EXHIBIT 3
GLOBAL-TECH APPLIANCES INC.
Quarterly Report for the Three and Nine Months ended December 31, 2001
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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, the financial condition of the
Company's customers, product demand and market acceptance, the success of new
product development, reliance on key strategic alliances, availability and
cost of raw materials, the timely and proper execution of certain business
plans, currency fluctuations, uncertainties associated with investments, the
regulatory environment, fluctuations in operating results, the impact of
changing global, political and economic conditions 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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11
GLOBAL-TECH APPLIANCES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts expressed in United States dollars)
December 31, March 31,
2001 2001
----------------------------------------
(unaudited) (audited)
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 49,081 $ 28,489
Short-term investments 7,661 31,221
Interests in joint venture 5,983 -
Accounts receivable, net 11,070 9,390
Deposits, prepayments and other assets 3,078 9,160
Inventories, net 10,976 14,898
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Total current assets 87,849 93,158
Property, plant and equipment 37,497 38,493
Goodwill (Note 1) 4,845 -
Intangible assets 1,835 13
Loan to a director 307 384
----------------------------------------
Total assets $ 132,333 $ 132,048
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ 78 $ -
Current portion of long-term bank loans 795 1,139
Accounts payable 5,878 14,007
Advance payments from customers 177 184
Accrued expenses 5,300 3,737
Income tax provision 3,408 3,014
----------------------------------------
Total current liabilities 15,636 22,081
Long-term bank loans 402 908
Minority Interests 1,163 -
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Total liabilities 17,201 22,989
----------------------------------------
Shareholders' equity:
Common stock, par value $0.01; 50,000,000 shares authorized;
12,830,000 shares issued as of September 30, 2001 and
March 31, 2001 128 128
Additional paid-in capital 81,662 81,662
Retained earnings 37,980 32,456
Accumulated other comprehensive deficit (14) (550)
----------------------------------------
119,756 113,696
Less: Treasury Stock, at cost (4,624) (4,637)
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Total shareholders' equity 115,132 109,059
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Total liabilities and shareholders' equity $ 132,333 $ 132,048
========================================
Note 1: The amount represented the excess of cost over fair value of net
assets acquired of Global Lite Array (BVI) Limited ("Lite Array") on May 31,
2001. On that day, Global-Tech Appliances Inc. entered into an agreement to
acquire 76.75% of the outstanding shares of Lite Array. Total consideration
for 76.75% of the outstanding shares of Lite Array was approximately $9.8
million.
Management has assessed the fair value of the purchase consideration of
approximately $9.8 million and the fair value of the net assets acquired and
liabilities assumed of Lite Array based on their best estimates at the
acquisition date. The fair value of the 76.75% of the net assets acquired is
approximately $4.9 million. Since the formal appraisal process of the net
assets acquired and liabilities assumed of Lite Array has not yet been
completed as of December 31, 2001, the allocation of purchase consideration
and the excess of cost over fair value of net assets acquired are subject to
change upon the finalization of the appraisals.
12
GLOBAL-TECH APPLIANCES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(Amounts expressed in United States dollars)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------------- --------------------------------
2001 2000 2001 2000
------------------------------- --------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
(in thousands, except for per share data)
Net Sales $ 19,488 $ 29,755 $ 67,578 $ 84,881
Cost of goods sold (14,785) (23,370) (51,516) (66,322)
------------------------------- --------------------------------
Gross profit 4,703 6,385 16,062 18,559
Selling, general and administrative expenses (3,374) (4,475) (11,359) (12,292)
Share of losses in joint venture (540) - (741) -
------------------------------- --------------------------------
Operating income 789 1,910 3,962 6,267
Other income, net 194 1,045 1,630 2,781
------------------------------- -------------------------------
Income before income taxes 983 2,955 5,592 9,048
Provision for income taxes (93) (169) (397) (490)
------------------------------- --------------------------------
Income before minority interests 890 2,786 5,195 8,558
Minority interests 150 - 336 -
------------------------------- --------------------------------
Net income $ 1,040 $ 2,786 $ 5,531 $ 8,558
=============================== ================================
Net income per share $ 0.09 $ 0.23 $ 0.46 $ 0.71
=============================== ================================
Weighted average number of shares outstanding 12,138 12,136 12,138 12,134
=============================== ================================
13
GLOBAL-TECH APPLIANCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts expressed in United States dollars)
Nine months ended
December 31,
-----------------------------------
2001 2000
-----------------------------------
(unaudited) (unaudited)
(in thousands)
Cash flows from operating activities:
Income before minority interest $ 5,195 $ 8,558
Adjustments to reconcile net income before minority interest to net cash
provided by operating activities:
Depreciation and amortization 3,465 3,192
Gain on disposal of short-term investment (107) -
Increase in accounts receivable, net (1,667) (4,853)
Increase in deposits, prepayments and other assets (538) (5,638)
Decrease (increase) in inventories, net 3,935 (3,944)
Increase in intangible assets (817) -
Decrease in loan to a director 77 77
(Decrease) increase in accounts payable (9,128) 4,118
(Decrease) increase in advance payments from customers (8) 23
(Decrease) increase in accrued expenses (162) 194
Increase in income tax provision 394 488
---------------- ---------------
Net cash provided by operating activities 639 2,215
---------------- ---------------
Cash flows from investing activities:
Purchase of short term investments (9,724) (35,175)
Proceed from disposal of short-term investments 33,927 41,965
Increase in interests in joint venture (884) -
Purchase of property, plant and equipment (1,720) (5,401)
Decrease in construction-in-progress - -
Net cash outflow in respect of the acquisition of a subsidiary (1) -
---------------- ---------------
Net cash provided by investing activities 21,598 1,389
---------------- ---------------
Cash flows from financing activities:
Addition of long-term bank loans - 646
Issuance of treasury stock to employees 6 66
Repayment in short-term bank borrowings (802) (1)
Repayment of long-term bank loans (849) (823)
Dividend paid - (16,495)
---------------- ---------------
Net cash used in financing activities (1,645) (16,607)
---------------- ---------------
Net increase (decrease) in cash and cash equivalents 20,592 (13,003)
Cash and cash equivalents at beginning of year 28,489 53,647
---------------- ---------------
Cash and cash equivalents at end of period $ 49,081 $ 40,644
================ ===============
14
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, 2001 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, 2001.
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, 2001 and its results of operations and cash flows for the nine
months ended December 31, 2001. The results of operations for the nine months
ended December 31, 2001 should not be considered indicative of the results
expected for the fiscal year ending March 31, 2002.
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 main manufacturing and warehousing 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, the Company issued 4,200,000 common shares, par value $0.01
per share, in connection with the initial public offering of its common shares
(the "IPO"). On May 7, 1998, the Company issued an additional 630,000 common
shares to the underwriters of the IPO pursuant to their exercise in full of the
over-allotment option granted to them by the Company.
As of December 31, 2001, the Company had repurchased an aggregate of 689,147
common shares held as treasury stock in connection with stock repurchase plans
authorized by its Board of Directors.
As of December 31, 2001, the Company had issued an aggregate of 50,753 common
shares in connection with stock grants under an employee stock purchase plan
authorized by its Board of Directors.
15
Note 2 -- SUBSIDIARIES
Details of the Company's principal subsidiaries as of December 31, 2001 were as
follows:
Percentage of
Place of Equity
Name of Subsidiary Incorporation Interest 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 100.0%
America
Global Lite Array (BVI) Ltd. British Virgin Islands 76.8%
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.
16
GLOBAL-TECH APPLIANCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE QUARTER ENDED DECEMBER 31, 2001
General
We design and manufacture a wide range of small household appliances.
Our 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),
Sunbeam(R) and West Bend(R). We manufacture over 160 different models, primarily
in four product categories:
. kitchen appliances, such as coffeemakers, breadmakers and deep
fryers;
. garment care products, such as steam irons;
. travel products and accessories, such as travel irons; and
. floor care products, such as upright vacuum cleaners and hand-held
steam vacuum cleaners.
We were founded in 1963 and, for most of our history, operated as a
contract manufacturer of products developed by our customers. In recent years,
however, we have emphasized original design manufacturing. As an original design
manufacturer, or ODM, we design and develop proprietary new products which we
manufacture for our customers. We 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 our ODM products represented 63.8% and 48.3% of our net
sales during the three months ended December 31, 2000 and December 31, 2001,
respectively, and 65.5% and 50.7% of our net sales during the nine months ended
December 31, 2000 and December 31, 2001, respectively, with the remaining sales
generated by our contract manufacturing activities.
Sales of ODM products have decreased as a percentage of net sales. This
trend is expected to continue as our traditional small appliance business (from
which most of our ODM product sales are generated) continues to be adversely
impacted by the declining number of prospective customers. If adequate returns
from manufacturing ODM products are not achieved in the long term, we intend to
continue to devote more of our resources into producing contract manufactured
products, such as the floor care products. We believe that by providing
excellent customer support, we will be able to generate a sufficient amount of
sales at acceptable profit margins to allow us to offset the decrease in sales
of ODM products. We plan to continue to promote sales of floor care products as
a means of offsetting decreased sales of our other products, and we believe that
the continuing transformation of our product lines from commodity-type small
household appliances to product lines that more fully utilize our technological
and processing capabilities will ultimately result in an overall increase in net
sales of products with higher profit margins. To this end, we acquired the
flat-panel displays business of Global Lite Array (BVI) Ltd. to diversify into a
product category which should have higher profit margins. While this new
business has only recently commenced production of flat-panel displays during
the last two quarters, we believe that it will generate material sales volume
and, ultimately, profit in the near term.
On March 1, 2002, we announced the acquisition of a revolutionary
technology that is used to develop and manufacture Stirling engines, also known
as heat engines, which we believe are more efficient and cost effective than
certain types of small electric or gasoline engines. A heat engine is a quiet,
light-weight, low-pollutant, fuel-efficient and low cost external combustion
engine that can utilize multiple types of fuel to convert heat into mechanical
power. More uniquely, when mechanical power is supplied to the heat engine, it
could become a cooling device that does not use a compressor or
chlorofluorocarbons
17
(CFCs). We believe that the heat engine can be a viable alternative to certain
other engines and heating or cooling devices that are currently being used in a
broad range of products or applications, such as lawn mowers, chain saws,
electrical generators, heat pumps, air conditioners and refrigeration systems.
The acquisition of this new technology further supports our strategy of
transforming the Company into a manufacturer of technology-oriented products. We
plan to deploy a team of engineers and consultants to accelerate and facilitate
the development of this advanced heat engine.
Since most of our purchases and sales are denominated in U.S. dollars,
our financial statements are presented in U.S. dollars, our functional currency.
Our 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 our fiscal year ended on December 31; for example, 2002 interim period
refers to the nine month period ended December 31, 2001. References to a
quarterly period refer to our fiscal quarter ended on December 31; for example,
2002 quarterly period refers to the fiscal quarter ended December 31, 2001.
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,
-------------------------- ---------------------
2001 2000 2001 2000
------------- ---------- --------- ---------
Net sales ..................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ............................ 75.9 78.5 76.2 78.1
------------- ---------- --------- ---------
Gross profit ................................... 24.1 21.5 23.8 21.9
Selling, general and administrative expenses ... 17.3 15.0 16.8 14.5
Share of losses in joint venture ............... 2.8 -- 1.1 --
------------- ---------- --------- ---------
Operating income ............................... 4.0 6.4 5.9 7.4
Other income, net .............................. 1.0 3.5 2.4 3.3
------------- ---------- --------- ---------
Income before income taxes ..................... 5.0 9.9 8.3 10.7
Provision for income taxes ..................... 0.5 0.6 0.6 0.6
-------------- ---------- --------- ---------
Income before minority interests ............... 4.6 9.4 7.7 10.1
Minority interests ............................. 0.8 -- 0.5 --
------------- ---------- --------- ---------
Net income ..................................... 5.3% 9.4% 8.2% 10.1%
============= ========== ========= =========
Nine Months ended December 31, 2001 Compared with Nine Months ended December 31,
2000
Net sales. Our net sales consist of our gross invoiced sales less
discounts and returns. Net sales for the 2002 interim period were $67.6 million
as compared to $84.9 million in the 2001 interim period. The decrease in net
sales for the interim period is primarily attributable to the loss of sales from
one of our major customers, Moulinex S.A., which recently sought protection from
its creditors with the Naterre Commercial Court in France. Moulinex represented
2.7% of the net sales for the 2002 interim period as compared to 15.0% for 2001
interim period. As of March 2002, we had successfully recovered 70% of the
accounts receivable due from Moulinex and have established a reserve for the
remaining 30%.
Sales to other major customers, such as Black & Decker, Morphy Richards
and Sunbeam, also decreased in the 2002 interim period. The decrease in sales to
Morphy Richards was primarily due to reduced orders for garment care and kitchen
products. We anticipate that the decrease in sales to this customer will
continue. The decrease in sales to Black & Decker was primarily due to decreased
demand for indoor grills, which was partially offset by an increase in sales of
coffee makers. We are in the process
18
of introducing new floor care products to Black & Decker, and, as a result, we
expect sales to Black & Decker to increase in fiscal year 2003. Due to the
financial difficulties of Sunbeam, we anticipate that sales to Sunbeam will
continue to decrease in the future. The decrease in sales to these customers was
partially offset by the increase of sales of floor care products.
Net sales consist primarily of sales in our four major product categories:
kitchen appliances, garment care products, travel products and accessories and
floor care products. While we exited the personal, beauty and health care
product category at the end of fiscal 2001, we continued to sell some of these
products to Helen of Troy Limited as an accommodation in the 2002 interim
period. Sales in each product category for the 2002 interim period as compared
to the 2001 interim period were as follows:
. sales of kitchen appliances decreased to $30.6 million, or 45.3% of net
sales, from $46.9 million, or 55.4% of net sales, primarily due to
decreased sales of indoor grills, breadmakers, food steamers and
electric knives;
. sales of personal, beauty and health care products decreased to $2.2
million, or 3.3% of net sales, from $3.2 million, or 3.8% of net sales,
due to our decision to exit this product category at the end of fiscal
2001;
. sales of garment care products decreased to $6.2 million, or 9.2% of net
sales, from $11.5 million, or 13.6% of net sales, primarily due to
deceased sales of steam irons to Morphy Richards;
. sales of travel products decreased to $1.1 million, or 1.7% of net
sales, from $2.8 million, or 3.3% of net sales, primarily due to
decreased sales of travel irons and travel sets;
. sales of floor care products increased to $26.3 million, or 38.9% of net
sales, from $19.2 million, or 22.6% of net sales, primarily due to
increased sales of existing floor care product models and the promotion
of new models; and
. sales of environmental care products increased to $383,800, or 0.6% of
net sales, from $100,000, or 0.1% of net sales, which was primarily due
to increased sales of air cleaners.
Due to the September 11th terrorist attack and the economic recession
experienced in the United States, we anticipate a decrease in net sales in the
fourth quarter of fiscal 2002. We believe that the expansion and diversification
of our floor care product line and the introduction of new products, such as
juicers and deep fryers, will help replace the anticipated continued decrease in
sales to Moulinex and other major small appliance customers. We believe we have
made progress at Global Lite Array (BVI) Ltd., our flat-panel display
manufacturing subsidiary, by achieving consistent production in the 2002
quarterly period and have implemented further corporate-wide cutbacks to control
costs and maintain profitability in this trying economic and business
environment. We also have made progress in changing our focus and diversifying
Global-Tech into a technology-oriented products manufacturer.
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 2002
interim period was $16.1 million, or 23.8% of net sales, as compared to $18.6
million, or 21.9% of net sales, in the 2001 interim period. Gross profit as a
percentage of net sales increased in the 2002 interim period due in part to the
decrease in net sales over the comparable periods and also due to a decrease in
wages for direct and indirect labor and in the cost of consumable goods, which
were partially offset by higher depreciation charges. The decrease in wages for
direct and indirect labor is primarily due to reductions in our workforce in
response to decreased purchase orders from our customers. The decreased
19
consumable goods expense is also attributable to reduced production. We have
tightened control of these expenses in order to remain profitable and we are
prepared to implement significant cutbacks and cost control measures if the
negative impact of the global economic slowdown continues. We anticipate that
depreciation charges will remain relatively constant in the near term, unless a
major project requires significant capital investment. We do not anticipate
undertaking any major projects in the near future.
Selling, general and administrative expenses. The primary components of our
selling, general and administrative ("SG&A") expenses are related to advertising
and promotion, product design and development, transportation of finished goods,
salaries for our marketing and administrative personnel, professional fees and
utilities. SG&A expenses in the 2002 interim period decreased to $11.4 million,
or 16.8% of net sales, from $12.3 million, or 14.5% of net sales, in the 2001
interim period. The SG&A expenses during the 2002 interim period included
$672,923 in SG&A expenses from the newly acquired Global Lite Array (BVI) Ltd.
Excluding the SG&A expenses incurred by Global Lite Array, SG&A expenses in the
2002 interim period would have decreased to $10.7 million, or 15.8% of the net
sales, from $12.3 million, or 14.5% of net sales, in the 2001 interim period.
The increase in SG&A expenses as a percentage of net sales was due to the
relatively greater decrease in net sales over the comparable periods as compared
to the decrease in SG&A expenses.
The primary components of our design and development expenses include
sample design fees, patent fees, testing charges, inspection fees and salaries
for our engineers and designers. Design and development expenses in the 2002
interim period were $1.23 million compared to $1.48 million in the 2001 interim
period. The decrease in design and development expenses was due to decreased
salaries for engineers and designers as a result of natural attrition of staff
and decreased product safety testing expenses.
Share of losses in joint venture. One of our principal subsidiaries, Global
Lite Array (BVI) Ltd., has a 50% equity interest in Jiangmen Lite Array (USA)
Electronic Company Limited. Jiangmen Lite Array's principal business activity is
the development, manufacturing and sale of electroluminescent flat panel
displays. Since inception, Jiangmen Lite Array has been engaged primarily in
research and development, market development and capital raising. Since Jiangmen
Lite Array remained in the development stage during the 2002 interim period, we
absorbed approximately $741,000 of its operating losses.
Interest expense and other income, net. Interest expense consists of
interest on our short- and long-term bank credit facilities. Interest expense
was approximately $206,000 in the 2002 interim period as compared to $184,000 in
the 2001 interim period. The increase in interest expense was due to our
absorbing additional expenses incurred by the newly acquired Global Lite Array
(BVI) Ltd. Interest expense during the 2002 interim period included
approximately $112,100 from us and $94,000 from Global Lite Array. Other income,
net includes tooling income, interest income and non-recurring income. Other
income, net was $1.6 million in the 2002 interim period as compared to $2.8
million in the 2001 interim period. The decrease in other income, net was
primarily attributable to a decrease in interest income during the 2002 interim
period, as we invested less of the remaining cash on hand and cash generated
from operating activities after acquiring a majority interest in Global Lite
Array. In addition, we incurred business exploration expenses of approximately
$181,000 during the 2002 interim period, which were classified as other expenses
and offset other income in December 2001.
Income tax. We had taxable income in Hong Kong in the 2002 and 2001 interim
periods. The financial statements include provisions for Hong Kong profits tax
of approximately $397,000 and $490,000 in the 2002 and 2001 interim periods,
respectively. We do not believe that our current method of operations would
subject us to material U.S. taxes because we 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 us in China during this period because our subsidiary
in China had accumulated tax losses during these periods.
20
Minority interests. During the 2002 interim period, we acquired a
controlling interest of Global Lite Array (BVI) Ltd. Our 2002 interim period
results included $336,000 of income from Global Lite Array's operations during
that period.
Net income. Net income for the 2002 interim period was $5.5 million, or
$0.46 per share, as compared to $8.6 million, or $0.71 per share, for the 2001
interim period. The decrease in net income was primarily attributable to the
decrease in net sales over the 2002 interim period due to the loss of sales to
Moulinex and other customers, as well as an increase in certain SG&A expenses
from the newly acquired Global Lite Array (BVI) Ltd.
Three Months ended December 31, 2001 Compared with Three Months ended December
31, 2000
Net sales. Net sales for the 2002 quarterly period decreased approximately
34.5% to $19.5 million from $29.8 million in the 2001 quarterly period. The
decrease in net sales was primarily attributable to the decrease in sales to
Moulinex and other customers, which were only partially offset by the increase
sales of floor care products. The decrease in sales to Moulinex can be
attributed to that company's financial difficulties, while the decrease in sales
to our other customers can be attributed primarily to the poor condition of the
global economy in general.
Sales in each product category for the 2002 quarterly period, including the
personal, beauty and healthcare product category that we exited at the end of
fiscal 2001, as compared to the 2001 quarterly period were as follows:
. sales of kitchen appliances decreased to $8.4 million, or 43.1% of net
sales, from $16.4 million, or 55.3% of net sales, primarily due to
decreased sales of breadmakers, coffeemakers and indoor grills;
. sales of personal, beauty and health care products decreased to
$533,000, or 2.7% of net sales, from $670,000, or 2.2% of net sales, due
to our decision to exit this product category at the end of fiscal 2001;
. sales of garment care products decreased to $1.3 million, or 6.9% of net
sales, from $3.8 million, or 12.8% of net sales, primarily due to
decreased sales of steam irons;
. sales of travel products decreased to $202,000, or 1.0% of net sales,
from $500,000, or 1.7% of net sales, primarily due to decreased sales of
travel irons and travel sets;
. sales of floor care products increased to $8.5 million, or 43.7% of net
sales, from $7.8 million, or 26.4% of net sales, primarily due to
increased sales of existing floor care product models and the promotion
of new models; and
. sales of environmental care products increased to approximately
$275,000, or 1.4% of net sales, from $35,000, or 0.1% of net sales,
primarily due to increased sales of air cleaners.
Gross profit. Gross profit in the 2002 quarterly period was $4.7 million,
or 24.1% of net sales, as compared to $6.4 million, or 21.5% of net sales, in
the 2001 quarterly period. Gross profit in the 2002 quarterly period decreased
primarily due to the decrease in net sales of approximately $10.3 million
between periods. Gross profit as a percentage of net sales increased in the 2002
quarterly period due in part to the decrease in net sales between comparable
periods and also due to a decrease in certain manufacturing expenses,
particularly in direct and indirect labor, fuel costs and consumable expenses
caused by reduced
21
production. The decrease in wages for direct and indirect labor is primarily due
to reductions in our workforce in response to decreased purchase orders from our
customers. We have tightened control of these expenses in order to remain
profitable and are prepared to implement further cutbacks and cost control
measures if the negative impact of the global economic slowdown continues.
Selling, general and administrative expenses. SG&A expenses in the 2002
quarterly period were $3.4 million, or 17.3% of net sales, as compared to $4.5
million, or 15.0% of net sales, in the 2001 quarterly period. The $3.4 million
in SG&A expenses in the 2002 quarterly period included approximately $3.3
million from us and $73,000 from Global Lite Array (BVI) Ltd, our flat-panel
display manufacturing subsidiary. Excluding the SG&A expenses incurred by Global
Lite Array, SG&A expenses in the 2002 quarterly period decreased to $3.3
million, or 16.9% of the net sales, from $4.5 million, or 15.0% of net sales, in
the 2001 quarterly period. The increase in SG&A expenses as a percentage of net
sales was due to the relatively greater decrease in net sales over the
comparable periods as compared to the decrease in SG&A expenses.
Design and development expenses in the 2002 quarterly period were
$384,000 as compared to $494,000 in the 2001 quarterly period. The decrease in
design and development expenses was due to decreased sample design fees, product
safety testing charges and salaries and wages paid to our design and engineering
staff.
Share of losses in joint venture. One of our principal subsidiaries,
Global Lite Array (BVI) Ltd., has a 50% equity interest in Jiangmen Lite Array
(USA) Electronic Company Limited. Jiangmen Lite Array's principal business
activity is the development, manufacturing and selling of electroluminescent
flat panel displays. Since inception, Jiangmen Lite Array has been engaged
primarily in research and development, market development and capital raising.
Since Jiangmen Lite Array remained in the development stage during the 2002
quarterly period, we absorbed approximately $540,000 of its operating losses.
Interest expense and other income, net. Interest expense was $60,253 in
the 2002 quarterly period as compared to $53,000 in the 2001 quarterly period.
The increase in interest expense was due to the inclusion of approximately
$41,000 in interest expense incurred by Global Lite Array (BVI) Ltd. during the
2002 quarterly period. Other income, net was $194,000 in the 2002 quarterly
period as compared to $1.0 million in the 2001 quarterly period. The decrease in
other income, net was primarily attributable to a decrease of interest income in
the 2002 quarterly period, as we invested less of the remaining cash on hand and
cash generated from operating activities after acquiring a majority interest in
Global Lite Array. In addition, we have incurred business exploration expenses
of approximately $181,000 which were classified as other expenses and offset
other income in December 2001.
Income tax. We had taxable income in Hong Kong in the 2002 and 2001
quarterly periods. The financial statements include provisions for Hong Kong
profits tax of approximately $93,000 and $169,000 in the 2002 and 2001 quarterly
periods, respectively. We do not believe that our current method of operations
would subject us to material U.S. taxes because we 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 us in China during this period because our
subsidiary in China had accumulated tax losses during these periods.
Minority interests. Our 2002 quarterly period results included $150,000
of income from Global Lite Array (BVI) Ltd.'s operations during that period.
Net income. Net income for the 2002 quarterly period was $1.0 million
as compared to $2.8 million for the 2001 quarterly period. The decrease in net
income was primarily due to the decrease in net
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sales to Moulinex and other customers and the consolidation of the financial
results of Global Lite Array (BVI) Ltd.
Liquidity and Capital Resources
Our 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 2002 interim period and 2001 interim
period were approximately $639,000 and $2.2 million, respectively. The decrease
in cash provided by operating activities over the comparable periods was
primarily due to a decrease in accounts payable. The decrease of accounts
payable was due to repayments to our suppliers in the usual course of business.
At December 31, 2001, accounts receivable were $11.1 million as
compared to $9.4 million at March 31, 2001 and $12.0 million at December 31,
2000. Receivables at December 31, 2001 represented 45.0 days of sales as
compared to 32.9 days of sales at March 31, 2001 and 38.9 days of sales at
December 31, 2000. The comparatively longer days of sales is attributable to
longer payment periods extended to a major customer in order to increase sales
to this customer.
At December 31, 2001, inventories were $11.0 million compared to $14.9
million at March 31, 2001 and $22.1 million at December 31, 2000. Our
inventories consist primarily of raw materials needed for future production. The
decrease in inventories was primarily attributable to the decreased stock of raw
materials as a result of a write-off of inventory and the cessation of a
production line. In addition, we are carrying lower stocks of finished goods due
to an anticipated decrease in demand for our products resulting from the slowing
global economy.
On May 31, 2001, we entered into an agreement to acquire 76.8% of the
outstanding shares of Global Lite Array (BVI) Ltd., which is the parent company
of Lite Array, Inc. Lite Array is a California based company involved
extensively in the research, development and pre-production of inorganic and
organic solid flat-panel displays. Lite Array operates a joint venture
manufacturing plant in Jiangmen, China. The transaction closed on June 28, 2001.
Total consideration for our investment in Global Lite Array (BVI) Ltd. was
approximately $9.8 million.
Our outstanding capital commitments of approximately $1.0 million at
December 31, 2001 included commitments for the expansion of the Dongguan
facility and the purchase of machinery and equipment. We have completed
expansion of the physical space of the Dongguan facility to 1.85 million square
feet. We do not, however, expect to complete the entire infrastructure or
purchase all the equipment that will ultimately be required until our order flow
warrants the additional capacity. We expect to incur an aggregate of
approximately $3.0 million in capital expenses for expansion of the Dongguan
facility in fiscal 2002, of which approximately $600,000 was committed as of
December 31, 2001. For the purchase of machinery and equipment, we anticipate
spending approximately $3.0 million in fiscal 2002, of which approximately
$400,000 was committed during the 2002 interim period. Our aggregate capital
expenditures during the 2002 and 2001 interim periods were approximately $1.7
million and $5.4 million, respectively. The decrease in capital expenditures
over the interim periods is primarily due to the nearly completed expansion of
the Dongguan manufacturing facility and less requirements for investment in
machinery and equipment.
We finance our operations and capital expenditures primarily by cash
flows from operations and borrowings. As of December 31, 2001, we had bank
credit facilities with an aggregate credit line of approximately $31.9 million,
of which we had outstanding $402,000 in long-term debt (excluding the current
portion) and $873,000 in short-term debt (including the current portion of
long-term debt). The aggregate monthly payment on all such indebtedness was
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approximately $183,000 as of December 31, 2001, of which $89,000 was for our
revolving credit facility and $94,000 was for our term loan debt.
Our revolving credit facilities with Standard Chartered Bank,
HongkongBank and Citibank, N.A. have an aggregate facilities limit of
approximately $31.9 million as of December 31, 2001, bearing interest at
floating commercial bank lending rates in Hong Kong, which ranged from 4.4.% to
7.0% per annum as of December 31, 2001. The amounts payable each month on the
revolving credit facilities varies depending upon the amounts drawn at the time
and was $78,000 in December 2001. Our outstanding borrowings vary according to
our seasonal working capital requirements. As of December 31, 2001, the amount
utilized for overdrafts, bank loans, guarantees and letters of credit under our
bank facilities was $2.2 million as compared to $4.9 million as of December 31,
2000.
As of December 31, 2001, our long term-debt consisted of five term
loans with an aggregate outstanding amount of $1.2 million (including the
current portion of long-term debt), all of which was provided by Standard
Chartered Bank under the revolving credit facility to finance the purchase of
machinery, equipment and motor vehicles. These loans bear interest at rates per
annum currently ranging from 6.25% to 9.75% and mature on various dates through
the year 2004. All of such loans are payable in monthly installments which was
approximately $94,000 as of December 31, 2001.
We anticipate that cash generated from operating activities should be
adequate to satisfy our capital requirements for at least 18 to 24 months. We
have in the past considered potential acquisitions of complimentary businesses.
Although we have not reached an agreement for such an acquisition, we plan to
continue to pursue selected acquisitions of complementary businesses. In the
event that we should consummate such an acquisition, our capital requirements
could increase.
Inflation. During 2000 and the first nine months of 2001, the rate of
inflation in Hong Kong ranged from approximately -4.5% to -0.9% per year
(approximately -3.8% during 2000) and the average rate of inflation in China
ranged from approximately -1.2% to 1.5% per year (approximately -0.4% during
2000). As a general matter, the effect of this inflation on us is primarily
limited to labor costs, which represent a small component of our total expenses.
As we purchase most of our raw materials outside China, inflation in China does
not have a significant effect on our overall costs.
Currency and exchange rates. Our functional currency is the U.S.
dollar. Nearly all of our sales are denominated in U.S. dollars. The majority of
our 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
currently pegged to the U.S. dollar, but may be depegged at some point in the
future. We have not been significantly affected by exchange rate fluctuations
and therefore have not needed to hedge our positions.
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