EXHIBIT 3
GLOBAL-TECH APPLIANCES INC.
Quarterly Report for the Three Months ended December 31, 2000
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Except for historical information, certain statements contained herein are
forward-looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
or variations of such words and similar expressions are intended to identify
such forward looking statements. These forward looking statements are subject to
risks and uncertainties, including but not limited to, the impact of competitive
products and pricing, product demand and market acceptance, new product
development, reliance on key strategic alliances, availability and cost of raw
materials, currency fluctuations, uncertainties associated with investments, the
regulatory environment, fluctuations in operating results and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission including its most recent Report on Form 20-F.
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GLOBAL-TECH APPLIANCES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts expressed in thousands of United States dollars)
December 31, March 31,
------------ -----------
2000 2000
------------ -----------
(unaudited) (audited)
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 40,644 $ 53,647
Investment in US treasury bills and marketable securities................ 13,282 20,278
Accounts receivable, net................................................. 12,020 7,167
Deposits prepayments & other assets...................................... 9,002 3,364
Inventories, net......................................................... 22,104 18,160
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Total current assets................................................. 97,052 102,616
Property, plant and equipment................................................. 33,396 29,305
Construction-in-progress...................................................... 5,438 7,320
Patents....................................................................... 14 14
Loan to a director............................................................ 384 461
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Total assets......................................................... $136,284 $ 139,716
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term bank loans.................................. $ 1,604 $ 1,063
Accounts payable......................................................... 12,853 8,736
Advance payments from customers.......................................... 94 71
Accrued expenses......................................................... 3,223 3,029
Income tax provision..................................................... 2,993 2,505
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Total current liabilities............................................ 20,767 15,404
Long-term bank loans.......................................................... 689 1,407
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Total liabilities.................................................... 21,456 16,811
============ ===========
Shareholders' equity:
Preferred stock, par value $0.01; 1,000,000 shares authorized, no
shares issued..................................................... - -
Common stock, par value $0.01; 50,000,000 shares authorized; 12,830,000
shares issued; 12,137,353 shares outstanding as of
December 31, 2000; 12,126,101 shares outstanding as of March 31, 128 128
2000..............................................................
Additional paid-in capital............................................... 81,662 81,662
Retained earnings........................................................ 38,245 46,237
Accumulated other comprehensive deficit.................................. (570) (364)
Less: Treasury stock, at cost, 692,647 shares, as of December 31, 2000;
703,899 shares as of March 31, 2000.................................. (4,637) (4,758)
------------ -----------
Total shareholders' equity........................................... 114,828 122,905
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Total liabilities and shareholders' equity........................... $136,284 $139,716
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GLOBAL-TECH APPLIANCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts expressed in thousands of United States dollars)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- ---------------------
2000 1999 2000 1999
------------------------- ---------------------
(unaudited) (unaudited) (unaudited) (unaudited)
(in thousands, except per share data)
Net sales ................................... $ 29,755 $ 25,879 $ 84,881 $ 72,837
Cost of goods sold .......................... (23,370) (19,627) (66,322) (55,321)
----------- ---------- --------- ----------
Gross profit ................................ 6,385 6,252 18,559 17,516
Selling, general and administrative expenses (4,475) (4,416) (12,292) (12,037)
Unusual item ................................ -- -- -- (500)
----------- ---------- --------- ----------
Operating income ............................ 1,910 1,836 6,267 4,979
Other income, net ........................... 1,045 957 2,781 2,585
----------- ---------- --------- ----------
Income before income taxes .................. 2,955 2,793 9,048 7,564
Provision for income taxes .................. (169) (41) (490) (229)
----------- ---------- --------- ----------
Net income .................................. $ 2,786 $ 2,752 $ 8,558 $ 7,335
=========== ========== ========= ==========
Net income per share ........................ $ 0.23 $ 0.23 $ 0.71 $ 0.61
=========== ========== ========= ==========
Weighted average number of shares outstanding 12,136 12,121 12,134 12,104
=========== ========== ========= ==========
GLOBAL-TECH APPLIANCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts expressed in United States dollars)
Nine Months Ended
December 31,
-----------------------------------
2000 1999
-----------------------------------
(unaudited) (unaudited)
(in thousands)
Cash flows from operating activities:
Net income $ 8,558 $ 7,335
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,192 2,691
(Increase) decrease in accounts receivable, net (4,853) 2,274
Increase in deposits, prepayments and other assets (5,638) (424)
Increase in inventories (3,944) (616)
Increase (decrease) in accounts payable 4,118 (602)
Increase (decrease) in advance payments from customers 23 (27)
Increase in accrued expenses 194 527
Increase in income tax provision 488 228
Decrease (decrease) in loan to directors 77 (460)
----------------- ---------------
Net cash provided by operating activities 2,215 10,926
----------------- ---------------
Cash flows from investing activities:
Decrease (increase) in investments in marketable securities (35,175) (32,172)
Proceed from disposal of investments in marketable securities 41,965 -
Purchases of property, plant and equipment (5,401) (2,887)
----------------- ---------------
Net cash provided by (used in) investing activities 1,389 (35,059)
----------------- ---------------
Cash flows from financing activities:
Addition of a new loan 646 -
Issuance of treasury stock 66 169
Repayment of short-term bank borrowings (1) (1,123)
Repayment of long-term bank loans (823) -
Dividend paid (16,495) (654)
----------------- ---------------
Net cash (used in) provided by financing activities (16,607) (1,608)
----------------- ---------------
Net decrease in cash and cash equivalents (13,003) (25,741)
Cash and cash equivalents at beginning of year 53,647 56,514
----------------- ---------------
Cash and cash equivalents at end of year $ $
40,644 30,773
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GLOBAL-TECH APPLIANCES INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(Amounts expressed in United States dollars unless otherwise stated)
Note 1 -- GENERAL
The accompanying unaudited consolidated financial statements of Global-Tech
Appliances Inc. ("Global-Tech") have been prepared as of December 31, 2000 and
for the nine-month period then ended. The interim financial statements should be
read in conjunction with the annual financial statements as of March 31, 2000.
These statements reflect all adjustments which are, in the opinion of
management, necessary to fairly present Global-Tech's financial position as of
December 31, 2000 and its results of operations and cash flows for the nine
months ended December 31, 2000. The results of operations for the nine months
ended December 31, 2000 should not be considered indicative of the results
expected for the year ending March 31, 2001.
Global-Tech Appliances Inc. ("Global-Tech"), formerly known as Wing Shing
International Limited, is incorporated in the British Virgin Islands and is a
holding company. Global-Tech and its subsidiaries are collectively referred to
as the "Company." The Company is a designer and manufacturer of a wide range of
small household appliances. The Company's manufacturing operations are located
in Dongguan and Shenzhen, the People's Republic of China ("China"). The
Company's products are sold to customers primarily in the United States and
Europe.
On April 14, 1998, Global-Tech issued 4,200,000 shares of common stock, par
value $0.01 per share, in connection with the initial public offering of its
common stock (the "IPO"). On May 7, 1998, the Company issued an additional
630,000 shares of common stock, par value $0.01 per share, to the underwriters
of the IPO pursuant to their exercise in full of the over-allotment option
granted by the Company.
As of December 31, 2000, Global-Tech had repurchased an aggregate of 692,647
shares of common stock, par value $0.01 per share, held as treasury stock, in
connection with stock repurchase plans authorized by its Board of Directors.
As of December 31, 2000, Global-Tech had issued an aggregate of 47,253 shares of
common stock, par value $0.01 per share, in connection with stock grants under
an employee stock purchase plan authorized by its Board of Directors.
Note 2 -- SUBSIDIARIES
Details of Global-Tech's principal subsidiaries as of December 31, 2000 were as
follows:
Percentage of
Equity Interest
Name of Subsidiary Place of Incorporation Held
--------------------------------------------------------- ------------------------- ------------------
Pentalpha Enterprises Limited Hong Kong 100.0%
Pentalpha Hong Kong Limited Hong Kong 100.0%
Kwong Lee Shun Trading Company Limited Hong Kong 100.0%
Dongguan Wing Shing Electrical Products China 100.0%
Factory Company Limited
Wing Shing Products (BVI) Company Limited British Virgin Islands 100.0%
Wing Shing Overseas Limited British Virgin Islands 100.0%
Global-Tech USA, Inc. United States of America 100.0%
Note 3 -- SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed in the preparation of these
statements are identical to those applied in preparing the latest annual
financial statements.
GLOBAL-TECH APPLIANCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE QUARTER ENDED DECEMBER 31, 2000
General
Global-Tech Appliances Inc. (the "Company") is a designer and
manufacturer of a wide range of small household appliances. The Company's
products, all of which are manufactured in China, are sold under brand names
such as Black & Decker(R), DeLonghi(R), Dirt Devil(R), Hamilton Beach(R),
Krups(R), Morphy Richards(R), Moulinex(R), Mr. Coffee(R), Proctor-Silex(R),
Remington(R), Sunbeam(R), Vidal Sassoon(R), and West Bend(R). The Company
manufactures over 160 different models, primarily in six product categories: (i)
kitchen appliances such as coffeemakers, breadmakers and deep fryers; (ii)
personal, beauty and health care products such as hair dryers and hair setters;
(iii) garment care products such as steam irons; (iv) travel products and
accessories such as travel irons; (v) floor care products such as upright vacuum
cleaners and hand-held steam vacuum cleaners; and (vi) environmental care
products such as humidifiers and air cleaners.
The Company was founded in 1963 and, for most of its history, operated
as a contract manufacturer of products developed by its customers. In recent
years, however, the Company has emphasized original design manufacturing. As an
original design manufacturer, the Company designs and develops proprietary new
products which it manufactures for its customers. The Company made this shift by
forming a product design and development team consisting of engineers who focus
on the development of new products. Net sales of the Company's ODM products
represented 77.5% and 63.8% of the Company's net sales during the three months
ended December 31, 1999 and December 31, 2000, respectively, and 77.2% and 65.5%
of the Company's net sales during the nine months ended December 31, 1999 and
December 31, 2000, respectively, with the remaining sales generated by its
contract manufacturing activities. Sales of ODM products have decreased as a
percentage of net sales. This trend is expected to continue in the near term
because of an anticipated increase in sales of new floor care products which are
primarily contract manufactured products. The Company believes this upgrade in
its product lines from commodity-type small household appliances to product
lines that justify its technology and processing capabilities will result in an
overall increase in net sales. The Company plans to continue to explore ways of
expanding its business by diversifying into new product categories with higher
profit margins.
The Company is a holding company and has no business operations other
than ownership of its subsidiaries. The wholly owned subsidiaries of the Company
are Wing Shing Products (BVI) Company Limited and Wing Shing Overseas Limited,
each a British Virgin Islands corporation; Pentalpha Enterprises Limited,
Pentalpha Hong Kong Limited and Kwong Lee Shun Trading Company Limited, each a
Hong Kong corporation; Dongguan Wing Shing Electrical Products Factory Limited,
a corporation formed under the laws of the People's Republic of China; and
Global-Tech USA, Inc., a Delaware corporation.
Since most of the Company's purchases and sales are denominated in U.S.
dollars, the Company's financial statements are presented in U.S. dollars, the
functional currency of the Company. The Company's financial statements are
prepared in accordance with U.S. generally accepted accounting principles.
References to an interim period refer to the first nine months of the Company's
fiscal year ended on December 31; for example, 2001 interim period refers to the
nine month period ended December 31, 2000. References to a quarterly period
refer to the Company's fiscal quarter ended on December 31; for example, 2001
quarterly period refers to the fiscal quarter ended December 31, 2000.
Results of Operations
The following table sets forth certain statement of income data as a
percentage of net sales for the periods indicated:
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------------- ---------------------------------
2000 1999 2000 1999
---------------- --------------- -------------- ----------------
Net sales...................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................. 78.5 75.8 78.1 76.0
---------------- --------------- -------------- ----------------
Gross profit................................... 21.5 24.2 21.9 24.0
Selling, general and administrative expenses... 15.0 17.1 14.5 16.5
Unusual item................................... -- -- -- 0.7
---------------- --------------- -------------- ----------------
Operating income............................... 6.5 7.1 7.4 6.8
Other income (expense), net.................... 3.5 3.7 3.3 3.5
---------------- --------------- -------------- ----------------
Income before income taxes..................... 10.0 10.8 10.7 10.3
Provision for income taxes .................... 0.6 0.2 0.6 0.3
---------------- --------------- -------------- ----------------
Net income..................................... 9.4% 10.6% 10.1% 10.0%
================ =============== ============== ================
Nine Months ended December 31, 2000 Compared with Nine Months ended December 31,
1999
Net sales. The Company's net sales consist of its gross invoiced sales
less discounts and returns. Net sales for the 2001 interim period were $84.9
million as compared to $72.8 million in the 2000 interim period. The increase in
net sales for the interim period reflects in large part the Company's successful
efforts in introducing its floor care products to the market. The Company
anticipates that the increase in net sales attributable to new sales of floor
care products will continue in the short term. The Company considers
manufacturing floor care products to be its first step in its strategy to
diversify and transform a portion of its manufacturing from relatively simple,
commodity-type personal care and other appliances to more advanced, higher-value
products and into new product categories. The Company plans to continue and
expand the diversification program with the introduction of other new products
later in fiscal 2002. The Company anticipates utilizing its recently expanded
factory facilities for manufacturing new floor care products and other new
products. The Company believes that sales in these product categories will,
because of their potentially higher profit margins, help sustain and support
further growth and offset anticipated weakness in personal care and
commodity-type product sales.
Net sales consist primarily of sales in the Company's six major product
categories: kitchen appliances; personal, beauty and health care products;
garment care products; travel products and accessories; floor care products; and
environmental care products. Sales in each such product category for the 2001
interim period as compared to the 2000 interim period were as follows: sales of
kitchen appliances decreased to $46.9 million, or 55.4% of net sales, from $48.2
million, or 66.3% of net sales; sales of personal, beauty and health care
products decreased to $3.2 million, or 3.8% of net sales, from $6.6 million, or
9.1% of net sales; sales of garment care products increased to $11.5 million, or
13.6% of net sales, as compared to $11.0 million, or 15.1% of net sales; sales
of travel products decreased to $2.8 million, or 3.3% of net sales, from $4.0
million, or 5.5% of net sales; sales of floor care products increased to $19.2
million, or 22.6% of net sales, from $1.5 million, or 2.1% of net sales; and
sales of environmental care products decreased to $100,000, or 0.1% of net
sales, from $220,000, or 0.3% of net sales.
Gross profit. Gross profit consists of net sales less cost of goods
sold, which includes the costs of raw materials, production materials, labor,
transportation, depreciation and factory overhead. Gross profit in the 2001
interim period was $18.6 million, or 21.9% of net sales, as compared to $17.5
million, or 24.0% of net sales, in the 2000 interim period. Gross profit as a
percentage of net sales decreased in the
2001 interim period due to a decline in the gross margins of certain existing
products resulting from lower prices extended by the Company to its customers
due to price pressures and an increase in certain manufacturing expenses such as
plastic resin, fuel, transportation and depreciation charges. The Company
intends to gradually transform some of its manufacturing by replacing older,
commodity-type products with new products of higher value to reduce the negative
impact on gross margins caused by the increase in manufacturing expenses. The
Company also plans to implement solutions that could reduce fuel and energy
costs by installing a power line to utilize the local power supply as an
alternate energy source to reduce and stabilize such costs.
The Company's sales, being denominated in U.S. dollars, is affecting
its European customers as the Euro continues to decline against the U.S. dollar.
The Company is working closely with its European customers to monitor the value
of the Euro and plans to take appropriate measures that may alleviate the
pressure of their demand for lower product prices. If the Euro continues to
decline in value against the U.S. dollar, the Company's gross profit margin may
be adversely affected if the Company's European customers demand lower product
prices and the Company is unable to pass higher manufacturing costs onto these
customers. The Company plans to reduce this negative impact by introducing and
offering new products with higher gross profit margins to those customers when
such products become available.
Selling, general and administrative expenses. The primary components of
the Company's selling, general and administrative expenses ("SG&A") include
expenses related to advertising and promotion, product design and development,
transportation of finished goods, salaries for the Company's marketing and
administrative personnel, professional fees and utilities. SG&A in the 2001
interim period increased to $12.3 million, or 14.5% of net sales, from $12.0
million, or 16.5% of net sales, in the 2000 interim period. The increase in SG&A
was due to increased legal and professional fees, increased costs associated
with transportation of finished goods and increased management and traveling
expenses. The increase in SG&A was partially offset by lower commission expenses
related to fewer shipments of products to customers and a decrease in certain
administrative expenses, such as salaries and wages and other office expenses.
SG&A as a percentage of net sales decreased for the 2000 interim period due to
the Company's spreading its costs over increased net sales in the period.
The primary components of the Company's design and development expenses
("development expenses") include sample design fees, patent fees, testing
charges, inspection fees and salaries for the Company's engineers and designers.
Development expenses in the 2001 interim period were $1.48 million compared to
$1.42 million in the 2000 interim period. The increase in development expenses
was primarily due to increased salaries for engineers and designers.
Unusual item. The Company incurred approximately $500,000 in legal and
professional fees in the 2000 interim period in connection with certain
acquisition-related activities. Although the Company has ceased negotiations
with respect to those particular transactions, it continues to explore the
acquisition of other complementary businesses. There can be no assurance that
any of these acquisitions will be consummated.
Other income (expense), net. Interest expense consists of interest on
the Company's short- and long-term bank credit facilities. Interest expense was
$184,000 in the 2001 interim period as compared to $179,000 in the 2000 interim
period. The higher interest expense was due to increased financing costs for
machinery. Other income (expense), net includes tooling income, interest income
and non-recurring income. Other income (expense), net was $2.8 million in the
2001 interim period as compared to $2.6 million in the 2000 interim period. The
increase in other income (expense), net was primarily attributable to an
increase in interest income in the 2001 interim period as the Company invested
the remaining cash on hand from the net proceeds received from its initial
public offering.
Income tax. The Company had taxable income in Hong Kong in the 2001 and
2000 interim periods. The financial statements include provisions for Hong Kong
profits tax of approximately $490,000 and $229,000 in the 2001 and 2000 interim
periods, respectively. The Company does not believe that its current method of
operations would subject it to material U.S. taxes because it should not be
considered to have significant income effectively connected with a trade or
business in the U.S. No income tax was payable by the Company in China during
this period because the Company's subsidiary in China had accumulated tax losses
during these periods.
Net income. Net income for the 2001 interim period was $8.6 million, or
$0.71 per share, as compared to $7.3 million, or $0.61 per share, for the 2000
interim period. The increase in net income can be attributed to the $12.0
million increase in net sales over the 2001 interim period due primarily to new
sales of floor care products which offset an increase in certain manufacturing
expenses and SG&A.
Three Months ended December 31, 2000 Compared with Three Months ended December
31, 1999
Net sales. Net sales for the 2001 quarterly period increased
approximately 15.0% to $29.8 million from $25.9 million in the 2000 quarterly
period. The increase in net sales attributable to new sales of floor care
products is expected to continue in the short term. In the 2001 quarterly
period, the Company achieved significant sales increases to a few major
customers resulting primarily from sales of upright vacuum cleaners and
coffeemakers.
Sales in each product category for the 2001 quarterly period as
compared to the 2000 quarterly period were as follows: sales of kitchen
appliances decreased to $16.4 million, or 55.3% of net sales, from $18.2
million, or 70.6% of net sales; sales of personal, beauty and health care
products decreased to $670,000, or 2.2% of net sales, from $1.7 million, or 6.5%
of net sales; sales of garment care products decreased to $3.8 million, or 12.8%
of net sales, as compared to $4.0 million, or 15.6% of net sales; sales of
travel products decreased to $500,000, or 1.7% of net sales, as compared to $1.2
million, or 4.7% of the net sales; sales of floor care products increased to
$7.8 million, or 26.4% of net sales, from $300,000, or 1.2% of net sales; and
sales of environmental care products increased to $35,000, or 0.1% of net sales,
from $0.
Recently, two of the Company's customers filed for reorganization.
Since net sales to one of those customers were minimal during the 2001 interim
period while net sales to the other customer has dropped considerably in the
last two years to less than 7% of total net sales during the 2001 interim period
with no open receivables outstanding at the time of the reorganization filing,
the Company expects no material impact to its ongoing business due to its
continued efforts to diversify its customer base and increase its net sales of
new products and product categories such as floor care products.
Gross profit. Gross profit in the 2001 quarterly period was $6.4
million, or 21.5% of net sales, as compared to $6.3 million, or 24.2% of net
sales, in the 2000 quarterly period. Gross margins in the 2001 quarterly period
increased primarily due to higher net sales. Gross profit as a percentage of net
sales decreased in the 2001 quarterly period due to a decline in the gross
margins of certain existing products resulting from lower prices extended by the
Company to its customers due to price pressures and a simultaneous increase in
certain manufacturing expenses, particularly in fuel costs. As indicated
previously, a portion of this request for lower prices stems from the Company's
European customers who are being adversely affected by the fluctuation in value
of the Euro against the U.S. dollar.
Selling, general and administrative expenses. SG&A in the 2001
quarterly period was $4.5 million, or 15.0% of net sales, as compared to $4.4
million, or 17.1% of net sales, in the 2000 quarterly period. SG&A as a
percentage of net sales decreased for the 2001 quarterly period due to the
Company's
higher net sales without a significant corresponding increase in fixed expenses
as a result of a reduction in personnel and administrative expenses.
Development expenses in the 2001 quarterly period were $494,000 as
compared to $526,000 in the 2000 quarterly period. The decrease in development
expenses was due to decreased sample design fees and product safety testing
charges which were partially offset by increased salaries for engineers.
Other income (expense), net. Interest expense was $53,000 in the 2001
quarterly period as compared to $38,000 in the 2000 quarterly period. The
increase in interest expense was attributed to the financing cost of plastic
injection machinery. Other income (expense), net was $1.0 million in the 2001
quarterly period as compared to $957,000 in the 2000 quarterly period. The
increase in other income (expense), net was primarily attributable to the
collection of tooling income from certain customers. Tooling income is primarily
a chargeback to customers of mold development and manufacturing expenses for
contract manufactured products and does not provide a reliable source of income
for the Company.
Income tax. The Company had taxable income in Hong Kong in the 2001 and
2000 quarterly periods. The financial statements include provisions for Hong
Kong profits tax of approximately $169,000 and $41,000 in the 2001 and 2000
quarterly periods, respectively. The Company does not believe that its current
method of operations would subject it to material U.S. taxes because it should
not be considered to have significant income effectively connected with a trade
or business in the U.S. No income tax was payable by the Company in China during
this period because the Company's subsidiary in China had accumulated tax losses
during these periods.
Net income. Net income was $2.8 million for the 2001 and 2000 quarterly
periods. Net income for the 2001 and 2000 quarterly periods was approximately
the same due to increases in certain manufacturing expenses despite an increase
in net sales of floor care products.
Liquidity and Capital Resources
The Company's primary sources of financing have been cash from
operating activities and borrowings under credit agreements with various banks.
Net cash provided by operating activities during the 2001 interim period was
approximately $2.2 million as compared to approximately $10.9 million during the
2000 interim period. This decrease was primarily due to a substantial increase
in accounts receivable, prepayments and deposits and inventory.
On April 7, 1998, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form F-1, File No. 333-8462,
for the registration of 4,830,000 ordinary shares of the Company, par value
$0.01 per share, including the underwriter's overallotment option, in the
Company's initial public offering. The net proceeds of the offering (including
exercise of the overallotment option), after deducting expenses, were
approximately $81.0 million.
At December 31, 2000, accounts receivable were $12.0 million as
compared to $5.8 million at December 31, 1999. Receivables at December 31, 2000
represented 38.9 days of sales as compared to 21.5 days of sales at December 31,
1999 which were attributable to longer payment periods extended to certain
customers. The higher accounts receivable at December 31, 2000 was attributable
to the significant amount of sales that occurred in December 2000.
At December 31, 2000, inventories were $22.1 million, compared to $20.7
million at December 31, 1999. The Company's inventories consist primarily of raw
materials needed for future production. The increase in inventories was
primarily attributable to the increased stock of raw material for production of
new products.
On October 27, 1998, the Company made a loan to a start-up U.S.
corporation wholly owned by the spouse of a director of the Company for start-up
costs and working capital purposes. The loan is in the original principal amount
of $1.0 million, bearing interest at a fixed annual rate of 7.0%, and is payable
in quarterly installments of approximately $81,000 commencing October 28, 2003,
with any remaining balance due in full on October 28, 2008. As of December 31,
2000, accrued interest on the loan was approximately $166,346. As this company
is in a development stage, there can be no assurance that the loan will be
repaid on a timely basis, if at all.
On October 21, 1999, the Company made a loan to a director for the
purchase of a residence. The loan is in the original principal amount of
$460,000, bearing interest at a fixed annual rate of 6.02%, and is secured by a
mortgage on the property. The loan is payable in six years with annual
installments of approximately $77,000 of principal together with interest on the
unpaid principal balance, commencing October 21, 2000; however, such payments
will be forgiven in arrears on each payment due date in consideration for the
officer's continued employment by the Company.
On May 30, 2000, the Company declared a one-time special dividend of
$1.35 per share payable to stockholders of record as of June 5, 2000. Payment of
the dividend totaling approximately $16,383,739 was made on June 16, 2000.
On August 2, 2000, the Company announced that it made an investment in
Lite Array, Inc. ("Lite Array"). Lite Array is a California-based company that
has been engaged in the research and development of thin film electroluminescent
(TFEL) and organic light emitting diode (OLED or OEL) flat-panel, solid-state
displays. In connection with the investment, the Company also entered into an
agreement with Lite Array to establish a manufacturing plant to produce OLED
displays at its Dongguan, China facility and to collaborate in developing and
designing end-use applications and products utilizing these displays for the
Company to manufacture and distribute.
The Company's aggregate capital expenditures during the 2001 and 2000
interim periods were approximately $5.4 million and $2.9 million, respectively.
The Company anticipates increasing expenditures for the acquisition of plant and
machinery during the remainder of the current fiscal year. The Company's
outstanding capital commitments of approximately $1.9 million as of December 31,
2000 included commitments for the expansion of the Dongguan facility and the
purchase of machinery and equipment. The Company has nearly completed the
expansion of the physical space of the facility to 1,850,000 square feet. The
Company does not, however, expect to complete the entire infrastructure or
purchase all the equipment initially anticipated until its order flow warrants
the additional capacity. The Company expects to incur an aggregate of
approximately $400,000 in capital expenses for expansion of the Dongguan
facility in fiscal 2001, of which approximately $100,000 was committed as of
December 31, 2000. For the purchase of machinery and equipment, the Company
anticipates spending approximately $1.5 million in fiscal 2001, of which
approximately $1.0 million was committed during the 2001 interim period.
The Company finances its operations and capital expenditures primarily
by cash flows from operations, proceeds from the Company's initial public
offering and borrowings. As of December 31, 2000, the Company had bank credit
facilities with an aggregate credit line of approximately $37.0 million, of
which it had outstanding $689,000 in long-term debt (excluding the current
portion) and $1.6 million in short-term debt (including the current portion of
long-term debt). The aggregate monthly payment on all such indebtedness was
approximately $333 as of December 31, 2000.
The Company's revolving credit facilities with Standard Chartered Bank
and HongkongBank have an aggregate facilities limit of approximately $37.0
million as of December 31, 2000, bearing interest at floating commercial bank
lending rates in Hong Kong, which ranged from 9.5% to 10.50% per annum as of
December 31, 2000. The amounts payable each month on the revolving credit
facilities
varies depending upon the amounts drawn at the time and were $0 in December
2000. The Company's outstanding borrowings vary according to its seasonal
working capital requirements. As of December 31, 2000, the amount utilized for
overdrafts, bank loans, guarantees and letters of credit under its bank
facilities was $4.9 million as compared to $6.3 million as of December 31, 1999.
As of December 31, 2000, the Company's long term-debt consisted of six
term loans with an aggregate outstanding amount of $2.3 million (including the
current portion of long-term debt), of which approximately $2.3 million was
provided by Standard Chartered Bank under the revolving credit facility and
$11,000 was provided by other financial institutions to finance the purchase of
machinery, equipment and motor vehicles. These loans bear interest at rates per
annum currently ranging from 7.5% to 10.25% and mature on various dates through
the year 2003. All of such loans are payable in monthly installments which were
approximately $92,000 as of December 31, 2000.
The Company anticipates that the net proceeds received from its initial
public offering, together with cash generated from operating activities, should
be adequate to satisfy its capital requirements for at least 18 to 24 months.
Over the past several months, the Company has considered potential acquisitions
of complementary businesses. Although the Company has not reached an agreement
for any such acquisitions other than for its investment in Lite Array, it plans
to continue to pursue selected acquisitions of complimentary businesses. In the
event the Company should consummate such an acquisition, its capital
requirements could increase.
Given the current environment of declining interest rates in the United
States and the Company's substantial liquid assets, interest income is likely to
decrease in the near term.
Inflation. During 1999 and the first nine months of 2000, the rate of
inflation in Hong Kong has ranged from approximately -6.1% to 9.0% per year
(approximately -3.7% during 2000) and the average rate of inflation in China has
ranged from approximately -3.2% to 17.0% per year (approximately -1.3% during
1999). As a general matter, the effect of this inflation on the Company is
primarily limited to labor costs, which represent a small component of the
Company's total expenses. As the Company purchases most of its raw materials
outside China, inflation in China does not have a significant effect on its
overall costs.
Currency and Exchange Rates. The functional currency of the Company is
the U.S. dollar. Nearly all of the Company's sales are denominated in U.S.
dollars. The majority of the Company's expenses, including wages and other
production and administrative costs are denominated in Hong Kong dollars and
Chinese Renminbi. Certain raw materials and other expenses are purchased using a
variety of currencies including the U.S. dollar, Chinese Renminbi, Japanese yen
and German mark. The majority of raw materials are purchased using Hong Kong
dollars. The Hong Kong dollar is pegged to the U.S. dollar. The Company has not
been significantly affected by exchange rate fluctuations and therefore has not
needed to hedge its positions.
Year 2000
The year 2000 problem is the result of computer software and hardware
being written in two-digit (rather than four-digit) formats to define the
applicable year, which could cause miscalculations or system failures due to the
recognition of a year defined as "00" as 1900 rather than 2000. The Company has
identified the year 2000 ("Y2K") problem as one of its principal information
technology objectives and has organized a committee to address any related
issues. The committee has been evaluating and resolving the potential impact of
Y2K on its information technology and business processes.
As of December 31, 2000, the Company has spent approximately $100,000
to address the Y2K problem. The Company's compliance programs and progress
updates regarding Y2K compliance were
disclosed in the Fiscal 2000 Annual Report. The modification and upgrading of
the Company's equipment and software were completed as planned. As of the date
hereof, the operations of the Company have not been affected by the Y2K problem
and all of the Company's computer systems functioned properly without
disruption. Though contingency plans are in place to deal with dates considered
to be a risk for possible failures in systems, there can be no assurance that
the Company's systems are free of unanticipated errors related to the Y2K
problem or that the systems of the Company's suppliers, subcontractors, vendors,
shippers and customers will be fully Y2K compliant.