Exhibit 4
GLOBAL-TECH APPLIANCES INC.
Quarterly Report for the Three Months ended June 30, 2002
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, including the plan to
diversify and transform a portion of manufacturing capacity to higher-value,
technology-oriented products, 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.
Page 14
GLOBAL-TECH APPLIANCES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts expressed in thousands of United States dollars)
June 30, March 31,
------------- ------------
2002 2002
------------- ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 49,773 $ 48,589
Short-term investments ......................................................... 8,814 8,678
Accounts receivable, net ....................................................... 13,399 12,318
Deposits, prepayments and other assets ......................................... 2,239 2,158
Inventories, net ............................................................... 9,341 9,646
-------- --------
Total current assets ....................................................... 83,566 81,389
Property, plant and equipment .................................................. 34,152 34,198
Land use rights ................................................................ 1,989 2,002
License ........................................................................ 4,142 4,317
Patents ........................................................................ 288 286
Promissory note receivable ..................................................... 736 775
Loan to a director ............................................................. 306 306
-------- --------
Total assets ............................................................... $125,179 $123,273
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings ..................................................... $ 77 $ 76
Current portion of long-term bank loans ........................................ 828 715
Accounts payable ............................................................... 7,466 6,238
Amount due to a director ....................................................... - 180
Fees payable for license ....................................................... 1,000 1,800
Fees payable for land use rights ............................................... 275 275
Salaries and allowances payable ................................................ 712 541
Advance payments from customers ................................................ 276 43
Accrued expenses ............................................................... 1,667 1,961
Investment in a joint venture .................................................. 175 246
Income tax provision ........................................................... 3,360 4,384
-------- --------
Total current liabilities .................................................. 15,836 16,459
Long-term bank loans ........................................................... 641 272
Deferred tax liabilities, net .................................................. 43 43
-------- --------
Total liabilities .......................................................... 16,520 16,774
-------- --------
Shareholders' Equity:
Page 15
Common stock, par value $0.01; 50,000,000 shares authorized;
12,830,000 shares issued as of June 30, 2002 and March 31, 2002 ............. 128 128
Additional paid-in capital .................................................... 81,753 81,753
Retained earnings ............................................................. 31,571 29,415
Accumulated other comprehensive deficit ....................................... (193) (197)
Less: Treasury stock, at cost, 689,147 shares as of 30/th/ June 2002 and
31/st/ March 2002 .......................................................... (4,600) (4,600)
---------- ----------
Total shareholders' equity ............................................... 108,659 106,499
---------- ----------
Total liabilities and shareholders' equity ............................... $ 125,179 $ 123,273
========== ==========
Page 16
GLOBAL-TECH APPLIANCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts expressed in thousands of United States dollars, except per share data)
For the three months
ended June 30,
----------------------
2002 2001
----------------------
(unaudited) (unaudited)
Net sales ......................................... $ 21,641 $ 23,278
Cost of goods sold ................................ (15,539) (18,235)
---------- ---------
Gross profit ...................................... 6,102 5,043
Selling, general and administrative expenses ...... (3,869) (3,630)
Share of losses of a joint venture ................ (158) (54)
---------- ---------
Operating income .................................. 2,075 1,359
Other income, net ................................. 294 819
---------- ---------
Income before income taxes ........................ 2,369 2,178
Provision for income taxes ........................ (213) (111)
---------- ---------
Income before minority interests .................. 2,156 2,067
Minority interests ................................ - 4
---------- ---------
Net income ........................................ $ 2,156 $ 2,071
Net income per share .............................. $ 0.18 $ 0.17
========== =========
Weighted average number of shares outstanding ..... 12,140 12,138
========== =========
Page 17
GLOBAL-TECH APPLIANCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts expressed in thousands of United States dollars)
For the Three Months Ended
December 31
June 30,
----------------------------------
2002 2001
----------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Income before minority interests ................................................. $ 2,156 $ 2,067
Adjustments to reconcile income before minority interest to net cash
provided by operating activities:
Share of losses of a joint venture ......................................... 158 54
Depreciation and amortization .............................................. 1,319 1,253
Provision for promissory note receivable ................................... 61 -
Provision for income taxes ................................................. 213 111
Changes in operating assets and liabilities:
Accounts receivable, net ................................................... (1,081) 1,585
Deposit, prepayment and other assets ....................................... (81) (968)
Inventories ................................................................ 305 (197)
Promissory note receivable ................................................. (22) -
Accounts payable ........................................................... 1,228 (3,976)
Fee payable for license .................................................... (800) -
Salaries and allowances payable ............................................ 171 -
Advanced payments from customers ........................................... 233 (105)
Accrued expenses ........................................................... (294) 339
Income tax payable ......................................................... (1,237) (3)
------------- -------------
Net cash provided by operating activities ................................ 2,329 160
------------- -------------
Cash flows from investing activities:
Purchase of short term investments ......................................... (131) (7,161)
Proceed from disposal of short-term investments ............................ - 11,842
Purchases of property, plant and equipment ................................. (1,080) (1,219)
Purchase of patents ........................................................ (8) -
(Increase) decrease in loan to a joint venture ............................. (229) 34
Decrease in amount due to a director ....................................... (180) -
Net cash outflow in respect of the acquisition of a subsidiary ............. - (1)
------------- -------------
Net cash (used in) provided by investing activities ...................... (1,628) 3,495
------------- -------------
Cash flows from financing activities:
Addition of long term bank loans ........................................... 692 -
Addition of short-term bank borrowings ..................................... 1 -
Issuance of treasury stock to employees .................................... - 6
Repayment of short-term bank borrowings .................................... - (26)
Repayment of long-term bank loans .......................................... (210) (271)
------------- -------------
Net cash provided by (used in) financing activities ...................... 483 (291)
------------- -------------
Net increase in cash and cash equivalents ............................................. 1,184 3,364
Cash and cash equivalent at beginning of year ......................................... 48,589 28,489
------------- -------------
Cash and cash equivalents at end of year .............................................. $ 49,773 $ 31,853
============= =============
Page 18
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 June 30, 2002 and for
the three-month period then ended. The interim financial statements should be
read in conjunction with the annual financial statements as of March 31, 2002.
These statements reflect all adjustments which are, in the opinion of
management, necessary to fairly present Global-Tech's financial position as of
June 30, 2002 and its results of operations and cash flows for the three months
ended June 30, 2002. The results of operations for the three months ended June
30, 2002 should not be considered indicative of the results expected for the
fiscal year ending March 31, 2003.
Global-Tech 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.
Note 2 -- SUBSIDIARIES
Details of the Company's principal subsidiaries as of June 30, 2002 were as
follows:
Name Country Ownership
- ----------------------------------------- ---------------------- ---------
Wing Shing Products (BVI) Company Limited ...... British Virgin Islands 100.0%
Wing Shing Overseas Limited .................... British Virgin Islands 100.0
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
Factory Company Limited .................... China 100.0
Global-Tech USA, Inc. .......................... United States 100.0
Penatlpha Macau Commercial Offshore
Limited .................................... Macau 100.0
Global Lite Array (BVI) Limited ................ British Virgin Islands 76.8
Lite Array (BVI) Company Limited ............... British Virgin Islands 76.8
Lite Array, Inc. ............................... United States 76.8
Page 19
Global-Tech Appliances Inc. is a holding company of the above subsidiaries. It
does not engage in daily business operations. Wing Shing Products (BVI) Company
Limited is primarily engaged in selling finished goods to the Company's
customers. Wing Shing Overseas Limited, Pentalpha Enterprises Limited and
Pentalpha Hong Kong Limited are primarily engaged in buying raw materials and
selling finished goods to the Company's customers. Kwong Lee Shun Trading
Company Limited is a service company that provides management services to the
Company. Dongguan Wing Shing Electrical Products Factory Company Limited is the
Company's manufacturing facility located in Dongguan, China. Global-Tech USA,
Inc. provides investor relations and consulting services to the Company.
Pentalpha Macau Commercial Offshore Limited is a newly incorporated subsidiary
primarily engaged in selling finished goods to the Company's customers. Global
Lite Array (BVI) Limited is an investment holding company. Lite Array (BVI)
Company Limited is a newly incorporated subsidiary of Global Lite Array (BVI)
Limited primarily engaged in buying raw materials and selling organic solid
state flat-panel displays to the Company's customers. Lite Array, Inc. is
primarily engaged in research and development of organic solid state flat-panel
displays.
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. A summary of those significant accounting policies can be
found in the Company's fiscal 2002 Annual Report on Form 20-F, filed on October
15, 2002, in the Notes to the Consolidated Financial Statements, Note 3, and
under "Item 5.E--Operating and Financial Results and Prospects--Application of
Critical Accounting Policies."
Page 20
GLOBAL-TECH APPLIANCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE QUARTER ENDED JUNE 30, 2002
General
We design, manufacture and sell a wide range of small household appliances
for brand marketers in developed countries. Our products, all of which are
manufactured in China, are marketed by our customers under brand names such as
Black & Decker(R), DeLonghi(R), Dirt Devil(R), Eureka(R), Hamilton Beach(R),
Krups(R), Morphy Richards(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. This shift in emphasis was made possible by our
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
49.2% and 37.7% of our net sales during the three months ended June 30, 2001 and
June 30, 2002, respectively, with the remaining sales generated by our contract
manufacturing activities. Sales of ODM products have decreased as a percentage
of net sales over the last several years. This trend is expected to continue in
the near term due to an anticipated increase in sales of new floor care
products, which are primarily contract manufactured products. We expect to
continue to emphasize our ODM strategy to the greatest extent possible, however,
as ODM products generally have higher profit margins.
We also are continuing to acquire new technologies in an effort to expand
our capabilities in manufacturing finished products. These transactions are part
of our long-term business strategy to gradually diversify and transform a
portion of our manufacturing facility into higher-value, technology-oriented
products that we believe will allow us to leverage our existing research and
development and technical management staff in Hong Kong, as well as our
manufacturing infrastructure in China. Our long-term strategic focus is to
deemphasize component manufacturing, as such value-added opportunities are not
consistently available.
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 a quarterly period refer to our fiscal
quarter ended on June 30; for example, 2003 quarterly period refers to the
fiscal quarter ended June 30, 2002.
Page 21
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
June 30,
--------------------------
2002 2001
---------- --------
Net sales ........................................ 100.0% 100.0%
Cost of goods sold ............................... 71.8 78.3
---------- --------
Gross profit ..................................... 28.2 21.7
Selling, general and administrative expenses ..... 17.9 15.6
Share of losses in joint venture ................. 0.7 0.2
---------- --------
Operating income ................................. 9.6 5.9
Other income, net ................................ 1.4 3.5
---------- --------
Income before income taxes ....................... 11.0 9.4
Provision for income taxes ....................... 1.0 0.5
Minority interests ............................... 0.0 0.0
---------- --------
Net income ....................................... 10.0% 8.9%
========== ========
Three Months ended June 30, 2002 Compared with Three Months ended June 30, 2001
Net sales. Our net sales consist of our gross invoiced sales less discounts
and returns. Net sales for the 2003 quarterly period were $21.6 million as
compared to $23.2 million in the 2002 quarterly period. The decrease in net
sales was mainly attributable to the decrease in sales of kitchen appliances and
garment care products, which was partially offset by an increase in contract
manufacturing sales of floor care products. In the 2003 quarterly period, sales
of floor care products increased approximately 46% over the 2002 quarterly
period, and this product category is now larger than our kitchen appliance
business. There is no assurance, however, that our major floor care product
customer will continue to purchase floor care products from us, as this customer
is under no contractual obligation to do so. We believe that the increase in
sales of floor care products will continue in the short term and should offset
an expected continuing weakness in sales of kitchen and garment care products.
While we managed to secure new customers for our floor care products during the
2003 quarterly period, overall, we experienced a slowdown in orders for kitchen
appliances and other products and noticed an acceleration in price cutting on
these products at the retail level. Net sales of Lite Array, Inc. electronic
display units for the 2003 quarterly period were approximately $212,000.
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. Sales in each product category for the 2003
quarterly period as compared to the 2002 quarterly period were as follows:
Page 22
. Sales of kitchen appliances decreased to $7.1 million, or 32.8% of net
sales, from $10.4 million, or 44.8% of net sales, primarily due to
decreased sales of breadmakers, food steamers, coffee makers and
indoor grills. These products were once in high demand and comprised a
significant portion of our revenues in the past. More recently,
however, demand has waned for these products and due to continued
pressure from our customers to reduce prices on these products, we
have ceased manufacturing certain kitchen appliance products.
. Sales of garment care products decreased to $690,000, or 3.2% of net
sales, as compared to $2.7 million, or 11.7% of net sales, primarily
due to decreased sales of steam irons to a major European customer.
. Sales of travel products and accessories decreased to $237,000, or
1.1% of net sales, from $352,000, or 1.5% of net sales, primarily due
to decreased sales of travel sets, which include a travel iron and
dryer is one package. The decrease in sales of travel sets is
attributable to lower demand for these products.
. Sales of floor care products increased to $12.7 million, or 58.5% of
net sales, from $8.7 million, or 37.5% of net sales, primarily due to
our acquiring a new model to produce for our major floor care products
customer. We also secured a new customer for floor care products
during the 2003 quarterly period.
We are currently experiencing a slowdown in orders, particularly in kitchen
appliances and from our European customers, prompted in part by the global
economic downturn. In this regard, we are seeing a reluctance on the part of
many of our customers to make purchase commitments at historic levels due to
their concerns about slower holiday retail sales. We anticipate that continued
strong sales of floor care products should at least offset in part decreased
sales of kitchen appliances and other products as a result of the slowdown in
orders.
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. Generally, gross profit
margins are higher for our ODM products compared to contract manufactured
products. Gross profit in the 2003 quarterly period was $6.1 million, or 28.2%
of net sales, as compared to $5.0 million, or 21.7% of net sales, in the 2002
quarterly period. Gross profit as a percentage of net sales increased in the
2003 quarterly period primarily as a result of decreases in manufacturing
overhead, including wages for direct and indirect labor ($300,000 decrease over
the comparable quarterly period), the cost of consumable goods ($45,000 decrease
over the comparable quarterly period) and fuel expenses ($100,000 decrease over
the comparable quarterly period). Decreases in these expenses are attributable
to the lower net sales and lower production volume during the 2003 quarterly
period.
Selling, general and administrative expenses. The primary components of our
selling, general and administrative, or SG&A, expenses include product design
and development, transportation of finished goods, salaries for marketing and
administrative personnel and professional fees and utilities. SG&A expenses in
the 2003 quarterly period increased to $3.8 million, or 17.9% of net sales, from
$3.6 million, or 15.6% of net sales, in the 2002 quarterly period. SG&A expenses
increased by approximately 6.5% from the 2002 quarterly period, primarily due to
the $600,000 in SG&A expenses incurred by Lite Array's electronic display
operations. In our remaining operations, we achieved a reduction of
approximately 10% in SG&A expenses over the comparable quarterly period, from
$3.6 million in the 2002 quarterly period to $3.2 million in the 2003 quarterly
period.
The primary components of our design and development expenses include
sample design, patent fees, testing charges, inspection fees and salaries for
engineers and designers. Design and development
Page 23
expenses were $371,000 in the 2003 quarterly period as compared to $389,000 in
the same quarterly period of 2002.
Interest expenses and other income, net. Interest expense consists of
interest on our short- and long-term bank credit facilities. Interest expense
was $26,520 in the 2003 quarterly period as compared to $68,607 in the 2002
quarterly period. The decrease in interest expense was due to decreased
borrowings. Other income, net includes tooling income, interest income and
non-recurring income. Other income, net was approximately $294,000 in the 2003
quarterly period as compared to $819,000 in the 2002 quarterly period. The
decrease in other income, net was primarily attributable to a decrease in
interest income in the 2003 quarterly period, as we have used our cash to fund
capital expenditures and acquisitions.
Income tax. We had taxable income in Hong Kong in the 2003 and 2002
quarterly periods. Our financial statements include provisions for Hong Kong
profits tax of approximately $213,000 and $111,000 in the 2003 and 2002
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 United States. 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. During the 2002 quarterly period, we acquired a
controlling interest of Lite Array, Inc., a solid state flat-panel electronic
display business. Our 2002 quarterly period results included one month's
operations of Lite Array. There was no minority interest in the 2003 quarterly
period.
Net income. Net income for the 2003 quarterly period was $2.2 million,
$0.18 per share, as compared to $2.1 million, or $0.17 per share, for the 2002
quarterly period.
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 2003 quarterly period was approximately $2.3
million, as compared to approximately $160,000 during the 2002 quarterly period.
The increase in net cash provided by operating activities was primarily due to
an increase in accounts payable.
At June 30, 2002, accounts receivable were $13.3 million, as compared to
$12.3 million at March 31, 2002. Receivables at June 30, 2002 represented 56
days of sales, as compared to 62 days of sales at March 31, 2002. We have
continued to extend the payment terms for one of our largest customers, Royal
Appliance Manufacturing Company in order to attract additional business from
this customer and we expect to continue to do so in the future.
At June 30, 2002, inventories were $9.3 million, as compared to $9.6
million at March 31, 2002. Our inventories consist primarily of raw materials
needed for future production. The decrease was mainly due to our using
significantly more raw materials than we had previously purchased for our
production needs during the first quarter of fiscal 2003. As a consequence, we
had also used part of our warehouse inventories during the quarter.
At June 30, 2002, accounts payable were approximately $7.5 million as
compared to $6.2 million at March 31, 2002. The increase was mainly due to our
increased stocking of raw materials for the peak productions period in the
second quarter. As discussed above, we had used more raw materials during the
first quarter than we had earlier purchased. Working capital increased from
$64.9 million at March 31,
Page 24
2002 to $67.7 million at June 30, 2002 due primarily to increases in cash and
cash equivalents and accounts receivable.
In October 1998, we made a loan to a start-up U.S. corporation wholly owned
by the spouse of a corporate executive in the original principal amount of $1.0
million, bearing interest at a fixed annual rate of 7.0% and 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 June 30, 2002,
accrued interest on the loan was approximately $317,000. We have reserved fully
against the interest due. As this company is currently in the development stage,
there can be no assurance that the loan will be repaid on a timely basis, if at
all.
In October 1999, we 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. Payments on the loan will be
forgiven in arrears, however, on each payment due date in consideration for the
director's continued service to us.
Our aggregate capital expenditures during 2002 and 2003 quarterly period
were $1.1 and $1.2 million, respectively. Capital expenditures decreased in
fiscal 2002 primarily due to our existing physical plant and equipment being
adequate to support the current level of business. Our outstanding capital
commitments as of June 30, 2002 were approximately $233,000, primarily for the
acquisition of tooling and purchase of machinery and equipment. We expect to
incur an aggregate of approximately $1.4 million in capital expenses for the
expansion of the Dongguan facility in fiscal 2003 to support our organic light
emitting diode, or OLED, electronic display program. We plan to implement the
initial phase of the expansion, involving building a prototype assembly line
incorporating one evaporator and using samples from this line to determine
whether there is sufficient market interest to support building a full scale
pilot line.
We maintained revolving credit facilities with Standard Chartered Bank,
HongkongBank and Citibank, N.A. as of June 30, 2002. These credit facilities
have an aggregate facilities limit of approximately $35.7 million and bear
interest at floating commercial bank lending rates in Hong Kong that ranged from
7.25% to 8.25% per annum. The amounts payable each month on the revolving credit
facilities varies depending upon the amounts drawn at the time. The balance for
short-term borrowings under these facilities was approximately $77,000 as of
June 30, 2002. Our outstanding borrowings vary according to our seasonal working
capital requirements. The amount utilized for overdrafts, bank loans, guarantees
and letters of credit under our bank facilities was approximately $3.5 million
as of June 30, 2002.
Our long term-debt consisted of four term loans with an aggregate
outstanding amount of $1.5 million as of June 30, 2002 (including the current
portion of long-term debt). These terms loans were provided by Standard
Chartered Bank under the revolving credit facility to finance the purchase of
machinery, equipment and motor vehicles. The term loans bear interest at rates
currently ranging from 2.7% to 5.875% per annum and mature on various dates
through the year 2004. The term loans are payable in monthly installments, which
were approximately $70,000 in the aggregate as of June 30, 2002.
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.
Page 25
Our acquisition of Lite Array, Inc. was completed in May 2002. The
acquisition was accomplished through a newly-formed subsidiary, Global Lite
Array (BVI) Limited, into which we contributed our convertible bond investment
in Lite Array plus $3.8 million of cash. In turn, the former common shareholders
of Lite Array contributed their Lite Array shares into Global Lite Array in
exchange for 9.2% of the outstanding shares of Global Lite Array, and the
holders of Lite Array debt exchanged $4.0 million in Lite Array debt in exchange
for 14.0% of the outstanding shares of Global Lite Array. Lite Array is a
California-based company involved extensively in the research, development and
pre-production of inorganic and organic solid state flat-panel displays. Lite
Array also operates a joint venture manufacturing plant in Jiangmen, China.
Total consideration for our investment in Lite Array was approximately $9.6
million, of which approximately $3.8 million was settled in cash and we took
responsibility for paying for the balance due on a license of $1.8 million. The
remaining portion of the consideration was satisfied in exchange of convertible
notes issued by Lite Array in fiscal 2001.
As part of our analysis of the potential for Lite Array's thin film
electroluminescent, or TFEL, display business and the joint venture, we
determined that the long-term prospects might be limited. Global Lite Array's
board of directors decided, at a June 10, 2002 board meeting, to discontinue the
production of TFEL displays and cease funding the joint venture in China as of
September 30, 2002. A presentation was made regarding this matter to our board
of directors on June 30, 2002 and a decision was made to write off the value of
Lite Array's investment in the joint venture, the goodwill associated with the
TFEL display business and certain TFEL production equipment owned by us.
A balance due on the small molecule OLED license we assumed as a result
of our acquisition of Lite Array remained unpaid as of June 30, 2002. A partial
payment of $800,000 was made on this license during the 2003 quarterly period.
Pursuant to the license arrangement, Lite Array must pay royalties of a fixed
percentage of the net sales of OLED display products that are produced by using
the licensed know-how and sold by Lite Array and its subsidiaries before January
1, 2004. Lite Array also must pay royalties of the greater of a fixed amount or
a fixed percentage of the net sales of OLED display products that are produced
by using the licensed know-how and sold by Lite Array and its subsidiaries after
January 1, 2004. The license expires in 2023 and may be terminated at any time
after January 1, 2004.
On October 18, 2002, we announced that our Lite Array subsidiary had
acquired a license from Luxell Technologies Inc. of Toronto, Ontario, Canada to
incorporate Luxell's proprietary Black Layer(R) technology in the production of
OLED displays. We believe this technology should further accelerate and support
our recent announcement to concentrate Lite Array's research and development
efforts on OLED displays and our plans to set up a pilot production line for
developing and producing OLED displays.
On November 1, 2002, we announced that our subsidiary, Global Lite Array
(BVI) Limited, entered into an agreement to sell Lite Array's TFEL display
business, including the interest that Lite Array owns in a joint venture
manufacturing facility in Jiangmen, China, to the former management of Lite
Array. The transaction, which is subject to certain closing conditions, is
expected to be completed within sixty days. The transaction is not expected to
have a material affect on our business, results of operations or financial
condition.
Inflation. From 1996 through 2001 and the first six months of 2002, the
rate of inflation in Hong Kong has ranged from approximately -5.3% to 9.0%
(approximately -0.4% during 2001) and the average rate of inflation in China has
ranged from approximately -2.1% to 17.0% (approximately -0.4% during 2001). 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.
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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 pegged
to the U.S. dollar. We have not been significantly affected by exchange rate
fluctuations and therefore have not needed to hedge our positions.
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