EXHIBIT 2
GLOBAL-TECH APPLIANCES INC.
Quarterly Report for the Three and Six Months ended September 30, 2002
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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 material customers and key strategic alliances, availability and
cost of raw materials, the timing 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.
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GLOBAL-TECH APPLIANCES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts expressed in United States dollars)
September 30, March 31,
2002 2002
------------------------------------
(unaudited) (audited)
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 31,893 $ 48,589
Short-term investments 28,497 8,678
Accounts receivable, net 16,453 12,318
Deposits, prepayments and other assets 2,696 2,158
Inventories, net 10,423 9,646
--------------------------------
Total current assets 89,962 81,389
Loan to a director 306 306
Property, plant and equipment 33,454 34,198
Land use rights 1,976 2,002
License 3,967 4,317
Patents 276 286
Promissory note receivable 728 775
--------------------------------
Total assets $ 130,669 $ 123,273
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ 77 $ 76
Current portion of long-term bank loans 696 715
Accounts payable 10,582 6,283
Amount due to a director - 180
Fee payable for license 1,000 1,800
Fee payable for land use rights 275 275
Salaries and allowances payable 944 541
Advance payments from customers 216 43
Accrued expenses 1,336 1,961
Investment in a joint venture 198 246
Income tax provision 3,585 4,384
--------------------------------
Total current liabilities 18,909 16,459
Long-term bank loans 503 272
Deferred tax liabilities, net 43 43
--------------------------------
Total liabilities 19,455 16,774
--------------------------------
Shareholders' equity:
Common stock, par value $0.01; 50,000,000 shares authorized;
12,830,000 shares issued as of September 30, 2002 and
March 31, 2002 128 128
Additional paid-in capital 81,753 81,753
Retained earnings 33,994 29,415
Accumulated other comprehensive deficit (61) (4,600)
--------------------------------
111,214 106,499
Less: Treasury Stock, at cost, 689,147 shares as of September 30, (4,600) (4,600)
2002 and March 31, 2002
--------------------------------
Total shareholders' equity 111,214 106,499
--------------------------------
Total liabilities and shareholders' equity $ 130,669 $ 123,273
================================
2
GLOBAL-TECH APPLIANCES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(Amounts expressed in United States dollars)
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------- ----------------------------------
2002 2001 2002 2001
--------------------------------- ----------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
( in thousands, except for per share data)
Net Sales $ 23,702 $ 24,812 $ 45,343 $ 48,090
Cost of goods sold (17,290) (18,496) (32,829) (36,731)
--------------------------------- ----------------------------------
Gross profit 6,412 6,316 12,514 11,359
Selling, general and administrative expenses (4,010) (4,355) (7,879) (7,985)
Share of losses in joint venture (168) (147) (325) (201)
--------------------------------- ----------------------------------
Operating income 2,234 1,814 4,310 3,173
Other income, net 415 617 708 1,436
--------------------------------- ----------------------------------
Income before income taxes 2,649 2,431 5,018 4,609
Provision for income taxes (226) (193) (439) (304)
--------------------------------- ----------------------------------
Income before minority interests 2,423 2,238 4,579 4,305
Minority interests - 181 - 186
--------------------------------- ----------------------------------
Net income $ 2,423 $ 2,419 $ 4,579 $ 4,491
================================= ==================================
Net income per share $ 0.20 $ 0.20 $ 0.38 $ 0.37
================================= ==================================
Weighted average number of shares outstanding 12,140 12,138 12,140 12,138
================================= ==================================
3
GLOBAL-TECH APPLIANCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts expressed in United States dollars)
Six Months Ended
September 30,
----------------------------------
2002 2001
----------------------------------
(unaudited) (unaudited)
(in thousands)
Cash flows from operating activities:
Income before minority interest $ 4,579 $ 4,305
Adjustments to reconcile net income before minority interest to net
cash provided by operating activities:
Share of loss of a joint venture 325 -
Depreciation and amortization 2,632 2,323
Gain on disposal of short-term investment - (48)
Loss on disposal of property, plant and equipment 38 -
Provision for promissory note receivable 47 -
Provision for income tax 439 304
Changes in operating assets and liabilities:
Accounts receivable, net (4,135) (805)
Deposits, prepayments and other assets (538) (413)
Inventories (777) 855
Intangible assets - (800)
Accounts payable 4,344 (5,617)
Fee payable for license (800) -
Salaries and allowances payable 403 -
Advance payment from customers 173 (110)
Accrued expenses (625) 206
Income tax payable (1,238) (3)
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Net cash provided by operating activities 4,867 197
--------------- ------------
Cash flows from investing activities:
Purchase of short term investments (21,206) (7,161)
Proceed from disposal of short-term investments 1,523 29,404
Purchase of property, plant and equipment (1,540) (1,507)
Increase in loan to a joint venture (373) (699)
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 (21,776) 20,036
--------------- ------------
Cash flows from financing activities:
Addition of long-term bank loans 691 -
Addition of short-term bank borrowings 1 -
Issuance of treasury stock to employees - 6
Repayment of short-term bank borrowings - (800)
Repayment of long-term bank borrowings (479) (482)
4
--------------- ------------
Net cash used in financing activities 213 (1,267)
--------------- ------------
Net increase (decrease) in cash and cash equivalents (16,696) 18,957
Cash and cash equivalents at beginning of year 48,589 28,489
--------------- ------------
Cash and cash equivalents at end of period $ 31,893 $ 47,446
=============== ============
5
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 September 30, 2002 and
for the six-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
September 30, 2002 and its results of operations and cash flows for the six
months ended September 30, 2002. The results of operations for the six months
ended September 30, 2002 should not be considered indicative of the results
expected for the 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 September 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
6
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."
7
GLOBAL-TECH APPLIANCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
Recent Developments
On December 17, 2002, Techtronic Industries Company Limited ("TTI") and
Royal Appliance Mfg. Co. jointly announced that they have entered into a
definitive agreement for TTI to acquire Royal Appliance. Royal Appliance is a
major customer of ours in the floor care product category. Sales to Royal
Appliance accounted for 42% of our net sales during fiscal 2002 and 44.8% of
our net sales during the first six months of fiscal 2003. Royal Appliance is not
contractually obligated to purchase floor care products from us, as we only sell
to them on the basis of purchase orders. TTI is a Hong Kong-based manufacturer
and marketer of home improvement products, floor care appliances and electronic
measuring devices. There can be no assurance that after acquiring Royal
Appliance, TTI will not begin to manufacture the floor care products we
currently supply to Royal Appliance or that TTI will not utilize another
sub-contractor to manufacture these products. If TTI does manufacture these
products itself or utilize another sub-contractor, it could have a material
adverse affect on our business, financial condition and results of operations.
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 and indoor grills;
. 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
48.3% and 43.4% of our net sales during the six months ended September 30,
2001 and September 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
8
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 an interim period refers to the six month
period ended September 30; for example, "2003 interim period" refers to the six
month ended September 30, 2002. References to a quarterly period refer to our
fiscal quarter ended on September 30; for example, "2003 quarterly period"
refers to the fiscal quarter ended September 30, 2002.
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 Six Months Ended
September 30, September 30,
---------------------------------- -----------------------------------
2002 2001 2002 2001
---------------- ----------------- ----------------- -----------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 72.9 74.5 72.4 76.4
---------------- ----------------- ----------------- -----------------
Gross profit 27.1 25.5 27.6 23.6
Selling, general and administrative expenses 16.9 17.6 17.4 16.6
Share of losses in joint venture 0.7 0.6 0.7 0.4
---------------- ----------------- ----------------- -----------------
Operating income 9.5 7.3 9.5 6.6
Other income, net 1.8 2.5 1.6 3.0
---------------- ----------------- ----------------- -----------------
Income before income taxes 11.3 9.8 11.1 9.6
Provision for income taxes 1.0 0.8 1.0 0.6
---------------- ----------------- ----------------- -----------------
Income before minority interests 10.3 9.0 10.1 9.0
Minority interests 0.0 0.7 0.0 0.4
---------------- ----------------- ----------------- -----------------
Net income 10.3% 9.7% 10.1% 9.4%
================ ================= ================= =================
Six Months ended September 30, 2002 Compared with Six Months ended September 30,
2001
Net sales. Our net sales consist of our gross invoiced sales less discounts
and returns. Net sales for the 2003 interim period were $45.3 million as
compared to $48.1 million in the 2002 interim period. The decrease in net sales
was mainly attributable to the decrease of kitchen appliance and garment care
product sales, which was partially offset by an increase in contract
manufacturing sales of floor care products. In the 2003 interim period, sales of
floor care products increased approximately 47% over the 2002 interim period.
There is no assurance, however, that our major floor care product customers will
continue to purchase floor care products from us, as they are 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 partially offset an
expected continuing weakness in sales of kitchen appliances and garment care
products. Net sales of Lite Array, Inc. electronic display units for the 2003
interim period were approximately $233,000.
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 interim period
as compared to the 2002 interim period were as follows:
9
. Sales of kitchen appliances decreased to $15.2 million, or 33.5% of
net sales, from $22.2 million, or 46.3% of net sales, primarily due to
decreased sales of breadmakers, food steamers 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 $1.5 million, or 3.3% of
net sales, as compared to $5.1 million, or 10.6% of net sales,
primarily due to decreased sales of steam irons to a major European
customer.
. Sales of travel products decreased to $350,000, or 0.8% of net sales,
from $669,000, or 1.4% of net sales, primarily due to decreased sales
of travel irons and travel sets. The decrease is attributable to lower
demand for these products.
. Sales of floor care products increased to $26.2 million, or 57.8% of
net sales, from $17.8 million, or 37.0% of net sales, primarily due to
increased sales of a new model for one major floor care products
customer. This increase also is attributable in part to an increase in
sales to another customer in the second quarter of fiscal 2003.
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 2003
interim period was $12.5 million, or 27.6% of net sales, as compared to $11.4
million, or 23.6% of net sales, in the 2002 interim period. Gross profit as a
percentage of net sales increased in the 2003 interim period primarily because
cost of goods sold decreased over the prior period at a more accelerated rate
than net sales decreased. Cost of goods sold decreased $3.9 million in the 2003
interim period due to decreases in raw material costs ($2.9 million decrease
over the comparable period), direct and indirect labor costs ($511,000 decrease
over the comparable period) and the cost of consumables ($540,000 decrease over
the comparable period) and other overheads. Raw material and other costs
decreased primarily due to lower sales volume during the 2003 interim period. We
have continued to retain tight control of manufacturing overheads such as labor
and consumables. We anticipate that cost of goods sold will continue to decrease
throughout the remainder of fiscal 2003. We are, however, in the process of
developing some new products, and we expect to incur additional overhead and raw
material costs in the early production stages that may offset any further
decreases in costs of goods sold related to the reduced sales volume.
Selling, general and administrative expenses. The primary components of our
selling, general and administrative ("SG&A") expenses include expenses 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 were approximately $7.9 million
in the 2003 and 2002 interim periods, or 17.4% and 16.6% of net sales,
respectively, in the 2003 and 2002 interim periods. SG&A expenses increased as a
percentage of net sales due to the decrease in net sales in the 2003 interim
period. Excluding the SG&A expenses incurred by Lite Array, we would have saved
approximately $1.1 million. We are in the process of selling Lite Array's
thin-film electroluminescent, or TFEL, display business to the former management
of Lite Array. Therefore, we anticipate that SG&A will decrease throughout the
remainder of fiscal 2003, which may be partially offset to some degree by an
increase in certain SG&A expenses related the development of new products.
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 2003
interim period were approximately $710,000 compared to $850,000 in
10
the 2002 interim period. The decrease in design and development expenses was due
to decreased salaries for engineers and designers and product safety testing
expenses.
Share of losses in joint venture. The share of loss in joint venture in the
2003 interim period was approximately $325,000 as compared to $201,000 in the
2002 interim period. The loss represented through Lite Array, our share of costs
of operating a production facility for TFEL displays in Jiangmen, China. On
October 30, 2002, we had entered into an agreement to sell the TFEL display
business, including the interest in the joint venture manufacturing facility in
Jiangmen, China, to the former management of Lite Array.
Interest expense and other income, net. Interest expense consists of
interest on our short- and long-term bank credit facilities. Interest expense
was approximately $41,500 in the 2003 interim period as compared to $146,000 in
the 2002 interim period. The decrease in interest expense was due to decreased
borrowing requirements. Other income, net includes tooling income, interest
income and non-recurring income. Other income, net was $708,000 in the 2003
interim period as compared to $1.4 million in the 2002 interim period. The
decrease in other income, net was primarily attributable to a decrease in
interest income during the 2003 interim period, as we invested less of the
remaining cash on hand from the net proceeds of our initial public offering and
cash generated from operating activities. Instead, we have invested this cash in
acquiring new technologies in an effort to expand our capabilities in
manufacturing other finished products.
Income tax. We had taxable income in Hong Kong in the 2003 and 2002 interim
periods. The financial statements include provisions for Hong Kong profits tax
of approximately $439,000 and $304,000 in the 2003 and 2002 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.
Minority interests. During the 2002 interim period, we acquired a
controlling interest of Global Lite Array (BVI) Ltd., a flat-panel display
business. Our 2002 interim period results included $181,000 of income from
Global Lite Array's operations during that period. There was no minority
interest in the 2003 interim period.
Net income. Net income for the 2003 interim period was $4.6 million, or
$0.38 per share, as compared to $4.5 million, or $0.37 per share, for the 2002
interim period.
Three Months ended September 30, 2002 Compared with Three Months ended September
30, 2001
Net sales. Net sales for the 2003 quarterly period decreased approximately
4.5% to $23.7 million from $24.8 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. There is no
assurance that the increase in net sales of floor care products will
continue, as our customers are under no contractual obligation to continue to
purchase such products from us.
Sales in each product category for the 2003 quarterly period as compared to
the 2002 quarterly period were as follows:
. Sales of kitchen appliances decreased to $8.1 million, or 34.1% of net
sales, from $11.8 million, or 47.6% of net sales, primarily due to
decreased sales of breadmakers, food steamers, electric knives and
food processors. Demand has waned for these products. Sales of these
products
11
also has decreased due to significant price competition in this
product category, which is expected to continue.
. Sales of garment care products decreased to $812,000, or 3.4% of net
sales, as compared to $2.4 million, or 9.7% of net sales, primarily
due to decreased sales of steam irons to a major European customer.
. Sales of travel products decreased to $112,000, or 0.5% of net sales,
as compared to $317,000, or 1.3% of net sales, primarily due to
decreased sales in travel irons and iron sets as a result of the
decreased demand for these products.
. Sales of floor care products increased to $13.5 million, or 57.2% of
net sales, as compared to $9.1 million, or 36.6% of net sales,
primarily due to increased sales of a new model for our major floor
care products. We also had increased sales to a new customer since the
first quarter of fiscal 2003.
Gross profit. Gross profit in the 2003 quarterly period was $6.4 million,
or 27.1% of net sales, as compared to $6.3 million, or 25.5% of net sales, in
the 2002 quarterly period. Gross profit as a percentage of net sales increased
in the 2003 quarterly period primarily because cost of goods sold decreased over
the prior period at a more accelerated rate than net sales decreased. Cost of
goods sold decreased $1.2 million in the 2003 quarterly period due to decreases
in raw material costs ($780,000 decrease over the comparable period) and
decreased manufacturing overhead, including direct and indirect labor costs
($170,000 decrease over the comparable quarterly period) and the cost of
consumables and repair and maintenance ($200,000 and $50,000 decrease,
respectively, over the comparable quarterly period). Raw material and other
costs decreased primarily due to lower sales volume during the 2003 quarterly
period. We have continued to retain tight control of manufacturing overheads
such as labor and consumables. We anticipate that cost of goods sold will
continue to decrease throughout the remainder of fiscal 2003. We are, however,
in the process of developing some new products, and we expect to incur
additional overhead and raw material costs in the early production stages that
may offset any further decreases in costs of goods sold related to the reduced
sales volume.
Selling, general and administrative expenses. SG&A expenses in the 2003
quarterly period were $4.0 million, or 16.9% of net sales, as compared to $4.4
million, or 17.6% of net sales, in the 2002 quarterly period. The decrease was
primarily due to decreases in legal and professional fees ($134,000 decrease
over the comparable quarterly period), wages paid to the administrative staff
($32,000 decrease over the comparable quarterly period) and other expenses. SG&A
expenses included $489,000 attributable to Lite Array which will not be incurred
in the future. Therefore, we anticipate that SG&A will decrease throughout the
remainder of fiscal 2003, which may be partially offset to some degree by an
increase in certain SG&A expenses related the development of new products.
Design and development expenses in the 2003 quarterly period were $340,000
as compared to $415,000 in the 2002 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. The share of loss in joint venture in the
2003 quarterly period was approximately $168,000 as compared to $147,000 in the
2002 quarterly period. The loss represented, through Lite Array, our share of
costs of operating a production facility for TFEL displays in Jiangmen, China.
On October 30, 2002, we entered into an agreement to sell the TFEL business,
including the interest in the joint venture manufacturing facility in Jiangmen,
China, to the former management of Lite Array.
12
Interest expense and other income, net. Interest expense was $15,000 in
the 2003 quarterly period, as compared to $77,543 in the 2002 quarterly period.
The decrease in interest expense was due to decreased borrowings. Other income,
net was $415,000 in the 2003 quarterly period, as compared to $617,000 in the
2002 quarterly period. The decrease in other income, net was primarily
attributable to a decrease of interest income in the 2003 interim period, as we
invested less of the net proceeds from our initial public offering and cash
generated from operating activities. Instead, we have invested this cash in
acquiring new technologies in an effort to expand our capabilities in
manufacturing other finished products.
Income tax. We had taxable income in Hong Kong in the 2003 and 2002
quarterly periods. The financial statements include provisions for Hong Kong
profits tax of approximately $226,000 and $193,000 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 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. During the 2002 quarterly period, we absorbed
approximately $181,000 in losses from the operations of Global Lite Array (BVI)
Ltd. during that period. There was no minority interest in 2003 quarterly
period.
Net income. Net income for both the 2003 and 2002 quarterly periods was
$2.4 million, or $0.20 per share.
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 interim period was $4.9 million
as compared to approximately $197,000 in 2002 interim period. During the 2002
interim period, the increase in net cash provided by operating activities was
mainly due to the increase in accounts payable, which was due to the increased
stocking of raw materials for the peak production period in the 2003 interim
period. The shift in current asset balances since March 31, 2002 from cash and
cash equivalents to short-term investments reflects our estimated cash reserve
being adequate to meet current liabilities.
At September 30, 2002, accounts receivable were $16.5 million, as
compared to $12.3 million at March 31, 2002. Receivables at September 30, 2002
represented 66.4 days of sales, as compared to 62.0 days of sales at March 31,
2002. We have continued to extend the payment terms for one of our largest
customers, Royal Appliance, which purchases floor care products from us, in
order to attract additional business from this customer and we expect to
continue to do so in the future.
At September 30, 2002, inventories were $10.4 million, as compared to
$9.6 million at March 31, 2002. Our inventories consist primarily of raw
materials needed for future production. The increase was mainly due to our
increased stocking of raw materials for the production of floor care products in
the peak production season. This increase in inventory was partially offset by
our use of raw materials already in our warehouse as we consumed more raw
materials in the first quarter than we purchased.
At September 30, 2002, accounts payable were approximately $10.6
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 production of floor care
products during the peak production period in the 2003 interim period. 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,
2002 to $71.1 million at September 30, 2002 due primarily to increases in
short-term investments and accounts receivable.
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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 September 30,
2002, accrued interest on the loan was approximately $317,066. 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 were $1.5 million during each of the
2002 and 2003 interim periods. During the 2003 interim period, the capital
expenditure was mainly incurred for acquisition of fixed assets. Our outstanding
capital commitments as of September 30, 2002 were approximately $500,000,
primarily for the furnishing of our new administrative office and 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 OLED 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 finance our operations and capital expenditures primarily by cash
flows from operations, proceeds from our initial public offering and borrowings.
Our revolving credit facilities with Standard Chartered Bank, HongkongBank and
Citibank, N.A. have an aggregate facilities limit of approximately $35.7 million
as of September 30, 2001, bearing interest at floating commercial bank lending
rates in Hong Kong, which ranged from 5.125% to 6.125% per annum as of September
30, 2002. The amounts payable each month on the revolving credit facilities
varies depending upon the amounts drawn at the time and was $77,000 in September
2002. Our outstanding borrowings vary according to our seasonal working capital
requirements. As of September 30, 2002, the amount utilized for overdrafts, bank
loans, guarantees and letters of credit under our bank facilities was $1.9
million.
As of September 30, 2002, our long-term debt consisted of four 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 2.94% to 5.88% and mature on various dates through
the year 2004. All of such loans are payable in monthly installments which were
approximately $80,000 as of September 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.
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%
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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 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 September 30, 2002. A
partial payment of $800,000 was made on this license during the 2003 interim
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 60 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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