiscal year
ended October 31, 2003. The 1.2% increase was attributable to increased raw
material costs (6%) as a percent of sales due primarily to one customer being
sold to on a fixed contract price representing (14%) of total revenue; due to
unfavorable exchange rates of the Japanese Yen; and increased semi-conductor
costs and changes in PRC legislation which reduced the amount of VAT recoverable
(1%). These increases were offset by absorption of overhead (5%) and
depreciation (2%) over a larger revenue base.
General and administrative expenses - General and administrative expenses
were $5,403,000 for the fiscal year ended October 31, 2004, and $3,637,000 for
20
the fiscal year ended October 31, 2003, an increase of 48.6%. As a percentage of
sales, general and administrative expenses were 11.7% and 15.9% for the fiscal
years ended October 31, 2004 and 2003, respectively. The increase is primarily
attributed to increases in payroll due to the recruitment of the Company's new
CEO, expansion of the internal audit department and Sarbanes Oxley compliance;
increase in legal and accounting fees; increased credit insurance costs on the
Company's accounts receivable; and increased depreciation, bad debt, and
exchange loss expense. The Company expects that its costs for Sarbanes Oxley
compliance will continue in fiscal 2005 at the current rate. Significant
elements of this expense include employee related expenses of $2,792,000,
professional fees of $684,000, rent, telephone and utilities of $165,000,
insurance of $308,000, local Chinese government fees of $194,000, and
depreciation of $130,000.
Sales, marketing, and customer service - Sales, marketing, and customer
service expenses were $2,096,000 for the fiscal year ended October 31, 2004, and
$1,655,000 for the fiscal year ended October 31, 2003, an increase of 26.6%. As
a percentage of sales, sales, marketing, and customer service expenses were 4.5%
and 7.2% for the fiscal years ended October 31, 2004 and 2003, respectively.
Increased commission expense at $921,000 ($498,000 for the year ended October
31, 2003) accounts for 96% of the increase in sales, marketing and customer
service expenses in fiscal 2004 due to higher volumes of commissionable sales
during the year. Significant elements of this expense consist of employee
related expenses of $749,000, commission expense of $921,000, travel expense of
$135,000 and rent of $81,000.
Engineering, advanced design and project management expenses - Engineering,
advanced design and project management expenses were $625,000 for the fiscal
year ended October 31, 2004 and $593,000 for the fiscal year ended October 31,
2003 an increase of 5.4%. As a percentage of sales, engineering, advanced design
and project management expenses were 1.3% and 2.6% for the fiscal years ended
October 31, 2004 and 2003, respectively. The increase is attributable to costs
related to the addition of our equipment development department in the 4th
quarter of fiscal 2003 and continuing through fiscal 2004. Significant elements
of this expense consist of employee related expenses of $522,000, rent expense
of $57,000 and travel expenses of $34,000.
Interest expense - Interest expense increased to $396,000 for the fiscal
year ended October 31, 2004, from $389,000 for the year ended October 31, 2003
an increase of 1.8%. As a percentage of sales interest expense was 1% and 1.7%
for the fiscal years ended October 31, 2004 and 2003, respectively. The increase
can be attributed to increased borrowings on the Company's accounts receivable
line of credit offset by the repayment of the Company's outstanding notes
payable at a significantly higher interest rate.
Other income - Other income for the fiscal year ended October 31, 2004 was
$108,000 and $220,000 for the fiscal year ended October 31, 2003. The decrease
in other income is primarily as a result of $150,000 of accrued expenses that
were reversed in fiscal 2003 related to previous operations, such reversal did
not occur in fiscal 2004. The significant component was $85,000 received from a
sublet of leased property.
Litigation settlement - Other expense for the fiscal year ended October 31,
2004 was $625,000. Other expense was a result of settlement of previously
disclosed litigation, now concluded.
21
Net income - The net income for the year ended October 31, 2004 was
$1,074,000. The net loss for the year ended October 31, 2003 was $808,000. The
significant reason for the increase in net income was the 103% increase in sales
while a considerable portion of costs are fixed or increased at a lower rate
than the increase in sales.
Comparison of the year ended October 31, 2003 to the year ended October 31, 2002
Net sales - Net sales for the fiscal year ended October 31, 2003 increased
9.2% to $22,846,000 from $20,928,000. Our new European customer accounted for
the majority of the increase. We have restructured our sales operation to focus
on specific multinational customers in expanded geographic markets. Our new
European customer was derived as a direct result of our new focus.
Cost of sales - Cost of sales increased 1.8% to 77.0% of net sales for the
fiscal year ended October 31, 2003 from 75.2% of net sales for the fiscal year
ended October 31, 2002. 1.5% of the increase can be attributed to increased
material costs resulting from a change in product mix related to production for
our new European customer, 1.2% of the increase to direct labor costs caused by
the use of overtime to meet delivery schedules required in part due to a
recruitment ban imposed by the Chinese government during the SARS crisis and
0.8% of the increase to transportation costs, offset by a 1.5% decrease in
depreciation charges.
General and administrative expenses - General and administrative expenses
were $3,637,000 for the fiscal year ended October 31, 2003, and $4,036,000 for
the fiscal year ended October 31, 2002, a decrease of 9.9%. The decrease is
primarily attributed to a decrease in amortization expense related to our
goodwill which was written off at the end of fiscal 2002. Significant elements
of this expense include employee related expenses of $1,753,000, professional
fees of $360,000, rent, telephone and utilities of $183,000, insurance of
$222,000, and local Chinese government fees of $197,000.
Selling, marketing, and customer service - Selling, marketing and customer
service expenses were $1,655,000 for the fiscal year ended October 31, 2003 and
$1,562,000 for the fiscal year ended October 31, 2002, an increase of 6.0%.
These increases can be attributed to the opening of the Ann Arbor, Michigan and
Woking, Surrey, United Kingdom sales offices in June and July 2003,
respectively. Significant elements of this expense consist of employee related
expenses of $659,000, commission expense of $498,000 and rent of $71,000. We
believe the increase in sales and marketing expense is consistent with the
anticipated revenue growth through new customers; however, we will continue to
monitor sales and marketing expenses as a percentage of revenue.
Engineering, advanced design and project management expenses - Engineering,
advanced design and project management expenses were $593,000 for the fiscal
year ended October 31, 2003, and $691,000 for the fiscal year ended October 31,
2002, a decrease of 14.2%. The decrease is attributable to lower salary costs
realized by replacement of expatriate engineering staff with Chinese based
staff. We anticipate increases in engineering related costs associated with
design and process engineering services to our clients, as well as our efforts
to team engineers with our sales and marketing efforts to service our new and
existing client base.
22
Impairment of goodwill - In October 2001, we merged into our predecessor
and were the surviving corporation. In accordance with the provisions of SFAS
No. 121, we were required to periodically review the operating environment and
our performance to determine if there are any grounds for reviewing the carrying
value of goodwill and whether impairment may exist.
In October 2002, we applied the provisions of SFAS No. 121 to goodwill and
recorded an impairment charge of $5,287,000, which eliminated all of our
remaining goodwill and included this charge as a component of operating expenses
in fiscal 2002.
Goodwill was being amortized on a straight-line basis over 15 years.
Amortization expense charged to operations was $432,000 for the period ended
October 31, 2002.
Impairment of machinery - Pursuant to the provisions of SFAS No. 121, a
review of the carrying value of long-lived assets in the fourth quarter of
fiscal 2002 concluded that we could not be certain to recommence the use of
certain equipment that was decommissioned when it became more economical to
outsource rather than manufacture in house, nor did we foresee significant
proceeds from the sale of such equipment. Therefore, an impairment charge of
$270,000 was recorded in fiscal 2002. Reviews in the fiscal 2003 did not reveal
the need for further reductions in the carrying value of fixed assets, thus
there was no fixed asset impairment charge recorded in the fiscal year ended
October 31, 2003, pursuant to SFAS No. 144, which superseded SFAS No. 121.
Interest expense - Interest expense decreased to $389,000 for the fiscal
year ended October 31, 2003, from $464,000 for the year ended October 31, 2002 a
decrease of 16.2%. Although there was an increase in debt in fiscal 2003 over
2002, the overall decrease in interest expense is primarily due to a reduction
in the average outstanding debt during the year as new debt was added in the
fourth quarter of 2003.
Other income - Other income for the fiscal year ended October 31, 2003 was
$220,000. The significant components included a write-back of $150,000 of
accrued expenses related to previous operations and $63,000 received from a
sublet of leased property. Other income for the fiscal year ended October 31,
2002 was $170,000.
Net loss - The net loss for the year was $808,000. This was a 41.7%
decrease compared to the net loss from the fiscal period ended October 31, 2002
of $1,385,000 before the write off of goodwill of $5,287,000 and the impairment
of machinery of $270,000. The net loss for the year ended October 31, 2002 was
$6,942,000, including impairment charges for the write off of all goodwill at
the year end and the charge for the impairment of machinery. The 9.2% increase
in sales and the 6.4% decrease in operating expenses were significant
contributors to the reduction in the net loss.
Liquidity and Capital Resources
The Company and its subsidiaries generated income from continuing
operations of $1,074,000 during the period ended October 31, 2004 and net losses
from continuing operations of $808,000 and $6,942,000 ($953,000 before charges
23
for amortization and write-off of goodwill of $5,719,000 and equipment
impairment charges of $270,000) during the periods ended October 31, 2003 and
2002, respectively. The Company and its subsidiaries also have an accumulated
deficit of $36,579,000 as of October 31, 2004, of which $23,833,000 is from
discontinued operations and $12,746,000 is from continuing operations.
The Company required capital to repay certain existing fixed obligations,
to provide for additional working capital and to invest in capital equipment to
grow in accordance with its business plan. To this end the Company completed the
following transactions in the fiscal year ended October 31, 2004:
o A $5,000,000 private placement, on December 23, 2003, through the
sale of 3,333,335 shares of the Company's common stock at $1.50 a
share. Proceeds, net of expenses of $426,000 were $4,574,002. The
placement agent received a five-year warrant to purchase 166,666
shares at $1.75 a share.
o A new $5,000,000 asset-based credit line with Wells Fargo
Business Credit, Inc. The new line replaced an existing domestic
only receivable line and creates up to $3,000,000 in additional
working capital with more favorable terms.
o A $20,250,000 private placement through the sale of 4,500,000
shares of the Company's common stock at $4.50 a share. Proceeds,
net of expenses of $1,770,000, were $18,480,000.
Management believes that these transactions, the asset based lines of
credit, and cash flows from operations will provide the Company sufficient
working capital to fund operations for the foreseeable future.
In addition the Company made an early repayment of notes due on December
31, 2004, bearing an interest rate of 12%, in the amount of $1,524,000. There
was no prepayment penalty for the early payment and the Company saved on
interest expense.
At October 31, 2004, the Company had debt falling due in fiscal 2005 of
$496,000 and a further amount of $70,000 due in fiscal 2006.
24
RISK FACTORS
Investment in our common stock involves risk. You should carefully consider
the risks we describe below before deciding to invest. The market price of our
common stock could decline due to any of these risks, in which case you could
lose all or part of your investment. In assessing these risks, you should also
refer to the other information included in this report, including our
consolidated financial statements and the accompanying notes. You should pay
particular attention to the fact that we are a holding company with substantial
operations in China and are subject to legal and regulatory environments that in
many respects differ from that of the U.S. Our business, financial condition or
results of operations could be affected materially and adversely by any of the
risks discussed below and any others not foreseen. This discussion contains
forward-looking statements.
Risks Related to Our Business
We have just purchased a Color LCD line.
In June 2004, we contracted for the purchase of a used color LCD line on an
"as is, where is" basis. The line has now been installed in new factory premises
on property in close proximity to our existing campus on which we have executed
a rental agreement for a period of ten years with an option to extend for an
additional ten years at the current rent. We have only just begun test operation
of the line and do not yet have reliable information on the yield or throughput
capacity achievable in mass production, although we do have statistical
information available from the seller. We have not as yet produced samples that
have been accepted by customers; however, we have received prototyping orders
from existing customers. We have also determined that this line can produce
monochrome displays and have identified monochrome projects to be run on this
line. If our color yields are not as expected, the resulting lower margins would
adversely affect operating results in future periods.
Adverse trends in the electronics industry may adversely affect our operating
results.
Our business depends on the electronics industry which is subject to rapid
technological change, short product life cycles and margin pressures. In
addition, the electronics industry has been cyclical and subject to significant
downturns characterized by diminished product demand, production over-capacity,
and accelerated erosion of average selling prices. Economic conditions affecting
the electronics industry in general or our major customers may adversely affect
our operating results. If our customers' products fail to gain widespread
commercial acceptance, become obsolete, or otherwise suffer from low sales
volume, our business and operating results would be negatively impacted.
A few customers and applications account for a significant portion of our sales.
In fiscal 2004, five customers contributed 62% of total sales revenue,
including one customer which contributed 16% of our revenue. This compares with
fiscal 2003 when five customers contributed 48% of our total sales revenue and
one customer contributed 29% of our revenue. Under present conditions, the loss
25
of any one of these customers could have a material effect on our performance,
liquidity and prospects. To reduce this risk, we continue to emphasize custom
devices for which customer relationships are generally longer term with lower
probability of cancellation.
We do not have long-term purchase commitments from our customers and may have to
rely on customer forecasts.
Custom manufacturers for OEMs and EMSs must provide increasingly rapid
product turnaround and respond to increasingly shorter lead times. A variety of
conditions, both specific to individual customers and generally affecting the
demand for their products, may cause customers to cancel, reduce or delay
orders. Cancellations, reductions or delays by a significant customer or by a
group of customers would result in reduced revenue, and could result in excess
and obsolete inventory and/or unabsorbed manufacturing capacity, which would
adversely affect our business. On occasion, customers require rapid increases in
production, which can strain our resources and reduce our margins. Although we
have increased our manufacturing capacity, we may lack sufficient capacity at a
given time to meet our customers' demands if they exceed anticipated levels. We
strive for rapid response to customer demand, which can lead to reduced labor
efficiency, purchasing efficiency and increased material costs.
Our customers generally do not provide us with firm, long-term volume
purchase commitments. In addition, the worldwide product demand have led to
radically shortened lead times on purchase orders as rapid product cycles became
the norm. Although we sometimes enter into manufacturing contracts with our
customers, these contracts clarify order lead times, inventory risk allocation
and similar matters rather than provide firm, long-term commitments. As a
result, customers can generally cancel purchase commitments or reduce or delay
orders at any time. The large percentage of our sales to customers in the
electronics industry; which is subject to severe competitive pressures, rapid
technological change and product obsolescence, increases our inventory and
overhead risks.
In addition, we make significant and material decisions, including
determining the levels of business that we will seek and accept, production
schedules, component procurement commitments, facility requirements, personnel
needs, and other resource requirements, based on our estimates of customer
requirements. The short-term nature of our customers' commitments and the
possibility of rapid changes in demand for their products reduce our ability to
estimate accurately the future requirements of those customers. Because many of
our costs and operating expenses are fixed, a reduction in customer demand can
harm our gross margins and operating results. In order to transact business, we
assess the integrity and creditworthiness of our customer and may; based on this
assessment, agree to amortize design, development and set up costs over time and
enter into purchase commitments with suppliers. Such assessments are not always
accurate and expose us to potential costs, including the write off of costs
incurred and inventory obsolescence. We may also occasionally place orders with
suppliers based on a customer's forecast or in anticipation of an order.
Additionally, from time to time, we may purchase quantities greater than
customer orders to secure more favorable pricing, delivery or credit terms.
These purchases can expose us to losses from cancellation penalties, inventory
carrying costs or inventory obsolescence.
26
Failure to optimize our manufacturing potential and cost structure could
materially and adversely affect our business and operating results.
We strive to fully utilize the manufacturing capacity of our facilities but
may not do so on a consistent basis, particularly as we have committed to a
ten-year lease of new facilities and completed the purchase of a second LCD line
primarily for the production of color displays. Our factory utilization will be
dependent on our success in acquiring new business for the expanded capacity,
predicting volatility, timing volume sales to our customers, balancing our
productive resources with product mix, and planning manufacturing services for
new or other products that we intend to produce. Demand for contract
manufacturing of these products may not be as high as we expect, and we may fail
to realize the expected benefit from our investment in our manufacturing
facilities. Our profitability and operating results are also dependent upon a
variety of other factors, including: utilization rates of our manufacturing
lines, downtime due to product changeover, impurities in raw materials causing
shutdowns, maintenance of contaminant-free operations and availability of power,
water and labor resources.
Moreover, our cost structure is subject to fluctuations from inflationary
pressures in China and other geographic regions where we conduct business. China
is currently experiencing dramatic growth in its economy. This growth may lead
to continued pressure on wages and salaries that may exceed increases in
productivity. In addition, these may not be compensated for and may be
exacerbated by currency movements. We are also exposed to movement in commodity
prices, particularly the cost of electrical power for our manufacturing
facilities.
We face intense competition, and many of our competitors have substantially
greater resources than we do.
We operate in a competitive environment that is characterized by price
deflation and technological change. We compete with major international and
domestic companies. Our major competitors include BYD, Data Image, Data Vision,
Hantronics, Ocular, Optrex, Tian Ma, Truly Semiconductors, Limited, Varitronix,
Ltd., Wintek Corporation, and other similar companies primarily located in
Japan, Taiwan, Korea, Hong Kong and China. Our competitors may have greater
market recognition and substantially greater financial, technical, marketing,
distribution, purchasing, manufacturing, personnel and other resources than we
do. Furthermore, some of our competitors have manufacturing and sales forces
that are geographically diversified, allowing them to reduce transportation
expenses, tariff costs and currency fluctuations for certain customers in
markets where their facilities are located. Many competitors have production
lines that allow them to produce more sophisticated and complex devices than we
do and to offer a broader range of display devices to our target customers.
Other emerging companies or companies in related industries may also increase
their participation in the display and display module markets, which would
intensify competition in our markets.
We depend on the market acceptance of the products of our customers.
Currently, we do not sell products to end users. Instead, we design and
manufacture various display product solutions that our customers incorporate
27
into their products. As a result, our success depends almost entirely upon the
widespread market acceptance of our customers' products. Any significant
slowdown in the demand for their products would adversely affect our business.
Therefore, we must identify industries that have significant growth potential
and establish strong, long-term relationships with OEMs and EMSs in those
industries. Our failure to identify potential growth opportunities or establish
these relationships would adversely affect our business.
We extend credit to our customers and may not be able to collect all receivables
due to us.
We extend credit to our customers based on assessments of their financial
circumstances, generally without requiring collateral. Our overseas customers
may be subject to economic cycles and conditions different from those of our
U.S. customers. We may also be unable to obtain satisfactory credit information
or adequately secure our credit risk for some of these overseas customers. The
extension of credit presents an exposure to risk of uncollected receivables.
Additionally, the collectable amounts may not realize the amounts anticipated in
U.S. dollar terms when denominated in a foreign currency. While the Company
maintains credit insurance on all of its accounts receivable, collection
difficulties could result in the insurance not being renewed which may have an
affect on our liquidity as we borrow under an asset based credit line, under
which uncollected receivables are a major asset and our collection record a key
indicator of performance to our lender. In the fiscal year ended October 31,
2004, the Company recorded expenses of $82,000 related to the extension of
credit.
We may need to produce higher-end products to remain competitive.
Our future success may be partly dependent upon our ability to effectively
offer higher-end products that we do not currently supply, including thin film
transistor, ("TFT"), and organic liquid emissive displays, ("OLED"), as we
believe the high volume markets are moving in these directions. If we fail to
offer more complex higher-end products that are desired by the marketplace, our
competitive position could decline.
The growth of our business depends on our ability to finance new products and
services.
We operate in a rapidly changing industry. Technological advances, the
introduction of new products and new design and manufacturing techniques could
adversely affect our business unless we are able to adapt to the changing
conditions. To remain competitive, we must continue to incur significant costs
in product development, equipment, facilities and invest in working capital.
These costs may increase, resulting in greater fixed costs and operating
expenses. As a result, we could be required to expend substantial funds for and
commit significant resources to the following:
o research and development activities on existing and potential product
solutions;
o additional engineering and other technical personnel;
o advanced design, production and test equipment;
o manufacturing services that meet changing customer needs;
28
o technological changes in manufacturing processes; and
o manufacturing capacity.
Our future operating results will depend to a significant extent on our
ability to continue to provide new product solutions and electronic
manufacturing services that compare favorably on the basis of time to market,
cost and performance with the design and manufacturing capabilities of OEMs and
competitive third-party suppliers and technologies. Our failure to increase
sufficiently our net sales to offset these increased costs would adversely
affect our operating results.
We are subject to lengthy development periods and product acceptance cycles.
We sell our products and services to OEMs and EMSs who on sell to OEMs, who
then incorporate them into the products they sell. They make the determination
during their product development programs whether to incorporate our products
and services or pursue other alternatives. This requires us to make significant
investments of time and resources well before our customers introduce their
products and before we can be sure that our efforts will generate any
significant sales or that we will even recover our initial investment of time
and resources.
During a customer's entire product development process, we face the risk
that our products will fail to meet technical, performance or cost requirements
or that they could be replaced by competing products. Even if we complete our
design or production processes in a manner satisfactory to our customer, the
customer may delay or terminate its product development efforts. The occurrence
of any of these events could adversely affect our operating results. The lengthy
development period also means that it is difficult to immediately replace
unexpected losses of existing or expected business.
We are subject to lengthy sales cycles.
Our focus on developing a customer base that requires custom displays and
devices means that it may take longer to develop strong customer relationships
or partnerships. Moreover, factors specific to certain industries also have an
impact on our sales cycles. In particular, those customers who operate in or
supply to the medical and automotive industries require longer sales cycles as
qualification processes are longer and more rigorous, often requiring extensive
field audits. These lengthy and challenging sales cycles may mean that it could
take longer before our sales and marketing efforts result in revenue, if at all.
Products we manufacture may contain design or manufacturing defects, which could
result in reduced demand for our services and customer claims.
We manufacture products to our customers' requirements, which can be highly
complex and may at times contain design or manufacturing errors or failures. Any
defects in the products we manufacture, whether caused by a design,
manufacturing or component failure or error, may result in returns, claims,
29
delayed shipments to customers or reduced or cancelled customer orders. If these
defects occur, we will incur additional costs and if in large quantity or too
frequent, we may sustain loss of business, loss of reputation and may incur
liability.
We could become involved in intellectual property disputes.
We do not have any patents, licenses or trademarks material to our
business. Instead, we rely on trade secrets, industry expertise and our
customers' sharing of intellectual property with us. We do not knowingly
infringe patents, copyrights or other intellectual property rights owned by
other parties; however, in the event of an infringement claim, we may be
required to spend a significant amount of money to defend a claim, develop a
non-infringing alternative or to obtain licenses. We may not be successful in
developing such an alternative or obtaining licenses on reasonable terms, if at
all. Any litigation, even without merit, could result in substantial costs and
diversion of our resources and could materially and adversely affect our
business and operating results.
Our customers may decide to design and/or manufacture the products that they
currently purchase from us.
Our competitive position could also be adversely affected if one or more of
our customers decide to design and/or manufacture their own displays and display
modules. We may not be able to compete successfully with these in-house
developments by our customers.
We may develop new products that may not gain market acceptance.
We operate in an industry characterized by frequent and rapid technological
advances, the introduction of new products and new design and manufacturing
technologies. As a result, we may be required to expend funds and to commit
resources to research and development activities, possibly requiring additional
engineering and other technical personnel; purchasing new design, production,
and test equipment; and continually enhancing design and manufacturing processes
and techniques. We may invest in equipment employing new production techniques
for existing products and new equipment in support of new technologies that fail
to generate adequate returns on the investment due to insufficient productivity,
functionality or market acceptance of the products for which the equipment may
be used. We could therefore incur significant sums in design and manufacturing
services for new product solutions that do not result in sufficient revenue,
which would adversely affect our future operating results. Furthermore,
customers may change or delay product introductions or terminate existing
products without notice for any number of reasons unrelated to us, including
lack of market acceptance for a product. Our future operating results will
depend significantly on our ability to provide timely design and manufacturing
services for new products that compete favorably with design and manufacturing
capabilities of OEMs and third-party suppliers.
Our component and materials suppliers may fail to meet our needs.
We do not have long-term supply contracts with the majority of our
suppliers or for specific components. This generally serves to reduce our
commitment risk but does expose us to supply risk and to price increases that we
may not be able to pass on to our customers. In our industry, at times, there
30
are shortages of some of the materials and components that we use. In some
cases, supply shortages and delays in delivery have resulted in curtailed
production or delays in production, which contribute to an increase in inventory
levels and loss of profit. We expect that shortages and delays in deliveries of
some components will continue to occur from time to time. If we are unable to
obtain sufficient components on a timely basis, we may experience manufacturing
delays, which could harm our relationships with current or prospective customers
and reduce our sales. We also depend on a small number of suppliers for certain
supplies that we use in our business. If we are unable to continue to purchase
components from these limited source suppliers or identify alternative
suppliers, our business and operating results would be materially and adversely
affected. We may also not be able to obtain as competitive pricing for some of
our supplies as our competitors. Moreover, some suppliers, for example, those
who sell integrated circuits, could be preferential in their sales to our
competitors, who may have greater buying power or leverage in negotiations.
We are exposed to the limit on the availability and price of electricity.
The primary energy supply to our operations is electricity from the local
power company. There is not an extensive and resilient connection to a national
or regional power grid. Thus, we may be exposed to power outages and shut downs
which our standby generators would only partially mitigate. Fluctuations in
world oil prices and supply could also work to affect our supply and cost of
electricity.
We are exposed to the limit on the availability of water.
We depend on a continuous supply of water in our manufacturing processes.
To date when we have experienced shortages, we have been able to obtain
supplementary supplies from alternative local sources. We cannot be certain that
such an arrangement will always be available and that no interruption to
production will result.
Future outbreaks of severe acute respiratory syndrome or other communicable
diseases may have a negative impact on our business and operating results.
In 2003, several economies in Asia, including Hong Kong and southern China,
where our operations are located, were affected by the outbreak of severe acute
respiratory syndrome, or SARS. If there is a recurrence of an outbreak of SARS,
or similar infectious or contagious diseases such as avian flu, it could
adversely affect our business and operating results. For example, a future SARS
outbreak could result in quarantines or closures to some of our factories, and
our operations could be seriously disrupted as the majority of our work force is
housed in two dormitories. In addition, an outbreak could negatively affect the
willingness of our customers and suppliers to visit our facilities.
Our results could be harmed if compliance with new environmental regulations
becomes too burdensome.
Our manufacturing processes result in the creation of small amounts of
hazardous and/or toxic wastes, including various gases, epoxies, inks, solvents
and other organic wastes. We are subject to Chinese governmental regulations
related to the use, storage and disposal of such hazardous wastes. We also have
our own standby electrical power generation plant that operates on diesel fuel.
The amounts of our hazardous waste are expected to increase in the future as our
31
manufacturing operations increase, and therefore, our cost of compliance is
likely to increase. In addition, sewage produced by dormitory facilities which
house our labor force is coming under greater environmental legislation.
Although we believe we are operating in compliance with applicable environmental
laws, there is no assurance that we will be in compliance consistently as such
laws and regulations or their interpretation and implementation change. Failure
to comply with environmental regulation could result in the imposition of fines,
suspension or halting of production or closure of manufacturing operations.
From time-to-time, we may seek additional equity or debt financing and may not
be able to secure this financing at acceptable terms.
From time-to-time, we may seek additional equity or debt financing to
provide for the capital expenditures required to maintain or expand our design
and production facilities and equipment and/or working capital, as well as to
repay loans if our cash flow from operations is insufficient. We cannot predict
with certainty the timing or amount of any such capital requirements. If such
financing is not available on satisfactory terms, we may be unable to expand our
business or to develop new business at the rate desired, and our operating
results may suffer.
We must effectively manage our growth.
Failure to manage our growth effectively could adversely affect our
operations. We have increased the number of our manufacturing locations from one
to two and are increasing the number of our manufacturing and design programs
and plan to expand further the number and diversity of our programs in the
future and may further increase the number of locations from which we
manufacture and sell. Our ability to manage our planned growth effectively will
require us to:
o enhance our operational, financial and management systems;
o expand our facilities and equipment; and
o successfully hire, train and motivate additional employees, including
the technical personnel necessary to operate our production facilities.
An expansion and diversification of our product range, manufacturing and
sales locations and customer base would result in increases in our overhead and
selling expenses. We may also be required to increase staffing and other
expenses as well as our expenditures on plant, equipment and property in order
to meet the anticipated demand of our customers. Customers, however, generally
do not commit to firm production schedules for more than a short time in
advance. Any increase in expenditures in anticipation of future orders that do
not materialize would adversely affect our profitability. Customers also may
require rapid increases in design and production services that place an
excessive short-term burden on our resources.
Potential strategic alliances may not achieve their objectives.
We are currently exploring strategic alliances designed to enhance or
complement our technology or to work in conjunction with our technology,
32
increase our manufacturing capacity, provide additional know-how, components or
supplies and develop, introduce and distribute products and services utilizing
our technology and know-how. Any strategic alliances entered into may not
achieve their strategic objectives, and parties to our strategic alliances may
not perform as contemplated.
We may not be able to retain, recruit and train adequate management and
production personnel.
Our continued operations are dependent upon our ability to identify,
recruit and retain adequate management and production personnel in China. We
require trained graduates of varying levels and experience and a flexible work
force of semi-skilled operators. Many of our current employees come from the
more remote regions of China as they are attracted by the wage differential and
prospects afforded by Shenzhen and our operations. With the growth currently
being experienced in China and competing opportunities for our personnel, there
can be no guarantee that a favorable employment climate will continue and that
wage rates in Shenzhen or China as a whole will continue to be internationally
competitive.
We are at risk of double taxation due to transfer pricing.
None of the asset based finance or factoring lines we have established will
accept receivables from our Chinese subsidiaries as collateral for advances; we
therefore invoice our non-Chinese customers through our companies in Hong Kong
and the U.S. As a result, we have intercompany invoicing whereby our Chinese
subsidiaries invoice the Hong Kong and U.S. entities who then invoice our
customers for sales rendered. As required by the tax authorities in each
jurisdiction, we seek to apply arm's length pricing to this process. Should a
tax authority in any jurisdiction consider the pricing not to be arm's length,
it may deem the prices charged to be different from those we have applied. If
this decision were to be applied unilaterally, it could lead to an increase in
our overall tax expenses. In addition, we may have to expend resources in
defending our positions, irrespective of the outcome determined.
We are installing a new ERP system and are required to comply with the
provisions of the Sarbanes Oxley Act of 2002.
We are working diligently toward evaluating and documenting our internal
control systems in order to allow management to report on, and our independent
auditors to attest to, our internal control over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act of 2002. In addition, we are
in the process of converting our accounting and record-keeping software to a new
software system. We cannot assure the implementation of the new system will be
completed on a timely basis. In addition, we may experience difficulties in the
transition to the new software that could affect our internal control systems,
processes and procedures. Should we have to defer part of the implementation,
reliance on our current system for the purpose of complying with Sarbanes-Oxley
Section 404 will require significant effort in a compressed timeframe, as well
as result in our incurring costs to comply with Sarbanes-Oxley Section 404 that
will duplicate compliance costs that will be associated with the implementation
of our new system. There can be no assurances that the evaluation required by
Sarbanes-Oxley Section 404 will not result in the identification of significant
33
control deficiencies or that our auditors will be able to attest to the
effectiveness of our internal control over financial reporting.
We are at risk for potential product liability claims not covered by insurance
from our discontinued snowboard business.
We were acquired by Morrow Snowboards, Inc., which previously designed,
manufactured and distributed snowboards and apparel. Those operations were
discontinued in 1999, but the snowboards previously manufactured and distributed
may still be in use. To the extent there is an accident involving the use of
those old snowboards, we could be named in a civil action alleging liability.
Although we do not think there are defects in the boards previously
manufactured, it is not uncommon for an injured snowboarder to name the
manufacturer when the injuries are serious. We are currently not insured against
any such claims and although we do not believe such actions are likely given the
length of time that has lapsed since we last manufactured snowboards, there are
no assurances that such actions will not result in the future. To the extent an
action is brought and successfully prosecuted to a judgment, the claim could
have a material affect on our financial performance.
Risks Related to International Operations
We are dependent on our Chinese manufacturing operations.
Our current manufacturing operations are located in China, our sales
offices are in the U.S., Europe, Hong Kong, Singapore and China, and our
administrative offices are in the U.S. The geographical distances between these
facilities create a number of logistical and communications challenges. In
addition, because of the location of the manufacturing facilities in China, we
could be affected by economic and political instability there, including
problems related to labor unrest, lack of developed infrastructure, variances in
payment cycles, currency fluctuations, overlapping taxes and multiple taxation
issues, employment and severance taxes, compliance with local laws and
regulatory requirements, greater difficulty in collecting accounts receivable,
and the burdens of cost and compliance with a variety of foreign laws. Moreover,
inadequate development or maintenance of infrastructure in China, including
adequate power and water supplies, transportation, raw materials availability or
the deterioration in the general political, economic or social environment could
make it difficult, more expensive and possibly prohibitive to continue to
operate our manufacturing facilities in China.
The Chinese government could change its policies toward, or even nationalize,
private enterprise, which could harm our operations.
Over the past several years, the Chinese government has pursued economic
reform policies, including the encouragement of private economic activities and
decentralization of economic regulation. The Chinese government may not continue
to pursue these policies or may significantly alter them to our detriment from
time to time without notice. Changes in policies by the Chinese government
resulting in changes in laws, regulations, their interpretation, or the
imposition of confiscatory taxation, restrictions on currency conversion or
imports and sources of supply could materially and adversely affect our business
and operating results. The nationalization or other expropriation of private
34
enterprises by the Chinese government could result in the total loss of our
investment in China.
The Chinese legal system has inherent uncertainties that could materially and
adversely impact our ability to enforce the agreements governing our operations.
We lease the land on which our factories in China are located. The
performance of the agreements and the operations of our factories are dependent
on our relationship with the local government. Our operations and prospects
would be materially and adversely affected by the failure of the local
government to honor our agreements or an adverse change in the laws governing
them. In the event of a dispute, enforcement of these agreements could be
difficult in China. China tends to issue legislation which is subsequently
followed by implementing regulations, interpretations and guidelines that can
render immediate compliance difficult. Similarly, on occasion, conflicts are
introduced between national legislation and implementation by the provinces that
take time to reconcile. These factors can present difficulties in our
compliance. Unlike the U.S., China has a civil law system based on written
statutes in which judicial decisions have limited precedential value. The
Chinese government has enacted laws and regulations to deal with economic
matters such as corporate organization and governance, foreign investment,
commerce, taxation and trade. However, its experience in implementing,
interpreting and enforcing these laws and regulations is limited, and our
ability to enforce commercial claims or to resolve commercial disputes in China
is therefore unpredictable. These matters may be subject to the exercise of
considerable discretion by agencies of the Chinese government, and forces and
factors unrelated to the legal merits of a particular matter or dispute may
influence their determination.
Because our operations are international, we are subject to significant
worldwide political, economic, legal and other uncertainties.
We are incorporated in the U.S. and have subsidiaries in The People's
Republic of China, Hong Kong, and the British Virgin Islands. Because we
manufacture all of our products in The People's Republic of China, substantially
all of the net book value of our total fixed assets and a major portion of our
inventory is located there. However, we sell our products to customers worldwide
with concentrations in Hong Kong, North America, Europe, Japan, China and
Southeast Asia and may thus have receivables in and goods in transit to those
locations. Protectionist trade legislation in the U.S. or foreign countries,
such as a change in export or import legislation, tariff or duty structures, or
other trade policies, could adversely affect our ability to sell products in
these markets, or even to purchase raw materials or equipment from foreign
suppliers. Moreover, we are subject to a variety of U.S. laws and regulations,
changes to which may affect our ability to transact business with customers or
in certain product categories.
We are also subject to numerous national, state and local governmental
regulations, including environmental, labor, waste management, health and safety
matters and product specifications. We are subject to laws and regulations
governing our relationship with our employees, including: wage and hour
requirements, working and safety conditions, citizenship requirements, work
permits and travel restrictions. These include local labor laws and regulations,
which may require substantial resources for compliance. We are subject to
significant government regulation with regard to property ownership and use in
connection with our leased facilities in China, import restrictions, currency
35
restrictions and restrictions on the volume of domestic sales and other areas of
regulation, all of which impact our profits and operating results.
We face risks associated with international trade and currency exchange.
We transact business in a variety of currencies including Hong Kong
dollars, Japanese Yen, Singapore dollars, U.S. dollars and the Chinese Yuan
Renminbi, or RMB. Increased sales to Europe may result in receivables by us in
other currencies, such as the Euro. Although we transact business predominantly
in U.S. and Hong Kong dollars, we collect a portion of our revenue and incur
approximately 30% of our operating expenses, such as payroll, land rent,
electrical power and other costs associated with running our facilities in
China, in RMB. Adverse movements between the selling currency and the RMB would
have a material impact on our profitability. Changes in exchange rates would
affect the value of deposits of currencies we hold. The RMB has been broadly
stable against U.S. dollar in the past three years, but is not fully convertible
and fully traded. It is not currently possible to hedge against movement in the
RMB exchange rate through conventional means; we are thus not hedged and remain
exposed to movement in the exchange rate. The exchange rate of the Hong Kong
dollar has been pegged to the U.S. dollar and has not in the past presented a
currency exchange risk, though this could change in the future. We also do not
currently hedge against exposure to other currencies. We cannot predict with
certainty future exchange rates and thus their impact on our operating results.
We also had long term debt, denominated in RMB, repayable in equal
installments over three years, of RMB 10 million (U.S. $1.2 million at current
exchange rates). As of October 31, 2004, one installment of RMB 3.3 million was
outstanding and is due for repayment in June 2005. An increase in the value of
the RMB against the U.S. dollar would result in a translation loss in U.S.
dollar terms that would be realized as U.S. dollars from sales revenues are
utilized to meet the repayment obligation.
Changes to Chinese tax laws and heightened efforts by the Chinese tax
authorities to increase revenues could subject us to greater taxes.
Under applicable Chinese law, we have been afforded a number of profits tax
concessions by, and tax refunds from, Chinese tax authorities on a substantial
portion of our operations in China. However, the Chinese tax system is subject
to substantial uncertainties with respect to interpretation and enforcement. The
Chinese government has attempted to augment its revenues through heightened tax
collection efforts. Continued efforts by the Chinese government to increase tax
revenues could result in revisions to or changes to tax laws or their
interpretation, which could increase our future tax liabilities or deny us
expected concessions or refunds.
Risks Related to Our Shares
The concentration of share ownership by our officers and directors allows them
to control or substantially influence the outcome of matters requiring
shareholder approval.
As of October 31, 2004, our officers and directors as a group beneficially
owned approximately 16.3% of our common shares. As a result, acting together,
36
they may be able to control or substantially influence the outcome of matters
requiring approval by our shareholders, including the election of directors and
approval of significant corporate transactions.
We do not pay cash dividends.
We have never paid any cash dividends on our common stock and may not pay
cash dividends in the future. Instead, we intend to apply earnings to the
expansion and development of our business. Thus, the liquidity of your
investment is dependent upon your ability to sell stock at an acceptable price.
The price can go down as well as up and may limit your ability to realize any
value from your investment, including the initial purchase price.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Fluctuations
We sell a majority of our products in U.S. dollars and pay for our material
components in U.S. dollars, Hong Kong dollars, Chinese RMB and Japanese yen. We
pay labor costs and overhead expenses in U.S. dollars, RMB and Hong Kong
dollars.
The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed
by the Hong Kong government since October 1983 at approximately HK$7.80 to
US$1.00 through the currency issuing banks in Hong Kong and accordingly has not
in the past presented a currency exchange risk. This could change in the future
as there has been discussion in some circles concerning the advantages of the
floating rate.
Effective January 1, 1994, China adopted a floating currency system whereby
the official exchange rate equaled the market rate. Since the market and
official RMB rates were unified, the value of the RMB against the U.S. dollar
has been stable. There is currently pressure being exerted by the U.S. and
others for the RMB to be permitted to float more freely but it is unclear
whether this would lead to an upward movement in the exchange rate between the
RMB and the U.S. dollar. It is not currently possible to hedge against movement
in the RMB exchange rate through conventional means. We are thus not hedged and
remain exposed to movement in the exchange rate. We incur approximately 30% of
our expenses in RMB and have negligible RMB revenue; an increase in the value of
the RMB would thus have an adverse affect on our operating margins and minimal
effect on our monetary assets denominated in RMB as cash holdings broadly equate
to the remaining installment of RMB 3.3 million (US$ 403,000 at current rates)
due on a three mortgage repayable in June 2005.
We also incur liabilities in Japanese Yen from the purchase of raw
materials. We do not currently hedge against this exposure and are thus exposed
to exchange rate movement at present.
Interest Rate Risk
Our principal exposure to interest rate changes is on the asset based
lending line which is based on prime rates in the U.S.
37
Inflation Risk
Although inflation has remained low in recent years in the markets in which
we currently sell and expect to do so for the foreseeable future, the general
inflation rate in China is higher with wage inflation expected to run between
five and ten percent annually. Such inflation represents a risk to our
profitability if sustained and not compensated for by a movement in exchange
rates or productivity improvements.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of October 31, 2004 and 2003 F-3
Consolidated Statements of Operations for the year ended October
31, 2004, the year ended October 31, 2003 and the year ended
October 31, 2002 F-4
Consolidated Statements of Stockholders' Equity for the year
ended October 31, 2004, the year ended October 31, 2003 and the
year ended October 31, 2002 F-5
Consolidated Statements of Cash Flows for the year ended October
31, 2004, the year ended October 31, 2003 and the year ended
October 31, 2002 F-6
Notes to Consolidated Financial Statements F-7
Supplementary Information F-30
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of
International DisplayWorks, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of International
DisplayWorks, Inc. and subsidiaries (the "Company"), as of October 31, 2004 and
2003 and the related consolidated statements of operations, stockholders' equity
and cash flows, for each of the three years in the period ended October 31,
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International DisplayWorks,
Inc. and subsidiaries as of October 31, 2004 and 2003 and the results of its
operations and its cash flows for each of the three years in the period ended
October 31, 2004, in conformity with accounting principles generally accepted in
the United States of America.
In connection with our audit of the consolidated financial statements referred
to above, we have audited Schedule II - Valuation and Qualifying Accounts, for
each of the three years in the period ended October 31, 2004. In our opinion
this schedule presents fairly, in all material respects, the information
required to be set forth therein.
/S/ GRANT THORNTON
Hong Kong
December 8, 2004
F-2
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
-------------------- ------------------
ASSETS October 31, October 31,
------ 2004 2003
-------------------- ------------------
Current assets:
Cash and cash equivalents
Cash in banks $ 8,187 $ 1,178
Cash in commercial paper 1,999 -
-------------------- ------------------
Total cash and cash equivalents 10,186 1,178
Accounts receivable,
net of allowance for doubtful accounts of $101 and $40 11,378 4,260
Inventories 5,780 2,465
Prepaid expense and other current assets 1,160 1,361
-------------------- ------------------
Total current assets 28,504 9,264
-------------------- ------------------
Property and equipment at cost, net 16,418 4,796
-------------------- ------------------
Total assets $ 44,922 $ 14,060
==================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,236 $ 4,770
Accrued liabilities 3,588 1,636
Line of credit 4,398 1,051
Current portion of long term debt - related parties - 50
Current portion of long term debt 496 452
-------------------- ------------------
Total current liabilities 15,718 7,959
Long-term debt, net of current portion - related parties - 524
Long-term debt, net of current portion 70 1,353
-------------------- ------------------
Total liabilities 15,788 9,836
-------------------- ------------------
Commitments and contingencies
Shareholders' equity
Preferred stock, par $0.001, 10,000,000 shares authorized,
no shares issued or outstanding
Common stock, par $0.001, 40,000,000 shares authorized
30,573,383 and 20,984,913 shares issued and outstanding
at October 31, 2004 and October 31, 2003 respectively 65,642 41,806
Accumulated deficit (36,579) (37,653)
Cumulative translation adjustment 71 71
-------------------- ------------------
Total shareholders' equity 29,134 4,224
-------------------- ------------------
Total liabilities and shareholders' equity $ 44,922 $ 14,060
==================== ==================
The accompanying notes are an integral part of these financial statements
F-3
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, Except Share and per share data)
---------------------------------------------------------
For the Years Ended
---------------------------------------------------------
October 31, October 31, October 31,
2004 2003 2002
---------------------------------------------------------
Net sales $ 46,377 $ 22,846 $ 20,928
Cost of goods sold 36,266 17,600 15,730
---------------- --------------- -----------------
Gross profit 10,111 5,246 5,198
---------------- --------------- -----------------
Operating expenses:
General and administrative 5,403 3,637 4,036
Sales, marketing and customer service 2,096 1,655 1,562
Engineering, advanced design and
product management 625 593 691
Impairment of machinery - - 270
Impairment of goodwill - - 5,287
---------------- --------------- -----------------
Total operating expenses 8,124 5,885 11,846
---------------- --------------- -----------------
Income (loss) from operations 1,987 (639) (6,648)
---------------- --------------- -----------------
Other income (expense):
Interest expense (396) (389) (464)
Other income 108 220 170
Litigation settlement (625) - -
---------------- --------------- -----------------
Total other expense (913) (169) (294)
---------------- --------------- -----------------
Income (loss) before income taxes 1,074 (808) (6,942)
Provision for income taxes - - -
---------------- --------------- -----------------
Net income (loss) $ 1,074 $ (808) $ (6,942)
================ =============== =================
Net income (loss) per common share:
Net income (loss) - basic $ 0.04 $ (0.04) $ (0.36)
================ =============== =================
Net income (loss) - diluted $ 0.04 $ (0.04) $ (0.36)
================ =============== =================
Weighted average number of shares used in
computing share amounts:
Basic 25,647,763 19,448,718 19,207,246
================ =============== =================
Diluted 27,511,228 19,448,718 19,207,246
================ =============== =================
The accompanying notes are an integral part of these financial statements
F-4
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share and Per Share Data)
For the Year Ended October 31, 2004, the Year Ended October 31, 2003
and the Year Ended October 31, 2002
Common Stock Cumulative
----------------------------------- Accumulated Translation
Shares Amount Deficit Adjustment Total
-------------------------------------------------------------------------------------------
------------------ --------------------------------------------------------
Balance, November 1, 2001 19,321,246 $ 41,205 $ (29,903) $ 88 $ 11,390
- --------------------------- -------------------------------------------------------------------------------------------
Comprehensive loss
Net loss (6,942) (6,942)
Translation adjustment (17) (17)
------------
Total comprehensive loss (6,959)
Common stock options exercised (104,000) 7 7
Warrants issued 4 4
---------------- --------------- ----------------------------------------------------
Balance, October 31, 2002 19,217,246 $ 41,216 $ (36,845) $ 71 $ 4,442
- ------------------------- -------------------------------------------------------------------------------------------
Comprehensive loss
Net loss (808) (808)
Translation adjustment - -
------------
Total comprehensive loss (808)
Common stock options exercised
Warrants issued - 74 74
Stock issued 1,767,667 516 516
-------------------------------------------------------------------------------------------
Balance, October 31, 2003 20,984,913 $ 41,806 $ (37,653) $ 71 $ 4,224
===========================================================================================
Comprehensive income
Net income 1,074 1,074
Translation adjustment - -
------------
Total comprehensive loss 1,074
Common stock options exercised 635,375 302 302
Common stock warrants exercised 1,051,760 608 608
Warrants issued 85 85
Stock issued 7,901,335 22,841 22,841
-------------------------------------------------------------------------------------------
Balance October 31, 2004 30,573,383 $ 65,642 $ (36,579) $ 71 $ 29,134
- ------------------------ ===========================================================================================
The accompanying footnotes are an integral part of these financial statements.
F-5
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
---------------------------------------------
For the Years Ended
October 31, October 31, October 31,
2004 2003 2002
---------------------------------------------
Cash flows from operating activities:
$ 1,074 $ (808) $ (6,942)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation 910 811 1,096
Impairment of goodwill - - 5,287
Amortization of goodwill - - 432
Stock issued for services 58 16 -
Warrants issued for extension of debt terms - 29 -
Impairment of machinery - - 270
Loss on disposal of fixed assets 9 58 9
Loss (income) on foreign currency translation - - (17)
---------------------------------------------
2,051 106 135
Changes in operating assets and liabilities, net of business
combinations:
(Increase) decrease in accounts receivable (7,118) (1,196) 167
(Increase) in inventories (3,315) (1,005) (138)
Increase (Decrease) in prepaid expenses and other current
assets 201 (823) (123)
Increase in accounts payable 2,466 1,700 1,120
Increase in accrued liabilities 1,952 271 107
---------------------------------------------
Net cash provided by (used in)
operating activities (3,763) (947) 1,268
Cash flows from investing activities:
Acquisitions of property, plant and equipment (12,541) (491) (183)
Proceeds from disposal of property, plant & equipment - 23 -
---------------------------------------------
Net cash used in investing activities (12,541) (468) (183)
Cash flows from financing activities:
Proceeds from issuance of common stock 23,693 500 7
Issuance of warrants 85 45 4
Proceeds (payment) from lines of credit, net 3,347 46 (447)
Proceeds on debt - related parties - 100 -
Proceeds from debt - 848 -
Payment on debt - related parties (574) (100) (75)
Payment on debt (1,239) (402) -
---------------------------------------------
Net cash provided by (used in) financing activities 25,312 1,037 (511)
Increase (decrease) in cash and cash equivalents 9,008 (378) 574
Cash and cash equivalents at beginning of period 1,178 1,556 982
---------------------------------------------
Cash and cash equivalents at end of period $ 10,186 $ 1,178 $ 1,556
=============================================
Supplemental disclosure:
Cash paid for interest $ 396 $ 389 $ 464
=============================================
Cash paid for income taxes $ - $ - $ -
=============================================
Non-cash financing activities:
Stock issued for services $ 58 $ 16 $ -
=============================================
Warrants issued for extension of debt terms $ - $ 29 $ -
=============================================
The accompanying notes are an integral part of these financial statements
F-6
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE BUSINESS
Description of Business
-----------------------
International DisplayWorks, Inc. (the "Company"), headquartered in
Rocklin, California, was incorporated in the state of Delaware in July
of 1999. On October 31, 2001, the Company merged with its parent,
Granite Bay Technologies, Inc., a California corporation.
The Company, together with its subsidiaries, all of which are wholly
owned, is engaged in the design, manufacture and worldwide
distribution of liquid crystal displays (LCDs), modules, and
assemblies for major original equipment manufacturers (OEMs) with
applications in telecommunications, automotive, industrial, medical,
and consumer products.
The Company's manufacturing operations are in Shenzhen, People's
Republic of China (PRC). The display company MULCD Microelectronics
(Shenzhen) Co., Ltd. ("MULCD") and the module company IDW Technologies
(Shenzhen) Co., Ltd. ("IDWT") manufacture Liquid Crystal Displays
(LCDs) and LCD modules using various display technologies such as
chip-on-glass ("COG"), chip-on-board ("COB"), chip-on-flex ("COF"),
surface mount technology ("SMT"), and tape automated bonding ("TAB").
IDWT also provides additional module enhanced services by adding other
components such as back lighting, and keypads to module assemblies as
well as having the capabilities to produce complete turn-key products.
2. LIQUIDITY
The Company and its subsidiaries generated income from continuing
operations of $1,074,000 during the period ended October 31, 2004 and
net losses from continuing operations of $808,000, and $6,942,000
($953,000 before charges for amortization and write-off of goodwill of
$5,719,000 and equipment impairment charges of $270,000) during the
periods ended October 31, 2003 and 2002, respectively. The Company and
its subsidiaries also have an accumulated deficit of $36,579,000, of
which $23,833,000 is from discontinued operations and $12,746,000 is
from continuing operations.
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. To this end the Company has completed the following
transactions:
F-7
o A $5,000,000 private placement, on December 23, 2003, through the
sale of 3,333,335 shares of the Company's common stock at $1.50 a
share. Proceeds, net of expenses of $426,000 were $4,574,002. The
placement agent received a five-year warrant to purchase 166,666
shares at $1.75 a share.
o A new $5,000,000 asset based credit line with Wells Fargo
Business Credit, Inc. The new line replaced an existing domestic
only receivable line and creates up to $3,000,000 in additional
working capital with more favorable terms
o A $20,250,000 private placement through the sale of 4,500,000
shares of the Company's common stock at $4.50 a share. Proceeds,
net of expenses of $1,770,000 were a $18,480,000.
Management believes that these transactions, the asset based lines of
credit, and cash flows from operations will provide the Company sufficient
working capital to fund operations for the foreseeable future.
In addition the Company made an early repayment of notes due on December
31, 2004, bearing an interest rate of 12%, in the amount of $1,524,000. There
was no prepayment penalty for the early payment but an interest saving.
On October 31, 2004 the company had debt falling due in 2005 of $496,000
and a further amount due of $70,000 all of which was repayable in 2006.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
---------------------------
The consolidated financial statements include the financial
statements of International DisplayWorks, Inc., and all of the
following wholly-owned subsidiaries:
o International DisplayWorks (Hong Kong) Limited, (a Hong
Kong company)
o MULCD Microelectronics (Shenzhen) Co., Ltd., (a PRC
company)
o IDW Technology (Shenzhen) Co., Ltd. (a PRC company)
o International DisplayWorks Ltd., (a BVI company)
o International DisplayWorks Pte., Ltd., (a Singapore
company)
All significant intercompany accounts and transactions have been
eliminated on consolidation.
b. Fiscal Year
-----------
The Company operates on a fiscal year which ends on October 31.
F-8
c. Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with
maturity, at date of purchase, of three months or less to be cash
equivalents.
d. Financial Instruments
---------------------
The carrying amounts of cash and cash equivalents, accounts
receivable, notes payable, lines of credit, accounts payable, and
amounts due to related parties approximate fair value due to the
short-term maturity of these instruments. The carrying amount of
the mortgage debt also approximates fair value as the exchange
rate of the RMB to the U.S. dollar that has been applied has
remained relatively stable. Because of the length of the mortgage
contract, movements in the RMB could affect this carrying value.
e. Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined on the weighted average-cost basis. Costs included in
the valuation of inventory are labor, materials (including
freight and duty) and manufacturing overhead. Provisions are made
for obsolete or slow-moving inventory based on management
estimates.
f. Property, Plant and Equipment
-----------------------------
Property, plant and equipment are recorded at cost less
accumulated depreciation and any provision for impairment. The
cost of major improvements is capitalized whereas the cost of
maintenance and repairs is expensed in the period incurred. Gains
and losses from the disposal of property, plant and equipment are
included in income/loss from operations.
All land in the PRC is owned by the PRC government. According to
PRC law the government may sell the right to use the land for a
specified period of time. Thus all of the Company's land holdings
in the PRC are considered to be leasehold land and are amortized
on the straight-line basis over the respective term of the right
to use the land. The buildings on the land are also depreciated
over the same period.
Depreciation charges are calculated from the latter of date of
acquisition or when the asset is placed in service.
Amortization of leasehold improvements is provided using the
straight-line method over the shorter of the expected useful life
of the asset or the remaining lease term.
Depreciation rates computed using the straight-line method is as
follows:
Land and Buildings 30 years
Machinery 10 years
Furniture, fixtures, and equipment 5 years
F-9
g. Impairment or Disposal of Long-Lived Assets
-------------------------------------------
In August 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
that was applicable to financial statements issued for fiscal
years beginning after December 15, 2001. The FASB's new rules on
asset impairment supersede SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" and portions of Accounting Principles Board ("APB")
Opinion No. 30, "Reporting the Results for Operations." The
statement requires a single accounting model for long-lived
assets to be disposed of and significantly changes the criteria
that would have to be met to classify an asset as held-for-sale.
Classification as held-for-sale is an important distinction since
such assets are not depreciated and are stated at the lower of
fair value or carrying amount. The statement also requires
expected future operating losses from discontinued operations to
be recorded in the period(s) in which the losses are incurred,
rather than as of the measurement date as previously required. On
November 1, 2002, the Company adopted SFAS No. 144. The adoption
of SFAS No. 144 did not have any significant impact on the
financial position and results of operations of the Company.
h. Warranty Costs
--------------
The Company warrants its products against defects for fifteen
days after delivery to customers. As the Company manufactures
custom products to customer specifications and has not
experienced significant returns, the Company does not anticipate
it will incur a material amount of warranty expense and therefore
no provision has been made.
i. Advertising and Promotion Costs
-------------------------------
Advertising and promotion costs are expensed as incurred and are
included in selling, marketing and customer service expenses.
Advertising expenses were approximately $70,000, $44,000, and
$2,200 for the periods ending October 31, 2004, 2003 and 2002,
respectively.
j. Revenue Recognition
-------------------
The Company recognizes revenue from product sales in accordance
with Staff Accounting Bulletin (SAB) No. 104 "Revenue Recognition
in Financial Statements." SAB No. 104 requires that revenue be
recognized when all of the following conditions are met:
o Persuasive evidence of an arrangement exists,
o Delivery has occurred or services have been rendered,
o Price to the customer is fixed or determinable, and
o Collectability is reasonably assured.
F-10
The Company recognizes revenue from the sale of its products when
the products are shipped from its factory in the PRC, provided
collectability is reasonably assured from the customer. Sales
revenue is recorded net of discounts and rebates except for
prompt payment discounts, which are accounted for as an operating
expense. Returns and adjustments are booked as soon as they have
been assessed for validity.
k. Shipping and Handling Costs
---------------------------
Shipping and handling costs are expensed to cost of sales for
material purchases; and cost of sales or selling expenses for
delivery for finished products. During the periods ended October
31, 2004, 2003 and 2002, shipping and handling costs expensed to
cost of sales were $1,234,000, $535,000 and $356,000,
respectively. During the periods ended October 31, 2004 and 2003,
shipping and handling costs expensed to selling expenses were
nil, and for the period ended October 31, 2002 were $50,337.
l. Income Taxes
------------
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets,
including tax loss and credit carry forwards, and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Deferred
income tax expense represents the change during the period in the
deferred tax assets and deferred tax liabilities. The components
of the deferred tax assets and liabilities are individually
classified as current and non-current based on their
characteristics. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will
not be realized in the foreseeable future.
m. Stock Options and Warrants
--------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," allows
companies which have stock-based compensation arrangements with
employees to adopt a new fair value basis of accounting for stock
options and other equity instruments or to continue to apply the
existing accounting rules under APB Opinion No. 25, "Accounting
for Stock Issued to Employees," but with additional financial
statement disclosure. The Company continues to account for
stock-based compensation arrangements under APB Opinion No. 25.
See also the adoption of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" at note
3(r).
n. Product Development Costs
-------------------------
Expenditures associated with the development of new products and
improvements to existing products are expensed as incurred.
F-11
Product development costs were approximately $69,000, $13,000 and
$28,000 for the periods ended October 31, 2004, 2003 and 2002,
respectively.
o. Net Earnings (Loss) per Share
-----------------------------
Basic net earnings per common share is computed by dividing net
loss applicable to common shareholders by the weighted-average
number of common shares outstanding during the period.
Weighted-average number of shares outstanding at October 31, 2004
were 25,647,763 basic and 27,511,228 diluted. Diluted net
earnings (loss) per common share is determined using the
weighted-average number of common shares outstanding during the
period, adjusted for the dilutive effect of common stock
equivalents, consisting of shares that might be issued upon
exercise of common stock options. In periods where losses are
reported, the weighted-average number of common shares
outstanding excludes common stock equivalents, because their
inclusion would be anti-dilutive. For the periods ended October
31, 2003 and 2002 the weighted-average number of common shares
outstanding excludes common stock equivalents of 3,936,481 and
2,889,709 shares, respectively.
p. Foreign Currency
----------------
All transactions in currencies other than functional currencies
during the year are translated at the exchange rates prevailing
on the respective transaction dates. Monetary assets and
liabilities existing at the balance sheet date denominated in
currencies other than functional currencies are translated at the
exchange rates existing on that date. Exchange differences are
recorded in the consolidated statement of operations. For the
periods ended October 31, 2004, 2003 and 2002, the exchange
differences resulted in expense of $116,000, $67,000 and $48,900,
respectively.
The Company and its subsidiaries have adopted the U.S. dollar,
Hong Kong dollar and the PRC Renminbi as their functional
currencies. The financial statements of all subsidiaries with
functional currencies other than the U.S. dollar are translated
in accordance with SFAS No. 52, "Foreign Currency Translation."
All assets and liabilities are translated at the rates of
exchange ruling at the balance sheet date and all income and
expense items are translated at the average rates of exchange
over the year. All exchange differences arising from the
translation of subsidiaries' financial statements are recorded as
a component of comprehensive income.
The exchange rate between the Hong Kong dollar and the U.S.
dollar has been pegged (HK$7.80 to US$1.00) since October 1983.
The exchange rate between the Renminbi and the U.S. dollar is
based on the prevailing market rate, which was approximately
Renminbi 8.3 to US$1.00 at October 31, 2004, 2003 and 2002.
q. Segment Reporting
-----------------
The Company accounts for its segments pursuant to SFAS No. 131
"Disclosures about Segments of an Enterprise and Related
Information." Operating segments, as defined in SFAS No. 131, are
components of an enterprise for which separate financial
F-12
information is available and is evaluated regularly by the
Company in deciding how to allocate resources and in assessing
performance. The financial information is required to be reported
on the basis that it is used internally for evaluating the
segment performance. The Company believes it operates in only one
segment.
r. New Accounting Pronouncements
-----------------------------
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 to 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 disclosures 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
beginning after December 15, 2002 (November 1, 2003 for the
Company). The expanded annual disclosure requirements and the
transition provisions are effective for fiscal years ending after
December 15, 2002 (October 31, 2003 for the Company). 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.
In December 2004, the FASB issued SFAS No. 123R that amends SFAS
No. 123 "Accounting for Stock-Based Compensation," to require
public entities (other than those filing as small business
issuers) to report stock-based employee compensation in their
financial statements. Unless modified, the Company will be
required to comply with the provisions of SFAS No. 123R as of the
first interim period that begins after June 15, 2005 (August 1,
2005 for the Company). The Company currently does not record
compensation expense related to its stock-based employee
compensation plans in its financial statements.
At October 31, 2004, the Company has three stock-based employee
compensation plans, as more fully described in note 10(b). The
Company accounts for these plans under the recognition and
measurement principles of APB No. 25, "Accounting for Stock
Issued to Employees" and 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 the
market value of the underlying common stock on the date of grant.
During the periods ending October 31, 2004, 2003 and 2002, the
Company recorded no compensation expense related to its
stock-based employee compensation plans.
The following table illustrates the effect on net loss and loss
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.
F-13
-----------------------------------------------------
For the Years Ended October 31,
2004 2003 2002
-----------------------------------------------------
Net income (loss) as reported $ 1,074 $ (808) $ (6,942)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards. (181) (65) (130)
--------------- --------------- ---------------
Pro-forma net income (loss) $ 893 $ (873) $ (7,072)
=============== =============== ===============
Earnings per share:
Basic - as reported $ 0.04 $ (0.04) $ (0.36)
=============== =============== ===============
Basic - pro-forma $ 0.03 $ (0.04) $ (0.37)
=============== =============== ===============
Diluted - as reported $ 0.04 $ (0.04) $ (0.36)
=============== =============== ===============
Diluted - pro-forma $ 0.03 $ (0.04) $ (0.37)
=============== =============== ===============
The Company has computed the value of all options granted during
the periods ending October 31, 2004, 2003 and 2002 using the
Black-Scholes option-pricing model and the following weighted
average assumptions for grants for the periods ended:
October 31, October 31, October 31,
2004 2003 2002
---------------- -------------------- --------------------
Risk-free interest rate 3.7% 3.7% 3.7%
Expected dividend yield 0.0% 0.0% 0.0%
Expected life (years) 5 5 5
Expected volatility 100.7% 92.4% 100.1%
Using the Black-Scholes methodology, the total value of options
granted during the periods ending October 31, 2004, 2003 and 2002
was $1,033,515, $90,955 and $94,025, respectively, which would be
amortized on a pro forma basis over the vesting period of the
options (typically four years). The weighted average fair value
per share of options granted during the periods ending October
31, 2004, 2003 and 2002 was $0.75, $0.29 and $0.42, respectively.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (FIN 45). FIN 45 requires that upon issuance of a
guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also
requires additional disclosures by a guarantor in its annual
financial statements about the obligations associated with
guarantees issued. The recognition provisions of FIN 45 are
effective for any guarantees issued or modified after December
31, 2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15,
2002 (January 31, 2003 for the Company). The adoption of FIN No.
45 did not have a material effect on the Company's financial
position, results of operations, or cash flows.
F-14
In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") which is an interpretation
of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements." FIN 46 requires a variable interest entity (VIE) to
be consolidated by a company that is considered to be the primary
beneficiary of that VIE. In December 2003, the FASB issued FIN
No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities" ("FIN 46-R") to address certain FIN 46
implementation issues. The effective dates and impact of FIN 46
and FIN 46-R for the Company's consolidated financial statements
are as follows:
1. Special purpose entities ("SPEs") created prior to
February 1, 2003. The Company must apply either the
provisions of FIN 46 or early adopt the provisions
of FIN 46-R at the end of the first interim or
annual reporting period ending after December 15,
2003. The Company has determined that it has no
SPE's.
2. Non-SPEs created prior to February 1, 2003. The
Company is required to adopt FIN 46-R at the end
of the first interim or annual reporting period
ending after March 1, 2004. While not required,
the Company could elect to adopt FIN 46 or FIN 46-R
for these non-SPEs as of the end of the first
interim or annual reporting period ending after
December 15, 2003. Management does not believe that
the adoption of this provision will have a material
effect on the Company's financial position, results
of operations or cash flows.
3. All entities, regardless of whether a SPE, that were
created subsequent to January 31, 2003. The Company
is required to apply the provisions of FIN 46 unless
management elects to early adopt the provisions of
FIN 46-R as of the first interim or annual reporting
period ending after December 15, 2003. If the
Company does not elect to early adopt FIN 46-R, then
the Company is required to apply FIN 46-R to these
entities as of the end of the first interim or
annual reporting period ending after March 15, 2004.
The Company has not entered into any material joint
venture or partnership agreements subsequent to
January 31, 2003 and the Company does not expect to
enter into any such material agreements during the
first interim period ended January 31, 2004. If the
Company enters into any significant joint venture
and partnership agreements in the future that would
require consolidation under FIN 46 or FIN 46-R, it
could have a material impact on the Company's future
consolidated financial statements.
In April 2003, FASB issued SFAS No. 149, "Amendments of
Statement 133 on Derivative Instruments and Hedging
Activities," which establishes accounting and reporting
standards for derivative instruments, including derivatives
embedded in other contracts and hedging activities. SFAS No.
149 amends SFAS No. 133 for decisions made by the FASB as
part of its Derivatives Implementation Group process. SFAS
No. 149 also amends SFAS No. 133 to incorporate
clarifications of the definition of a derivative. SFAS No.
149 is effective for contracts entered into or modified and
hedging relationships designated after June 30, 2003. The
F-15
provisions of SFAS No. 149 are not expected to have a
material impact on the Company's financial position, results
of operations, or cash flows.
In May 2003, the FASB issued Statement No. 150, "Accounting
for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." SFAS No. 150 establishes
standards for how an issuer classifies and measures certain
financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issuer
classifies a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No.
150 was effective for financial instruments entered into or
modified after May 31, 2003, and otherwise was effective for
the Company's fourth quarter of 2003. The adoption of SFAS
No. 150 is not expected to have a material impact on the
Company's financial position, results of operations, or cash
flows.
s. Reclassifications
-----------------
Certain amounts in the prior periods' financial statements
have been reclassified to conform to the current year
presentation.
t. Use of Estimates
----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities
at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
4. INVENTORIES
Inventories consisted of the following at October 31 (in thousands):
2004 2003
------------------- --------------------
Finished goods $ 917 $ 687
Work-in-progress 1,820 752
Raw materials 3,510 1,537
Less: reserve for obsolete inventory (467) (511)
------------------- --------------------
$ 5,780 $ 2,465
=================== ====================
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following at
October 31 (in thousands):
F-16
2004 2003
------------------- --------------------
Prepaid expenses $ 259 $ 377
Advances to suppliers 447 303
PRC VAT recoverable 145 354
Other 309 327
------------------- --------------------
$ 1,160 $ 1,361
=================== ====================
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at October 31 (in
thousands):
2004 2003
------------------- --------------------
Land and buildings $ 1,185 $ 1,185
Furniture, fixtures and equipment 2,503 1,798
Machinery 14,476 4,865
Leasehold improvements 410 83
Construction in progress 1,857 -
------------------- --------------------
20,431 7,931
Less accumulated depreciation (4,013) (3,135)
------------------- --------------------
$ 16,418 $ 4,796
=================== ====================
Depreciation expense totaled $910,000, $811,000 and $1,096,000 for the
periods ended October 31, 2004, 2003 and 2002, respectively.
In October 2002, the Company assessed the recoverability of the
carrying value of a certain machine. The assessment resulted in an
impairment loss of the machine's entire net book value of $270,000.
This loss reflects the amount by which the carrying value of the
machine exceeded its estimated fair value. The impairment loss is
recorded as a component of operating expenses in the statement of
operations for fiscal 2002.
As of October 31, 2004, the Company had purchased $8.7 million of
machinery related to its new color line which had been delivered but
not placed into service as of year end.
As of October 31, 2004, the Company had, issued and outstanding,
purchase commitments for $2,086,000 of capital equipment.
7. GOODWILL
Goodwill represents the unamortized excess of the cost of acquiring a
business over the fair values of the net assets received at the date
of acquisition. The Company had no goodwill on its balance sheet
during the fiscal period ended October 31, 2004.
In accordance with the provisions of SFAS No. 121, management was
required to periodically review the operating environment and
F-17
performance of the Company to determine if there are any grounds for
reviewing the carrying value of goodwill to determine whether
impairment may exist.
In October 2002, the Company applied the provisions of SFAS No. 121 to
its goodwill and recorded an impairment charge of $5,287,000, which
eliminated all remaining goodwill of the Company and included this
charge as a component of operating expenses in fiscal 2002.
Goodwill was being amortized on a straight-line basis over 15 years.
Amortization expense charged to operations was $432,000 for the period
ended October 31, 2002.
8. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at October 31 (in
thousands):
2004 2003
------------------- --------------------
Accrued payroll and related liabilities $ 1,335 $ 747
Accrued staff expenses 190 219
Accrued inventory purchases 27 68
Accrued royalties 38 129
Accrued PRC government management fees 72 102
Accrued asset acquisition costs 1,560 -
Other accrued liabilities 366 371
------------------- --------------------
Total accrued liabilities $ $ 1,636
3,588
=================== ====================
9. LONG-TERM DEBT
Loans and notes payable consisted of the following at October 31 (in
thousands, except interest payments):
October 31, October 31,
2004 2003
------------------- --------------------
Notes payable to directors, stockholders and
immediate family members thereof,
interest only payments due in monthly
installments ranging from approximately
$2,400 to $3,700 at a yearly interest rate
ranging from 12.00% to 12.68%;
principal balance due and payable in full
December 31, 2004, collateralized by the
accounts receivable, inventory,
equipment and other tangible assets of the
Company. $ - $ 624
Note payable to a director of the Company,
interest and principal payments due in
monthly installments of $10,000 at a
F-18
yearly interest rate of 12.68%; principal
balance due in full March 1, 2004,
collateralized by the accounts receivable,
inventory, equipment and other tangible
assets of the Company. - 50
Notes payable to third-parties, interest only
payments due in monthly installments
ranging from $500 to $3,850 at a yearly
interest rate of 12.00%; principal balance
due and payable in full on June 30, 2004 or
December 31, 2004, collateralized by
the accounts receivable, inventory,
equipment and other tangible assets of
the Company. - 900
Mortgage loan, at a variable yearly interest
rate that ranges from 7.9% to 8.3% to be
repaid in three annual installments,
collateralized by the three factory
buildings in Shenzhen, PRC. There are
two equal additional installments due in
June 2004 and June 2005. 403 805
Capitalized Lease, term twenty four months,
payable in eight quarterly installments of
$23,260 beginning October 1, 2004, 163 -
------------------- --------------------
566 2,379
Less: current portion (496) (502)
------------------- --------------------
$ 70 $ 1,877
=================== ====================
Maturities of long-term debt are as follows:
Year Ending
October 31, Related parties Third parties Total
-------------------- ------------------------ --------------------- --------------------
2005 $ - $ 496 $ 496
2006 - 70 70
------------------------ --------------------- --------------------
$ - $ 566 $ 566
======================== ===================== ====================
In the quarter ended December 30, 2000, the Company issued
approximately $349,000 of collateralized notes payable due December
15, 2001 to a key employee, board members and other individual
investors. In February and June of 2003 the due dates were extended to
December 31, 2004. In exchange for the extension of the due dates the
F-19
note holders received warrants to purchase 228,437 shares of the
Company's common stock at between $0.16 and $0.21 per share.
During the year ended October 31, 2003, the Company extended the due
dates on $524,000 of the unpaid notes payable due to related parties
and others to March 1, 2004 or December 31, 2004.
From July 2003 through September 2003, the Company, in conjunction
with a private placement of stock (see note 12(a)), issued $1,000,000
of collateralized notes payable due December 31, 2004 to individual
investors. The notes carry an interest rate of 12% and warrants to
purchase common shares of the Company's stock equal to 20% of the face
value of the notes. The Company issued 200,000 warrants to purchase
200,000 shares of the Company's common stock at $0.35 per share for a
period of three years. The notes are collateralized by the accounts
receivable, inventory, equipment and intangible assets of the Company.
These notes do not contain any covenants. The notes were issued to
third parties and a related party. The related party subscribed to
$100,000 of the debt and received 20,000 warrants to purchase 20,000
shares of the Company's common stock. The related party is an
immediate family member of a director of the Company. Interest is
payable monthly with the principal due December 31, 2004. The proceeds
were used for general working capital of the Company.
On May 20, 2004, the Company repaid notes due December 31, 2004,
bearing an annual interest rate of 12%, in the amount of $1,524,000.
There was no prepayment penalty for early payment.
In June of 2001 and as amended in June 2002, the Company, through its
wholly owned subsidiary, IDWT, entered into a mortgage on the three
buildings located at its manufacturing facility in Shenzhen, PRC. The
amount borrowed was RMB 10,000,000, approximately $1,200,000 at
prevailing exchange rates, for three years at a variable interest rate
that ranged from 7.9% to 8.3% during the year, scheduled to be repaid
in three annual installments, the first due in June 2003. As of
October 31, 2004 approximately $403,000 remains outstanding. If the
exchange rate between the RMB and the USD should change the remaining
outstanding amount will vary in USD terms.
10. LINES OF CREDIT
On March 9, 2004, as subsequently amended, the Company entered into an
asset based lending program for a $5,000,000 line of credit secured by
IDW's accounts receivable, inventory, equipment, and intangibles. The
agreement was for twenty four months at an interest rate of 4% above
the "prime rate" (4.75% at October 31, 2004) with a minimum monthly
charge of $10,000. As of October 31, 2004 the Company had
approximately $4,398,000 currently due on the facility and had
available approximately $231,000 for use under this facility, based on
eligible receivables. This line replaced the Company's previously
existing lines.
F-20
11. COMMITMENTS AND CONTINGENCIES
a. Lease Obligations
-----------------
The Company leases premises under various operating leases. The
Company is currently obligated under the following significant
operating leases:
i. In March 2000, and as amended, the Company entered into a
5-year lease for office space in Rocklin, California. The
payment terms are $73,000 per year.
ii. In February 2003 the Company entered into a 2-year lease
for office space in Hong Kong. The payment terms are
$15,000 per year.
iii.The Company has entered into a lease agreement for a
workers' dormitory in Shenzhen, PRC. The lease on the
workers' dormitory expires on May 1, 2020 and costs
$233,700 per year. The expense recorded in fiscal years
ended October 31, 2004 and 2003 was offset by rental
income of $85,000 and $67,000, respectively.
iv. The Company has entered into various lease agreements for
individual employee quarters in Shenzhen, PRC. The lease
terms of these quarters range from six to sixty months.
The yearly lease payments range from $1,800 to $23,100.
During the fiscal year ended October 31, 2004, the Company
entered into six of the aforementioned leases with terms
of between six and twelve months and yearly lease payments
of between $1,500 and $13,000.
v. In November 2002 the Company entered into a one-year lease
at an annual cost of $40,600 for housing accommodation for
an officer of the Company. In August 2004 the lease term
was extended to expire in July 2005.
vi. In July 2004 the Company entered into a ten-year lease
agreement for additional factory and dormitory space in
Shenzhen, PRC. The lease expires on August 31, 2014 and
costs $283,000 per year. The lease has an option to renew
for an additional ten years at the same terms and lease
rate. The expense recorded in the fiscal year ended
October 31, 2004 was $47,000.
The following is a schedule of future minimum lease payments
under non-cancelable operating leases as of October 31, 2004 (in
thousands):
F-21
Minimum Lease Net Lease
Commitments Sublease Income Commitments
------------- --------------- -----------
2005 645 (89) 556
2006 547 - 547
2007 547 - 547
2008 524 - 524
2009 517 - 517
Thereafter 3,822 - 3,822
------------- --------------- -----------
6,602 (89) 6,513
============= =============== ===========
For the periods ended October 31, 2004, 2003 and 2002, rental
expense was $515,000, $365,000 and $117,000, respectively.
b. Legal Matters
-------------
From time to time, the Company is involved in routine litigation
in the normal course of business. Management is not aware of any
outstanding litigation involving the Company.
c. Purchase Commitments
--------------------
The Company enters into forward purchase commitments in the
normal course of business in anticipation of orders from
customers not all of which are matched by contracts from
customers. The Company believes that such commitments will be
required for future production or could be cancelled without
material cost.
12. STOCKHOLDERS' EQUITY
a. Issuance of Common Stock
------------------------
In November 2003 the Company issued 68,000 shares of the
Company's common stock at $0.85 per share for services rendered.
55,000 shares were issued to the Company's independent Directors
as compensation and 13,000 shares were issued for consulting
services. The securities issued for services rendered, other that
those issued for Directors' compensation which were registered
under an S-8 registration statement, were not registered under
the Securities Act of 1933, as amended, and therefore fall under
the restrictions of Rule 144 of The Securities Act of 1933, as
amended.
In December 2003, the Company issued 3,333,335 shares of the
Company's common stock at $1.50 per share in a private placement.
The proceeds of $5,000,000 were used for working capital and
operating expenses. The securities issued in this private
placement were registered under Form S-1 with the Securities and
Exchange Commission on February 18, 2004.
F-22
In May 2004, the Company issued 4,500,000 shares of the Company's
common stock at $4.50 per share in a private placement. The
proceeds of $20,250,000 were used for working capital and
operating expenses. The securities issued in this private
placement were registered under Form S-1 with the Securities and
Exchange Commission on June 25, 2004.
During the fiscal year ended October 31, 2004, the Company issued
1,051,760 shares of the Company's common stock as a result of
warrant exercises. The shares were issued at exercise prices
ranging from $0.16 to $2.45 per share. 280,000 shares of the
securities issued by exercise of warrants were registered under
Form S-1 with the Securities and Exchange Commission on February
18, 2004. The remaining 771,760 shares were not registered under
the Securities Act of 1933, as amended, and therefore fall under
the restrictions of Rule 144 of The Securities Act of 1933, as
amended.
During the fiscal year ended October 31, 2004, the Company issued
635,375 shares as a result of stock options exercised. The shares
were issued at exercise prices ranging from $0.15 to $2.50. The
shares were issued under the Company's stock option plans.
b. Stock Option Plans
------------------
The Company maintains the 1990 Employee Equity Incentive Plan for
selected executives, employees and directors for which 360,666
shares of common stock have been reserved for issuance under the
plan. The Plan permits the granting of options for terms not to
exceed ten years from the date of grant. The options generally
vest ratably over a four-year period and are exercisable subject
to terms established in the plan document. The exercise price of
the options granted under the Plan must be equal to or greater
than the fair market value of the shares on the date of grant for
incentive stock options and not less than 85 percent of the fair
market value for nonqualified stock options. The exercise price
of the options granted by the Company has generally been equal to
or greater than fair market value at the date of grant. There
were 8,166 options cancelled in the plan in the year ended
October 31, 2004, 25,000 options cancelled in the plan in the
year ended October 31, 2003, and there was no activity in the
plan in the year ended October 31, 2002. This Plan has now
expired and no new options are available for grant.
In September 2000, the Company established the 2000 Employee
Equity Incentive Plan for certain key employees of the Company.
The Plan also permits the granting of stock options, restricted
stock awards, stock appreciation rights, stock units and other
stock grants to certain persons with a relationship with the
Company, including agents, consultants, advisors, independent
contractors, sales representatives, distributors, principals and
retail distribution outlets for the Company's products. The Plan
provides for up to 1,632,800 shares of stock that are authorized
for issuance. The price of each share of stock covered by an
option shall not be less than 100% of the fair value of the
Company's common stock on the date of grant. Each option
certificate shall have an exercise period of six months to ten
years. There were 1,375,000 options granted, 238,375 options
exercised and 19,131 options cancelled during the year ended
October 31, 2004; 536,006 options granted and 205,000 options
F-23
cancelled during the year ended October 31, 2003 and 515,000
options granted and 68,000 options cancelled during the year
ended October 31, 2002. At October 31, 2003 approximately 413,800
options are available for grant under the Plan.
In October 1999, the Company established the 1999 Stock Option
Plan for Non-Employee Directors. This Plan provides for the
issuance of up to 300,000 shares of the Company's common stock to
existing Directors and, in the case of extra services or duties,
past directors. Unless otherwise provided in the option grant,
the options vest over the year following the date of grant and
expire after the later of five years after the date of grant or
five years after termination as a Director. During the year ended
October 31, 2004 there were 165,000 options exercised and 11,432
cancelled; during the year ended October 31, 2003 there were
6,000 options granted under the plan and 12,250 options were
cancelled; and during the year ended October 30, 2002 there were
30,000 options exercised under the Plan.
From fiscal 1999 to 2001 the board had granted 235,000 options to
various current and former directors at exercise prices ranging
from $0.50 to $0.78 that are not part of compensation plans. No
compensation expense was recorded for these options for the
periods ended October 31, 2004, 2003, and 2002. During the year
ended October 31, 2004, 232,000 of these options were exercised.
In addition, 1,000,000 additional options were granted to the
Company's incoming CEO at an exercise price of $3.85.
The following is a summary of the status of all of the Company's
stock option plans as of October 31, 2004, 2003 and 2002 and
changes during the periods ended on those dates:
Weighted
Number Average
Of Shares Exercise Price
--------------------- --------------------
Options outstanding at
October 31, 2001 1,237,848 $ 1.21
Granted 515,000 0.42
Exercised (30,000) 0.25
Cancelled (68,000) 0.76
--------------------- --------------------
Options outstanding at
October 31, 2002 1,654,848 $ 1.00
Granted 542,006 0.26
Exercised - -
Cancelled (242,250) 0.70
--------------------- --------------------
Options outstanding at
October 31, 2003 1,954,604 $ 0.78
Granted 1,375,000 3.97
Exercised (635,375) 0.46
Cancelled (38,729) 2.04
F-24
Options outstanding at
October 31, 2004 2,655,500 $ 2.57
===================== ====================
Options exercisable at :
October 31, 2004 1,034,501 $ 1.70
===================== ====================
October 31, 2003 1,157,098 $ 1.18
===================== ====================
October 31, 2002 1,038,332 $ 0.93
===================== ====================
The following table summarizes information about stock options
outstanding and exercisable at October 31, 2004:
- ----------------------------------------------------------------------------------------------------------------------
Number of Weighted average Weighted Weighted
shares remaining average Number of options average
Range of exercise outstanding at contractual life exercise price exercisable at exercise price
price October 31, 2004 (years) per share October 31, 2004 per share
- ----------------------------------------------------------------------------------------------------------------------
$0.15-$0.25 41,000 3.12 $ 0.15 41,000 $ 0.15
$0.26-$0.35 422,000 3.62 $ 0.32 153,751 $ 0.32
$0.36-$0.55 300,000 2.26 $ 0.41 224,000 $ 0.41
$0.56-$0.80 118,000 1.19 $ 0.67 118,000 $ 0.67
$0.81-$1.20 60,000 1.11 $ 0.85 60,000 $ 0.85
$1.21-$1.80 314,500 1.82 $ 1.93 202,750 $ 1.74
$1.81-$2.70 75,000 0.82 $ 3.70 75,000 $ 3.70
$2.71-$4.00 1,000,000 6.85 $ 3.85 - $ -
$4.01-$6.00 325,000 4.21 $ 5.19 160,000 $ 5.38
----------------------------------------------------------------------------------------------
2,655,500 4.29 $ 2.57 1,034,501 $ 1.70
==============================================================================================
c. Stock Warrants
The Company, from time-to-time has issued stock warrants as
payment for fees, interest, and services rendered. For the
periods ended October 31, 2004, 2003 and 2002, the Company had
outstanding warrants to purchase 828,964, 2,066,887 and 1,234,861
shares of common stock, respectively. All warrants are
exercisable at a weighted average price per share of $1.02, have
a term of five years and are exercisable immediately or over the
term of the related note if any. For the period ended October 31,
2004, 206,666 warrants were issued, 1,051,760 warrants were
exercised and 67,440 warrants were cancelled. For the periods
ended October 31, 2003 and 2002, no warrants to purchase common
stock were exercised and none lapsed. For the periods ended
October 31, 2003 and 2002, 458,437 and 15,000 warrants were
granted, respectively.
F-25
13. INCOME TAXES
The Company has not recorded an income tax expense or benefit for the
years ended October 31, 2004 and 2003.
Income before provision for income taxes consisted of the following
(in thousands):
October 31, October 31, October 31,
2004 2003 2002
Domestic (1,110) (789) (6,940)
Foreign 2,184 (19) (2)
----------- ----------- -----------
Pre-tax profit (loss) $ 1,074 $ 808 $(6,942)
=========== =========== ===========
The provision for income taxes differs from the amount obtained by
applying the statutory federal income tax rate to income before taxes
and follows (in thousands):
October 31, October 31, October 31,
2004 2003 2002
Pre-tax profit (loss) $ 1,074 $ (808) $ (6,942)
-------------- -------------- --------------
Computed Federal income tax
benefit at 34.0% 365 (275) (2,360)
Computed state income tax
benefit at 8.4%, net of federal
income benefit (65) (47) (202)
Effect of difference between
Hong Kong and PRC tax
rates and U.S. Federal and
state tax rates (341) 161 207
Impairment of goodwill - - 1,937
Other permanent differences (447) (234) 561
Change in valuation allowance 488 395 (143)
-------------- -------------- --------------
$ -- $ -- $ --
============== ============== ==============
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at
October 31, 2004 and 2003 are presented below (amounts in thousands):
F-26
2004 2003
--------------------------------------
Deferred tax assets:
Net operating loss (NOL) carry forwards $ 3,996 $ 3,564
Allowance for doubtful accounts receivable - 7
Inventory obsolescence 2 77
Write-off of machinery - 41
Accrued expenses 302 19
-------------------------------------
Total gross deferred tax assets 4,269 3,708
Deferred tax Liabilities:
Depreciation and amortization (77) (4)
--------------------------------------
Total gross deferred tax Liabilities (77) (4)
Less valuation allowance (4,192) (3,704)
--------------------------------------
Net deferred tax asset $ - $ -
================= ==================
The Company has provided a valuation allowance for 100% of its
deferred tax assets at October 31, 2004, 2003 and 2002 as the Company
concluded that it was not more likely than not that it would be able
to realize these assets due principally to the Company's history of
losses.
As of October 31, 2004 and 2003, the Company had an estimated federal
net operating loss carry forward of approximately $10,351,000 and
$9,493,000 respectively, expiring through 2024.
PRC Taxation:
------------
The fiscal tax year end of the PRC subsidiaries is December 31. The
tax rate for both companies is 15%. At December 31, 2003 IDWT and
MULCD had a tax loss carry forward of $116,000 and $222,000,
respectively. A 100% valuation allowance for the deferred tax assets
has been provided as it could not be concluded that it was more likely
than not that these assets would be realized.
Hong Kong Taxation:
-------------------
The rate of taxation in Hong Kong is 17.5%. A 100% valuation allowance
for the deferred tax assets has been provided as it could not be
concluded that it was more likely than not that these assets would be
realized. As of October 31, 2004 and 2003 the Company had estimated
net operating loss carry forwards in Hong Kong of approximately
$256,000 and $729,000, respectively.
F-27
14. RETIREMENT PLANS
The Company maintains the "IDW 401(k) Plan" (the "Plan") under the
provisions of Section 401(k) of the Internal Revenue Code. The Plan
covers substantially all full-time U.S. employees. At its option, the
Company can make discretionary matching contributions. To date, the
Company has not made such a contribution.
For its Hong Kong employees, the Company currently contributes
approximately $9,000 per year to a "Mandatory Provident Fund" (MPF)
under the laws of the Hong Kong Special Administrative Region of the
PRC.
15. SEGMENT AND GEOGRAPHIC INFORMATION
The Company produces displays or display modules for end products of
OEMs manufacturers and hence operates in one segment. However, the
Company has four major geographic territories where it sells and
distributes essentially the same products. The geographic territories
are the United States, Hong Kong (including China), Asia (excluding
Hong Kong and China), and Europe. The following represents
geographical data for continuing operations (in thousands).
Revenues Fiscal Year Ended October 31
--------------------------------------------------------------------------------------------------------
2004 2003 2002
-----------------------------------------------------------
United States $ 19,615 $ 10,824 $ 11,266
China (including Hong Kong) 8,440 4,916 6,753
Asia (excluding Hong Kong and China) 10,152 4,538 2,183
Europe 7,051 1,690 566
Other 1,119 878 160
-----------------------------------------------------------
$ 46,377 $ 22,846 $ 20,928
=========== ========= =========
"Long-lived Assets"
--------------------------------------------
2004 2003
------------------------------
United States $ 112 $ 109
China (including Hong Kong) 16,306 4,687
Asia (excluding Hong Kong and
China) - -
Europe - -
Other - -
------------------------------
$ 16,418 $ 4,796
=========== =========
F-28
Major Customer
--------------
Sales to one customer for the periods ended October 31, 2004, 2003 and
2002, accounted for approximately 16%, 29% and 30%, respectively of
total sales. This customer represented 5% and 9% of the Company's
accounts receivable at October 31, 2004 and 2003, respectively
16. QUARTERLY CONSOLIDATED FINANCIAL DATA (UN-AUDITED)
The following financial information reflects all normal recurring
adjustments that are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. The quarterly results for the
years ended October 31, 2004, 2003 and 2002 are set forth in the following
table:
Diluted Basic
Earnings Earnings
Net Earnings (Loss) Per (Loss) Per
2004 Sales Gross Profit (Loss) Share Share
---- ----- ------------ ------ ----- -----
First Quarter $ 9,796 $ 2,378 $ 621 $ 0.03 $ 0.02
Second Quarter 10,624 2,168 (449) (0.02) (0.02)
Third Quarter 11,654 2,434 370 0.01 0.01
Fourth Quarter 14,303 3,131 532 0.02 0.02
------------------------------------------------------------------------------------
Total $ 46,377 $ 10,111 $ 1,074 $ 0.04 $ 0.04
====================================================================================
2003
----
First Quarter $ 5,121 $ 1,492 $ 24 $ - $ -
Second Quarter 4,688 931 (628) (0.03) (0.03)
Third Quarter 5,889 1,305 (314) (0.02) (0.02)
Fourth Quarter 7,148 1,518 110 0.01 0.01
------------------------------------------------------------------------------------
Total $ 22,846 $ 5,246 $ (808) $ (0.04) $ (0.04)
====================================================================================
2002
----
First Quarter $ 4,611 $ 1,155 $ (299) $ (0.02) $ (0.02)
Second Quarter 5,584 1,383 (178) (0.01) (0.01)
Third Quarter 5,316 1,321 (347) (0.02) (0.02)
Fourth Quarter 5,417 1,339 (6,118) (0.32) (0.32)
------------------------------------------------------------------------------------
Total $ 20,928 $ 5,198 $ (6,942) $ (0.36) $ (0.36)
====================================================================================
F-29
SUPPLEMENTARY INFORMATION
F-30
INTERNATIONAL DISPLAYWORKS, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
For the Year Ended October 31, 2004, the Year Ended October 31, 2003
The Year Ended October 31, 2002
Balance at Charged to Balance
beginning costs and Deductions at End
Description of Period Expenses (write-offs) of Period
- --------------------------------------- --------------- --------------- --------------- --------------
October 31, 2002
Allowance for doubtful accounts $ 196 $ 237 $ (92) $ 341
Allowance for obsolete inventory $ 585 $ (216) $ - $ 369
October 31, 2003
Allowance for doubtful accounts $ 341 $ 6 $ (307) $ 40
Allowance for obsolete inventory $ 369 $ 142 $ - $ 511
October 31, 2004
Allowance for doubtful accounts $ 40 $ 82 $ (21) $ 101
Allowance for obsolete inventory $ 511 $ (44) $ - $ 467
F-31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, about the effectiveness of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of the end of the period covered by this
Form 10-K are effective in timely alerting them to material information required
to be included in this Form 10-K.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for in Item 10 of Part III is incorporated by
reference from the definitive proxy statement of the Company to be filed with
the Securities and Exchange Commission within 180 days from fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for in Item 11 of Part III is incorporated by
reference from the definitive proxy statement of the Company to be filed with
the Securities and Exchange Commission within 180 days from fiscal year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for in Item 12 of Part III is incorporated by
reference from the definitive proxy statement of the Company to be filed with
the Securities and Exchange Commission within 180 days from fiscal year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for in Item 13 of Part III is incorporated by
reference from the definitive proxy statement of the Company to be filed with
the Securities and Exchange Commission within 180 days from fiscal year end.
39
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information called for in Item 14 of Part III is incorporated by
reference from the definitive proxy statement of the Company to be filed with
the Securities and Exchange Commission within 180 days from fiscal year end.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Financial Statements (see Item 8.)
o Report of Independent Registered Public Accounting Firm
(Grant Thornton)
o Consolidated Balance Sheets - October 31, 2004 and October
31, 2003
o Consolidated Statements of Operations - Years Ended October
31, 2004, October 31, 2003 and October 31, 2002
o Consolidated Statements of Stockholders' Equity - Years
Ended October 31, 2004, October 31, 2003 and October 31,
2002
o Consolidated Statements of Cash Flows - Years Ended October
31, 2004, October 31, 2003 and October 31, 2002
o Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
o Schedule II - Valuation and Qualifying Accounts (accounts
not required or not material have been omitted)
(3) Exhibits
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger merging Morrow Snowboards, Inc. into
Granite Bay Technologies, Inc. (1)
2.2 Agreement and Plan of Merger merging Granite Bay Technologies,
Inc. into International DisplayWorks, Inc.(2)
3.1 Certificate of Incorporation (2)
3.2 Bylaws(22)
4.2 Securities Purchase Agreement dated October 31, 1997 among the
Registrant, Morrow, LLC, Morrow Snowboards ULC, Westbeach
Snowboard Canada Ltd. and the security holders of Westbeach
Snowboard Canada Ltd. listed therein (6)
4.3 Forms of Warrant (26)
4.4 Forms of Placement Agent Warrant (27)
10.1 Forms of Warrant (3)
40
10.2 Morrow Snowboards, Inc. Employee Equity Incentive Plan as amended
and restated February 13, 1997 (4)
10.3 Form of Nonqualified Stock Option Agreement (3-4)
10.4 Form of Incentive Stock Option Agreement (3-4)
10.5 Form of Indemnification Agreement (3-4)
10.6 Stock Option Plan for Non-Employee Directors (3-4)
10.7 Securities Purchase Agreement dated October 31, 1997 among the
Registrant, Morrow, LLC, Morrow Snowboards ULC, Westbeach
Snowboard Canada Ltd. and the Security holders of Westbeach
Snowboard Canada Ltd. listed therein (6)
10.8 Guarantee and Postponement of Claim by Morrow Westbeach Canada
ULC in favor of Foothill Capital Corporation dated as of May 7,
1998 (as assigned to Capitol Bay Management, Inc.) (19)
10.9 Intellectual Property and Security Agreement dated as of May 7,
1998, between Morrow Snowboards, Inc. and Foothill Capital
Corporation (as assigned to Capitol Bay Management, Inc.)(19)
10.10 General Security Agreement dated as of May 7, 1998, between
Morrow Westbeach Canada ULC and Foothill Capital Corporation (as
assigned to Capitol Bay Management, Inc.)(19)
10.11 Security Agreement-Stock Pledge dated as of May 7, 1998, between
Morrow Snowboards, Inc. and Foothill Capital Corporation (as
assigned to Capitol Management, Inc.)(19)
10.12 Assignment and Acknowledgment Agreement dated May 7, 1999,
between Capitol Bay Management, Inc. and Foothill Capital
Corporation, the Registrant and Westbeach Snowboard U.S.A.
Inc.(19)
10.13 Acquisition Agreement dated as of March 26, 1999, by and between
K2 Acquisitions, Inc. and the Registrant (10)
10.14 Memorandum of Understanding between Capitol Bay Management, Inc.
and the Company (11)
10.15 Payment Agreement effective June 17, 1999 among Morrow
Snowboards, Inc., certain Petitioning Creditors named therein and
Robert K. Morrow, Inc., a Disbursing Agent for the Petitioning
Creditors (12)
10.16 Promissory Note dated August 25, 1999, given by Morrow
Snowboards, Inc. to Dennis and Carol Pekkola (12)
10.17 Trust Deed dated August 25, 1999, given by Morrow Snowboards,
Inc. to Robert Smejkel, as Trustee, with Dennis and Carol Pekkola
as beneficiaries (13)
10.18 Subordination Agreement dated August 25, 1999, among Morrow
Snowboards, Inc., Robert K. Morrow, as Escrow Agent for certain
creditors of the Company and the Pekkolas (13)
10.19 Morrow Snowboards, Inc. 1999 Stock Option Plan for Non-Employee
Directors (14)
10.20 Asset Purchase Agreement dated as of November 12, 1999, among
Westbeach Canada ULC and Westbeach Sports Inc.(15)
10.21 General Assignment dated as of November 12, 1999, among Westbeach
Canada ULC and Westbeach Sports Inc.(15)
10.22 Assignment of Lease and Consent among Westbeach Canada ULC,
Westbeach Sports Inc. and Western Immo Holdings, Inc. dated as of
November 12, 1999 (15)
10.23 Assignment of Lease and Consent among Westbeach Canada ULC,
Westbeach Sports Inc. and Welf Arne Von Dehn dated as of November
12, 1999 (15)
41
10.24 Bill of Sale between Westbeach Canada ULC and Westbeach Sports
Inc. dated as of November 12, 1999 (15)
10.25 Letter from Arthur Andersen, LLP dated January 24, 2000 (16)
10.26 Placement Agent Agreement dated January 13, 2000, between Morrow
Snowboards, Inc. and Capitol Bay Securities, Inc (17)
10.27 Securities Purchase Agreement effective as of January 31, 2000,
among Morrow Snowboards, Inc. and the Sellers (18)
10.28 Sale and Purchase Agreement February 1, 2000 among Vikay
Industrial (Hong Kong) Ltd. and International DisplayWorks, Inc.
(19)
10.29 Supplemental Deed and Charge dated February 1, 2000, between
International DisplayWorks (Hong Kong) Ltd. and International
DisplayWorks, Inc., as Chargors, and Vikay Industrial Ltd. (in
Judicial Management) and Vikay Industrial (Hong Kong) Ltd. as
Chargees (18)
10.30 2000 Equity Incentive Plan for Non-Employee Directors (21)
10.31 Stock Option Agreements [Form of] (23)
10.32 Equity Incentive Plan (21)
10.33 Employment Contract with Ian Bebbington (24)
10.34 Manufacturing Agreement (25)
10.35 Form of Common Stock Purchase Agreement (26)
10.36 Form of Promissory Note (26)
10.37 Form of Securities Purchase Agreement (27)
10.38 Form of Registration Rights Agreement (27)
10.39 Memorandum of Understanding between Grand Pacific
Optoelectronincs Corporation and International DisplayWorks, Inc.
(28)
10.40 Form of Securities Purchase Agreement (29)
10.41 Form of Registration Rights Agreement (29)
10.42 Asset Purchase Agreement by and between International
DisplayWorks (Hong Kong) Limited and Grand Pacific Petrochemical
Corporation dated June 24, 2004 (30)
10.43 Employment Letter Agreement with Thomas A. Lacey dated September
7, 2004 (31)
23.1 Consent of Grant Thornton
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
(1) Incorporated herein by reference from the Company's Current
Report on Form 8-K dated November 6, 2000 (File No. 0-753683).
(2) Incorporated by reference from the Company's Current Report on
Form 8-K dated October 31, 2001 (File No. 0-27002).
(3) Incorporated herein by reference from the Company's registration
statement on Form S-1 (File No. 33-97800).
(4) Incorporated by reference from the Company's Proxy Statement for
the meeting held on May 22, 1997 (File No. 000-27002).
(5) Incorporated herein by reference from the Company's 1995 Annual
Report on Form 10-K (File No. 0-27002). (6) Incorporated by
reference from the Company's Current Report on Form 8-K dated
October 31, 1997 (File No. 0-27002).
(7) Incorporated by reference from the Company's Current Report on
Form 8-K dated November 11, 1997 (File No. 0-27002).
42
(8) Incorporated by reference from the Company's 1997 Annual Report
on Form 10-K (File No. 0-27002). (9) Incorporated by reference
from the Company's Current Report on Form 8-K dated May 8, 1998
(File No. 0-27002).
(10) Incorporated by reference from the Company's Current Report on
Form 8-K dated March 26, 1999 (File No. 0-27002).
(11) Incorporated by reference from the Company's Current Report on
Form 8-K dated April 27, 1999 (File No. 0-27002).
(12) Incorporated by reference from the Company's Current Report on
Form 8-K dated June 28, 1999 (File No. 0-27002).
(13) Incorporated by reference from the Company's Current Report on
Form 8-K dated August 25, 1999 (File No. 0-27002).
(14) Incorporated by reference from the Company's Current Report on
Form 8-K dated September 30, 1999 (File No. 0-27002).
(15) Incorporated by reference from the Company's Current Report on
Form 8-K dated November 12, 1999 (File No. 0-27002).
(16) Incorporated by reference from the Company's Current Report on
Form 8-K dated January 14, 2000 (File No. 0-27002).
(17) Incorporated by reference from the Company's Current Report on
Form 8-K dated January 31, 2000 (File No. 0-27002).
(18) Incorporated by reference from the Company's Current Report on
Form 8-K dated January 31, 2000 (File No. 0-27002).
(19) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended January 1, 2000 (File No.0-27002).
(20) Incorporated by reference from the Company's Proxy Statement for
the meeting held on September 28, 2000 (File No. 707647).
(21) Incorporated by reference from the Company's current report on
Form 8-K filed October 15, 1999 (File No. 000-27002).
(22) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended October 31, 2001 (File No
000-27002).
(23) Incorporated by reference from the Company's registration
statement on Form S-8 effective May 1, 2002 (File No. 333-87296).
(24) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended October 31, 2002 (File No
000-27002).
(25) Incorporated by reference from the Company's current report on
Form 8-K filed on April 24, 2003 (File No. 000-27002).
(26) Incorporated by reference from the Company's current report on
Form 8-K filed on October 10, 2003 (File No. 000-27002).
(27) Incorporated by reference from the Company's current report on
Form 8-K filed on December 30, 2003 (File No 000-27002).
(28) Incorporated by reference from the Company's current report on
Form 8-K filed on April 15, 2004 (File No 000-27002).
(29) Incorporated by reference from the Company's current report on
Form 8-K filed on May 13, 2004 (File No 000-27002).
(30) Incorporated by reference from the Company's current report on
Form 8-K filed on June 24, 2004 (File No 000-27002).
(31) Incorporated by reference from the Company's registration
statement on Form S-8 filed on November 12, 2004 (File No
333-120404).
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.,
A Delaware corporation
Dated: January 3, 2005 By: /s/ Thomas A. Lacey
--------------- ------------------------------
Thomas A. Lacey,
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1934 this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
INTERNATIONAL DISPLAYWORKS, INC.,
A Delaware corporation
Dated: January 3, 2005 By: /s/ Stephen C. Kircher
--------------- -----------------------------
Stephen C. Kircher,
Chairman
Dated: December 18, 2004 By: /s/ Anthony Genovese
----------------- -----------------------------
Anthony Genovese,
Vice-Chairman
Dated: January 3, 2005 By: /s/ William H. Hedden
--------------- -----------------------------
William H. Hedden, Director
Dated: December 19, 2004 By: /s/ Ronald A. Cohan
----------------- -----------------------------
Ronald Cohan, Director
44
Dated: December 28, 2004 By: /s/ Timothy B. Nyman
----------------- -----------------------------
Timothy Nyman, Director
Dated: December 20, 2004 By: /s/ D. Paul Regan
----------------- -----------------------------
D. Paul Regan, Director
Dated: December 28, 2004 By: /s/ Glenn Neland
----------------- -----------------------------
Glenn Neland, Director
Dated: January 3, 2005 By: /s/ Thomas A. Lacey
--------------- -----------------------------
Thomas A. Lacey,
Chief Executive Officer
(Principal Executive Officer)
Dated: December 22, 2004 By: /s/ Ian N. Bebbington
----------------- -----------------------------
Ian N. Bebbington
Chief Financial Officer
(Principal Financial Officer
45