Item 4. Information on the Company.
A. History and development of the Company .
Our legal name is Global-Tech Appliances Inc., and we were organized as an
international business company under the laws of the British Virgin Islands on
May 2, 1991 and went public on April 7, 1998. The address of our registered
office in the British Virgin Islands is TrustNet Chambers, P.O. Box 3444, Road
Town, Tortola, British Virgin Islands, and the telephone number at that address
is (284) 494-5296.
The address of our principal place of business, and the location of our
executive and administrative offices, is 21/F., Citicorp Centre, 18 Whitfield
Road, Causeway Bay, Hong Kong, and the telephone number at that address is (852)
2814-0601. Our e-mail address is welcome@pentalpha.com.hk. Our website is
located at www.businesswire.com/cnn/gai.shtml.
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B. Business overview.
Our core business is designing, manufacturing and selling a wide range of small
electrical household appliances to brand marketers in developed countries. While
the type of products we sell and their product categories have changed over
time, and will continue to change in the future, the total market that we serve
remains relatively stable. It is our aim to offer reliable, high-quality
manufacturing as a partner to U.S. and European companies that need to procure
finished products from the Far East for competitive reasons, but also need to
protect their brands' reputations. We also concentrate our resources on
developing creative and proprietary features for existing products which permit
us and our customers to achieve improved profit margins in today's retail
markets that demand lower prices for most commodity type products. Moreover, we
provide our customers opportunities to expand their businesses without the
considerable initial investment that would be required if they were to
manufacture their products themselves.
In our core business, we historically categorized the appliances we manufacture
by function. Our current product categories are floor care products, kitchen
appliances, garment care and travel products and environmental care products and
accessories. In each category, and with respect to the individual products
within the category, there are major brands and private label brands competing
for retail shelf space and consumer purchase. While the business as a whole has
remained fairly stable in the developed countries, it is subject to significant
shifts in demand for particular product categories and individual products
within the categories. In fiscal 2004, our net sales were comprised primarily of
sales in our two major categories: kitchen appliances and floor care products.
In the past, we manufactured personal care products, the least complex category
in small electric appliances. However, by 2001, we began to become less
competitive in this product category compared to other Chinese manufacturers
that did not have a Hong Kong staff or development programs and we decided to
de-emphasize this product category and begin to redirect our efforts. At the
same time, we expanded our electronic motor expertise and entered the floor care
product category. Floor care products are more complex and our product
development capabilities are more critical to their manufacture. We expect to
continue developing this business and other product categories using electric
motors and pumps for at least the next few years until we can introduce other
more technologically-advanced products that are currently, for the most part,
still in the development stage.
We attempt to make product development decisions and work with particular
partners based on the opportunity for consistent, sustainable and profitable
sales. We do not take on loss leaders or continue manufacturing certain products
in order to maintain factory capacity utilization at a specific level. Rather,
since our factory equipment has been paid in full and our fixed charges are not
significant, we concentrate our resources only on opportunities that we believe
will provide us with an acceptable return on investment. In recent years, we
chose not to pursue certain business opportunities presented to us because the
potential profit margin was not acceptable to us. Additionally, we believe that
our participation in a deflationary spiral for certain products or product
categories has no enduring benefit and this has led us to de-emphasize kitchen
appliances in our development programs in favor of floor care and our new
display businesses. While this strategy has led to lower revenues and affected
our profitability in the past three years, we believe over the longer term, it
will provide for a return to more acceptable financial performance.
One of our key strategies that historically aided our business success was our
emphasis on original design manufacturing as an alternative to contract
manufacturing. We have designed, engineered and tooled our own products and
offered them for sale to well-known household appliances companies for sale
under their own brand names. This was particularly effective with kitchen
appliances since brand marketers could introduce our products to the market with
minimum upfront investment on their part and satisfy the retailers' need for
differentiation and novelty. Our ODM strategy is usually most effective,
however, when we become well established in a given product category. For
example, we have recently begun introducing ODM floor care products after
successfully contract manufacturing these products for three years. While, in
the aggregate, our percentage of net sales of ODM products has decreased over
the last few fiscal years, we expect to emphasize our ODM strategy whenever
practicable since these products usually generate higher profit margins.
All of our sales are made in U.S. dollars. U.S. and European sales for our
products accounted for 83.9% and 6.7%, respectively, of our net sales during
fiscal 2004, as compared to 85.8% and 10.0%, respectively, of our net sales
during fiscal 2003, and 73.6% and 21.8% respectively, in fiscal 2002. The
percentage decrease in
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European sales in fiscal 2004 was primarily due to our de-emphasis on kitchen
appliances as well as the bankruptcy of Moulinex S.A. and the loss of one other
major customer. Sales to Moulinex S.A. were $0.0 in fiscal 2004 as compared to
$1.1 million, or 1.4% of net sales, in fiscal 2003 and $2.3 million, or 2.7% of
net sales in fiscal 2002. Sales to Moulinex S.A. in fiscal 2003 were the
completion of the remaining orders placed before its bankruptcy. In addition,
decreased sales in Europe were also due to the loss of a customer, Morphy
Richards, which was once our largest steam iron customer. The loss of this
customer was primarily because declining prices for steam irons in Europe, lead
to significant pressure on branded customers to reduce costs. Morphy Richards
was able to locate a Chinese manufacturer who was willing to produce these
products at what would have led to unacceptable profit margins for us. In fiscal
2004, Asian sales accounted for $5.7 million or 8.3% of our net sales as
compared to $2.3 million, or 3.0% in fiscal 2003. The increase in Asian sales
was mainly due to the increase in the sales of deep fryers. However, there can
be no assurance that sales in Asia will continue to increase in fiscal 2005.
Another major customer, Royal Appliance Manufacturing Company ("Royal"), was
acquired recently by Techtronic Industries Limited ("TTI"), a competitor of
ours. Royal is not contractually obligated to purchase floor care products from
us. These sales are primarily based on purchase orders we received from time to
time rather than firm, long-term purchase commitments and therefore, there is no
assurance that they will continue to buy floor care products from us in the
future. During fiscal 2004, Royal was still our largest customer and they
continued placing orders on existing products. While we have not received any
formal or informal notice from Royal and cannot predict when TTI will begin
producing all of Royal products and stop purchasing from us, we believe such a
result is likely to occur within the reasonably near future. Sales to Royal were
approximately $33.4 million, or 44.3% of net sales and $32.4 million, or 48.4%
of net sales in fiscal 2003 and 2004, respectively. The Eureka Company
("Eureka") is another major floor care customer. In fiscal 2004, sales to this
customer were $17.5 million or 26.1% of net sales as compared to $4.3 million,
or 5.7% of net sales in fiscal 2003. Eureka is also not contractually obligated
to purchase products from us. The loss of either of these two customers could
have a material adverse effect on our results of operations and we are
continuing to concentrate our efforts on introducing ODM floor care products to
the market in order to reduce our reliance on contract manufacturing for such a
significant portion of our business.
Small household appliances are sold through a variety of distribution channels,
including mass merchandisers, specialty retailers, warehouse clubs, drug store
chains, direct marketing organizations and department stores. In the United
States, mass merchandisers, such as Wal-Mart and Target, have become the
dominant retailers of small household appliances. We believe that a similar
trend is emerging in Western Europe. Generally, mass merchandisers prefer to
purchase from a limited number of well-known household appliance companies that
provide a variety of high quality, innovative, brand name products on a timely
and cost-effective basis. Accordingly, household appliance companies are
focusing on their primary strengths of marketing and distribution, while
increasingly outsourcing product development and manufacturing.
We 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 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.
Late in fiscal 2003, we began exploring opportunities in display-oriented
products, particularly those utilizing flat-panel displays. We concluded that
investing in the capital equipment to produce flat-panel modules was not as
attractive as sourcing the panels, software, and other electronic components
while we focus on utilizing our manufacturing experience and capabilities to
produce high-quality, competitive products. Thus, we hired a number of
experienced software and electronic engineers to adapt "total solution" software
from several companies to develop such products. Development expenses in fiscal
2004 were $0.8 compared to $0.0 in fiscal 2003.
In our pursuit of this endeavor, we established a separate subsidiary, Global
Display, to develop and market a wide range of such display-oriented products.
It has its own dedicated and experienced technical and marketing staff who will
focus initially on developing flat-panel high definition televisions (HDTVs)
incorporating plasma or thin film transistor liquid crystal displays (TFT LCDs).
Since the basic display modules are readily procured from "fab" plants (the
capital intensive processing facilities that convert glass, gases and
transistors into display modules),
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we can concentrate our efforts on product design, software development, and
framing production, which can be produced utilizing our existing metal stamping
and injection molding equipment.
We plan to follow the ODM strategy that was successful in our core business as
the model for our program to develop higher-value, more technologically-advanced
consumer products incorporating flat-panel displays. The Company has been
approached by potential customers for certain products incorporating flat panel
displays. They are intrigued because purchasing from us may allow them to enter
the market with a minimum initial investment and also allow them to sell their
products at lower prices. This could in turn help them compete with the major
brands. During the fourth quarter of fiscal 2004, we shipped some samples to
certain customers for their review and testing. We anticipate that initial
purchase orders might be concluded with certain customers in the second and
third quarter of fiscal 2005. However, there is no assurance that these
preliminary customer trials will ultimately result in significant or sustainable
sales. The other major competitive advantages we plan to utilize, along with our
relatively low cost of labor, are our experience and vertically-integrated
manufacturing capabilities in tooling, metal coating, metal stamping, die
casting, printed circuit boards, and plastic injection molding. In the next few
years we intend to develop and produce other display-oriented products utilizing
liquid crystal on silicon (LCOS), optical and digital technologies utilizing our
low cost ODM concept. The key to our success in this area will be our ability to
design and tool products with attractive appearance and innovative features to
secure potential customers.
In May of 2001, we decided to purchase a controlling interest in Lite Array
through a newly formed subsidiary, Global Lite Array (BVI) Limited. Our
investment in the TFEL business was made assuming the profits from the TFEL
display business would be sufficient to fully fund the OLED display technology's
development. By March 31, 2002, we had concluded that the long-term prospects
for the TFEL business were limited. It also became clear that Lite Array's TFEL
business would not attain sufficient profitability within in enough time to
fully fund the OLED display development. Our board of directors determined that
Global-Tech was not prepared to support additional years of significant losses.
Consequently, Global Lite Array's board of directors decided to discontinue
production of TFEL displays and cease funding the joint venture in China as of
September 30, 2002. We decided 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.
As required by U.S. GAAP, we performed an evaluation of impairment of goodwill,
interest in a joint venture and property, plant and equipment as of March 31,
2002. This evaluation was completed by June 3, 2002 and accordingly a write-down
of such assets was taken as of March 31, 2002. In fiscal 2002, Lite Array had a
net loss of $11.7 million after the write off, which had a major impact on our
operating results. Subsequently, a decision was made to dispose of or liquidate
Lite Array's TFEL display business. In fiscal 2003, we sold the TFEL business
including the interest in the joint venture in Jiangmen, China, to the former
management of Lite Array. Lite Array's OLED display business is still in the
research and development phase, but we believe the business shows promise.
Currently, all of Lite Array's resources are being dedicated to this effort.
In March 2002, we announced the acquisition of a technology that we may be able
to use to develop and manufacture Stirling, or heat, engines, which have
potential to be more efficient and cost effective than certain other types of
small electric or gasoline engines. We have dedicated modest resources to work
on the development of advanced heat engines. To date, we have not reached
commercialization of any products utilizing a heat engine.
Business Strategy
It is our intention to de-emphasize unprofitable product categories with lower
profit margins that merely maintain sales volume and expand into more
technologically advanced product categories. In recent years, we have endeavored
to develop new business opportunities such as the establishment of Global
Display and the OLED program. Our strategy is to seek out business opportunities
that take advantage of our engineering and design, low cost manufacturing,
quality system and reputation and logistical skills.
Small Household Appliances Business
Our business strategy is to achieve growth by expanding the number of products
we manufacture that can be marketed and offered effectively to consumers by the
brand marketers that we supply. In order to carry out this strategy, we
regularly evaluate what product categories fit well with our production
capabilities. In the past, we
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have evaluated whether to manufacture a number of hardware categories, such as
lawn and garden, steam cleaning and pumps, as well as developing the designs and
software for the manufacture of certain consumer electronic products. However,
to date we have not made the decision to proceed in most of the categories. The
following are the key elements of our business strategy process.
Market research into new categories and products. We begin by examining existing
products and determine if, by manufacturing them ourselves, we could provide
potential customers a benefit from our innovative manufacturing process which
would lead to outsourcing opportunities. Our particular emphasis on innovation
in our core business is based on convenience, health and safety and cost
reduction. We also target for research those product categories in which
products are still primarily manufactured in their respective domestic markets
but ultimately will be required to be outsourced to meet competitive pressures
and retail pricing demands.
Innovative product development. Based on our research, we develop new products
that may range from minor design changes in existing products to new products
that contain significant new functions or features. In creating new products, we
concentrate on developing concepts, functions and features that are not offered
by existing products and can be produced at a reasonable cost. We seek to
reinforce the proprietary nature of our new products by obtaining patent
protection when possible, and retaining ownership of the tooling required to
manufacture them. We believe that the flexibility of our design and
manufacturing process allows us to introduce new products with shorter
development cycles than if our customers attempted to manufacture these products
themselves.
Vertically-integrated, low-cost manufacturing. We maintain our principal
production facility in Dongguan, China dedicated to vertically-integrated
manufacturing. We have made a significant investment, and continue to invest, in
sophisticated machinery to create the tooling and components used in the
manufacturing process. This machinery, along with the use of relatively
inexpensive labor, enables us to efficiently produce many of our components and
to assemble these components to create finished products. We also invest where
necessary in automation to offset increased labor costs. By locating our
manufacturing facilities in close proximity to Hong Kong, we are also able to
leverage both the transportation resources and engineering and managerial
expertise available in Hong Kong. We believe that our investment in
manufacturing machinery, combined with the strategic use of labor and management
resources, allows us to provide customers with high-quality, low-cost products
in an efficient and timely manner.
Commitment to quality. We are committed to manufacturing high-quality products
and we achieve this goal by engaging in quality control testing at each stage of
the manufacturing process. We are able to assure the reliability and consistent
performance of our products by testing both the individual components and the
fully-assembled finished product. Our quality management system has been
certified as conforming to the standards of the International Organization for
Standardization, or ISO. The ISO is a Geneva, Switzerland-based organization
that publishes a series of standards for quality management and quality
assurance with the goal of providing guidelines for consistent practices
worldwide. Our quality control system has been certified by Det Norske Veritas
QA Ltd., an accredited unit of the ISO, as conforming to Quality System Standard
ISO 9002 for the manufacture of electrical household appliances
Focus on sales to brand name customers. Our ability and commitment to develop
new and innovative, high-quality products at a low-cost have allowed us to
benefit from the increased outsourcing of product development and manufacturing
by our brand customers. We intend to enter into collaborative arrangements
whenever possible with our brand customers to support their offshore procurement
efforts. We still believe in the importance of supporting brands.
Expansion of manufacturing capabilities. We invest either directly or indirectly
in all the equipment needed to manufacture our products. In recent years, we
have added die casting and electric motor manufacturing to our processes and
plan to use our Lite Array subsidiary to develop OLED displays for use in our
own products as well as components to be marketed to consumer electronic
manufacturers.
Pursue selected acquisitions. We believe that the continuing trend among
retailers to consolidate their vendors and require more support from them will
provide us with cooperative manufacturing and acquisition opportunities. We will
continue to pursue select acquisitions that fit our long-term business strategy
to gradually
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diversify and transform a portion of our manufacturing capacity to higher-value,
technology-oriented products that will allow us to leverage our existing
research and development and technical management staff in Hong Kong, as well as
our existing manufacturing infrastructure in China. We also have considered
other potential complementary acquisitions. Although we have not reached an
agreement for any such acquisitions, we plan to continue to pursue selected
acquisitions of complementary businesses. There can be no assurance that any of
these acquisitions will be consummated or, if consummated, such acquisitions
will be successfully integrated into our operations.
Display-Oriented Products Business
Our strategy for flat panel displays is very similar to our appliance business.
Our initial products are expected to be high definition televisions utilizing
liquid crystal display (LCD) or plasma screens, but we plan to focus ultimately
primarily on innovative micro-displays and optical systems for larger displays.
Explore and exploit new technologies and business opportunities. We are now
actively working on a number of product development programs incorporating
multimedia flat-panel display technologies that we believe could positively
redirect the focus of our business in the next two to five years. We are not
relying on any one technology or product category to succeed, but believe that
once one or more of these product categories utilizing flat-panel displays
attain market acceptance, they will provide us with a sustainable, growing
revenue and income stream.
Lite Array's OLED Business
Since the acquisition of Lite Array, we have been active in the development of
organic light emitting diode (OLED) technology utilizing licensed proprietary
single molecule technology. We have built a clean room, acquired a development
line and related know-how and are producing OLED display samples for customer
evaluation.
According to the forecast of Stanford Resources, a market and technology
research firm specializing in the electronic display industry, the worldwide
market for OLED displays will grow from about $220 million in 2003 to more than
$3.0 billion in 2009, which represents a compound annual growth rate of
approximately 56%. Demand has been established for passive matrix OLED displays,
including sub-displays for mobile flip-phones and panel displays for car audio
systems. In particular, the wide acceptance of OLED in mobile phone sub-displays
because of its thin profile, as compared to a LCD module with a backlight, is
driving demand. Due to the growth in flip-phones in Asia, particularly in China,
our planned production line in Dongguan, China should be well positioned to ship
displays to the mobile phone manufacturers directly.
Products
Currently, we design and manufacture a number of small electrical household
appliances. During fiscal 2002, 2003 and 2004, ODM products accounted for 48.5%,
39.3 and 25.5%, respectively, of our net sales, with the balance of our net
sales being from contract manufacturing performed according to product
specifications provided by customers. In fiscal 2004, we produced approximately
2.7 million units.
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The following table reflects our net sales for each significant product category
in fiscal 2002, 2003 and 2004:
Fiscal Year Ended March 31,
2002 2003 2004
(In thousands)
Product category:
Floor care products $ 37,332 $ 42,143 $ 49,734
Kitchen appliances 36,086 26,259 12,044
Garment care and travel products and accessories 7,851 2,755 1,574
Other (1) 4,052 4,332 3,549
Total $ 85,321 $ 75,489 $ 66,901
(1) Includes environmental care products, personal and health care
products and accessories for each of our product categories and
display products samples as well as tooling income for
procurement, design and manufacturing of tooling and molds.
Kitchen appliances. We began manufacturing kitchen appliances in 1992, and
focused much of our ODM design and development efforts in this area over the
next ten years. We manufactured a broad line of kitchen appliances, including
blenders, breadmakers, coffeemakers, electric knives, espresso machines, food
choppers, food processors, food steamers, ice cream makers, indoor grills and
rice cookers. Kitchen appliances represented 42.3%, 34.8% and 18.0% of our net
sales in fiscal 2002, 2003 and 2004, respectively.
During 2001, a number of changes occurred in the kitchen appliance business,
which convinced us that the market for many of the kitchen products we
manufacture had changed and that such changes would cease to reward us for
innovation and development work with respect to these products. Accordingly, we
subsequently decided to concentrate our efforts on manufacturing a smaller
number of kitchen appliance products, where innovation (particularly with
respect to healthy cooking) is still important, and gradually cease
manufacturing other kitchen appliance products. In the past three fiscal years,
our most significant reduction in manufacturing has been in breadmakers and food
steamers and the total sales of these products decreased from $14.1 million in
fiscal 2002 to $3.5 million in fiscal 2004. In addition, the bankruptcies of two
of our former major customers, Sunbeam Corporation and Moulinex S.A., the
consolidation in the industry and the continued demand by mass merchandisers for
lower-priced appliance products have led us to accelerate our diversification
strategy and reduce our development efforts of most kitchen appliance products.
Garment care and travel products. We began manufacturing garment care products
in 1985. Our garment care products include a variety of steam and dry irons and
clothes steam brushes. Garment care products represented 7.7%, 2.9% and 2.0% of
our net sales in fiscal 2002, 2003 and 2004, respectively. The decrease in sales
in this product category in Europe has been significant, as we decided not to
reduce prices and further reduce our margins on these products for one major
customer. We also lost business due to Moulinex's bankruptcy. The travel
products we manufacture include travel steam and dry irons, travel hair dryers,
travel hair roller sets and voltage converters/adaptors. Travel products
represented 1.5%, 0.8% and 0.4% of our net sales in fiscal 2002, 2003 and 2004,
respectively.
Floor care products. We started manufacturing floor care products in fiscal
2000. Our floor care products include hand-held steam vacuum cleaners, upright
vacuum cleaners and extractors. Floor care products represented 43.8%, 55.8% and
74.3% of our net sales in fiscal 2002, 2003 and 2004, respectively. As a
contract manufacturer, our growth in this category has been principally driven
by our product quality, testing systems and sophisticated electric motor
production and the fact that our tooling and injection molding machinery for
large plastic parts is already in place. We are continuing to concentrate our
efforts on introducing ODM floor care products to the market in an effort to
reduce our reliance on contract manufacturing for such a significant portion of
our business. We believe the introduction of ODM floor care products should help
us sustain our profit margins.
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Product Design and Development
Our core business is designing, manufacturing and selling a wide range of small
electrical household appliances for brand marketers in developed countries.
However, we are continuing to acquire new technologies in an effort to expand
our capabilities in manufacturing finished products. It is our long-term
strategy to gradually diversify and transform a portion of our manufacturing
facility to produce higher-value, technology-oriented products that will allow
us to leverage our existing research and development and technical management
staff in Hong Kong. We established our subsidiary, Global Display, to develop
and market a wide range of display oriented products. Much of this research and
development work had its origin in Lite Array's OLED display business.
Small Household Appliances Business
We dedicate resources to the development of new products that may range from
minor design changes in features of existing products to innovative new products
with significant new functions or features. In creating new products, we
concentrate on developing concepts, functions and features that are not
available in existing products, are relatively easy to incorporate and can be
produced at a reasonable cost. We seek to reinforce the proprietary nature of
our products by obtaining patents when possible and retaining ownership of the
tooling required to manufacture them. We believe that the flexibility of our
design and manufacturing process allows us to introduce new products with
shorter development cycles than most of our customers could achieve if they
manufactured these products themselves. In fiscal 1999, we established a testing
facility under the Client Interactive Program of Underwriters Laboratories Inc.,
or UL, in order to achieve UL and Canadian UL certification of our products
faster and with less expense.
We established our own design and development department in 1998. It currently
has 29 engineers and technical staff including 18 individuals located in Hong
Kong and 11 individuals located in the PRC. They are responsible for conducting
feasibility analyses of new product ideas, testing of new products, detailed
design and tooling engineering and overseeing the initial production runs for
these new products. This is done in close collaboration with the sales and
marketing departments. Together, both groups evaluate competitive products,
monitor changes in consumer buying patterns and plan new products or the
improvement of existing products. Since its inception, the product design and
development team has contributed to the development of over 200 products.
We employ industrial design, mechanical, electrical and electronic engineers to
design, develop and test our products. Employee, customer and retailer feedback
is used to test the viability of potential new products and product
enhancements. Once targeted for possible production, product and enhancement
concepts are conveyed to industrial, and then mechanical, designers, who use
computerized design and other leading design and engineering technologies. These
engineering technologies include CAD systems, an advanced 3-D solid modeling
system and state-of-the-art stereo lithography equipment to design and engineer
new products. We believe that these new technologies and equipment have improved
the speed and efficiency of the design process and the quality of our finished
products.
Our design and development team guides products from conception through
manufacturing. A typical cycle for a product to be manufactured and sold to an
ODM customer is nine to twelve months from conception through design, tooling
and production. The typical cycle for contract manufacturing is eight to ten
months, as the concept and design for the product are supplied by the customer.
Contract manufacturing customers generally bear the cost of retooling for our
manufacturing facility, while we absorb such costs in the ODM process. When
tooling is completed and the appropriate agency listing, such as UL or TUV
(Technischer Uberwachungs Verein, the European standard for safety) is obtained,
production begins.
Our expenditures for design and development of small household products were
approximately $2.0 million in fiscal 2002, $1.6 million in fiscal 2003 and $1.3
million in fiscal 2004.
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Display-Oriented Products Business
We established our subsidiary, Global Display, to develop and market a wide
range of display products for our display business. Initially, the primary
product development function is to design flat panel high definition televisions
(HDTV's) incorporating plasma or thin film transistor liquid crystal displays
(TFT-LCDs). Since the display modules are readily procured from "fab" plants
(the capital intensive processing facilities that convert glass, gases and
transistors into display modules) we can concentrate our effort on cosmetic
design, framing systems and software. We believe the key is software, where we
are developing our own video control board designs in order to satisfy different
OEM and ODM client requirements, as well as incorporating differentiated audio
and video systems in order to enhance performance.
As of March 31, 2004, we had established a dedicated product development team
for Global Display of 22 engineers stationed in Hong Kong and 7 in our Shenzhen,
PRC office. This team is responsible for the following aspects of flat-panel
display development for Global Display:
Electronic engineering, including developing software and electronic
components, for LCD TVs, plasma displays, rear projection TVs and
projectors,
Mechanical engineering focusing on structural design to meet the
specifications and requirements of customers and agency approvals,
Product design providing cosmetic designs to serve different OEM
and ODM customers, and
Sourcing of critical components and raw materials to ensure our
competitiveness in the display market.
In fiscal 2004, our expenditures for design and development for Global Display
were approximately $0.7 million but had grown to an annualized level of $0.9
million by the fourth quarter. These expenses are expected to increase in fiscal
2005 as product development work in this area accelerates.
Lite Array's OLED Business
The Company's subsidiary Lite Array continued its development of manufacturing
processes and product designs for OLED throughout fiscal 2004. A vacuum
deposition system has been set up in a clean room in our factory at Dongguan,
China and towards the end of the year the prototyping line, including the
photolithography equipment we acquired from Opsys US Corporation ("Opsys"), was
being installed. The line, when completed in the near future, is expected to
have the capacity to produce prototypes for customer product evaluation. Three
products are currently being developed for cellular phone displays, car audio
and interactive game applications. It is anticipated that one or more of these
products can be introduced commercially in late fiscal 2005. We recently
established strategic alliances with two OLED display manufacturers, to
facilitate the commercialization of our OLED consumer electronic products, such
as mobile phone.
In fiscal 2004, our expenditure for design and development for OLED, excluding
license amortization, was approximately $300,000, as compared to $140,000 in
fiscal 2003, the majority of which was for wages and salaries of our technical
staff and engineers. As of March 31, 2004, the OLED program had a product
development group of seven people in the PRC.
We expect Company-wide design and development expenses to increase to include
approximately $1.5 million for Lite Array and approximately $6.0 million for
Global Display and $1.0 million in our core business in fiscal 2005.
Manufacturing
We maintain our principal production facility in the township of Dongguan,
Guangdong Province, China, which is a self-contained 1.85 million square foot
vertically-integrated manufacturing complex. Vertical integration enables us to
manufacture high-quality products at a low cost. It also allows us to emphasize
quality control and provide the flexibility in the manufacturing process
necessary to better service our customers' needs. We have made
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a significant investment in machinery to create the tooling and components used
in the manufacturing process for many of our products. This machinery, along
with the use of relatively inexpensive labor, enables us to efficiently produce
many of our components and assemble these components to create our finished
products. We manufacture most of our motors and other components, including
thermostats, plastic, metal and die-casting parts, switches and circuit boards.
We also have a multi-faceted coatings line and pad printing capability. We
sub-contract the production of certain components either when they can be bought
from other suppliers at lower prices or if we do not have the specialized
machinery to produce the component or when we can allocate our production
capacity more efficiently to alternative tasks. We do not generally depend on
other manufacturers to provide key parts or accessories.
Generally, our production schedule is based on purchase orders and forecasts
received from our customers once tooling is completed, typically covering a
period of three to six months. The first 45 days of orders to be shipped
pursuant to the forecasts are generally firm. Later shipments often vary from
initial forecasts, depending on the needs of the customer. The relation of
actual shipments to forecasted orders is based on industry custom rather than on
binding agreements, and thus forecasted orders may be canceled at any time
without penalty to the customer or recourse to us. To the extent that a material
percentage of forecasted orders from customers are canceled, we could suffer a
loss on long-lead item components.
Our physical space is less than fully utilized and we have excess capacity
available to meet any temporary surge in our requirements and also for future
development. Excluding dormitories, cafeterias and recreation areas, roads and
portions of land reserved for future expansion, the completed production area is
approximately 1.56 million square feet. Currently we are utilizing approximately
80% of our manufacturing facility's production capacity. In fiscal 2004, we did
not reduce our workforce significantly as it was anticipated that mass
production of display products would soon commence and we were concerned about
the inadequate supply of labor in Guangdong Province. Specialized skills are
generally not required for most of our manufacturing workforce and we believe
that we will be able to acquire the necessary labor when product demand
increases. However, due to demand for labor in Guangdong Province exceeding
supply, we expect the cost of labor to increase substantially. We therefore plan
to invest in more automation to help hold down our cost of production.
We ship our products primarily free on board (FOB) from ports in Hong Kong and
China, with customers generally liable for any losses resulting from the
transportation of finished products from the port to their final destination.
Title to the goods passes to the customer when the truck is unloaded and the
container is accepted by the carrier located in the ports of Hong Kong or China.
Transportation of components and finished products between Dongguan, China and
port is by truck. Component parts purchased from areas outside Guangdong
province are generally shipped by sea.
Our subsidiary Lite Array, formerly operated a joint venture in Jiangmen, China
to produce 1/4 VGA or smaller monochrome TFEL displays. As further disclosed
under "Item 4.B-Business Overview," Global Lite Array's board of directors
decided to discontinue production of TFEL displays and cease funding the joint
venture in China as of September 30, 2002. We decided 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 in
fiscal 2002. In fiscal 2003, we sold the TFEL business to the former management
of Lite Array including the interest in the joint venture in Jiangmen, China.
We are in the process of establishing an OLED prototype production facility in
our Dongguan manufacturing complex and plan to make use of the existing
administrative, engineering and logistical support to help minimize our costs.
On January 7, 2003, we entered into an asset purchase and lease agreement with
Opsys. We purchased their R&D experimental production equipment for small
molecule OLED displays for $1.0 million. Concurrent with the purchase of the
equipment, we leased it back to Opsys through February 28, 2003 for a rental
payment of $1,000 per month. Upon the execution of the Purchase Agreement, we
were granted a warrant to purchase securities of Opsys (and of any of its
affiliates that raised capital) having an aggregate valuation of $2.0 million,
with such warrants having an exercise price of $0.0001 per share. At the time of
the execution of the Purchase Agreement, we believed that the purchase of the
equipment and the opportunity to acquire such securities would accelerate our
progress in OLED product development. An involuntary proceeding under Chapter 7
of the United States
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Bankruptcy Code was commenced against Opsys on May 3, 2003. On September 4,
2003, the Bankruptcy Court for the Northern District of California issued an
order to allow us to proceed with removal of the equipment located in Opsys'
business location. We have removed and shipped the equipment to our facility in
Dongguan, China and we have completed re-installing it in a new clean room. We
plan to operate this R&D line and produce prototypes and samples from it during
fiscal 2005.
Quality Control
We are committed to manufacturing products of the highest quality and we achieve
this goal by engaging in quality control testing at each stage of the
manufacturing process. All incoming raw materials and components are inspected
by our quality control personnel. During the production stage, our quality
control personnel inspect all work-in-process at several points in the
production process. We are able to test the reliability and consistent
performance of our products by testing both individual components and the
fully-assembled finished product. We provide access to our manufacturing
facility for representatives of our major customers to allow them to monitor
production and to provide them with direct access to our manufacturing
personnel.
Our quality control system has been certified by Det Norske Veritas QA Ltd., an
accredited unit of the ISO, as conforming to Quality System Standard ISO 9002
for the manufacture of electrical household appliances. Our receipt of ISO 9002
certification demonstrates that our manufacturing, installation and servicing of
products have met specified requirements.
Suppliers
We obtain over 7,000 different component parts from more than 350 major
suppliers. We are not dependent upon any single supplier for any key component.
Our recent supply agreements with Oplus and Samsung do not prohibit us from
sourcing from other vendors who are willing and able to supply reliable and
economic source of display components and raw materials. Certain of our major
component parts, such as plastic, metal sheets and packaging, are purchased
solely from outside suppliers. Others, such as motors and electrical and
electronic parts, are either manufactured by us or purchased from outside
suppliers, depending on the complexity of the component and the capacity of our
facilities at the time. We believe that we can obtain all of these components
from alternate sources if necessary. Raw materials, electronic components and
other parts are either sourced in China or from other countries, primarily the
United States, Japan and Germany. Raw materials from outside China are generally
shipped through Hong Kong and then transported by truck to our factory in China.
Transactions with our suppliers are based on purchase orders issued by us from
time to time and we have no other written agreements with our suppliers. Orders
for components are based on actual orders and forecasts that we receive from our
customers that reflect anticipated shipments during the production cycle for a
particular model. See "Product Design and Development" Many of the raw materials
used in our products including plastics that are purchased outside China are
subject to any applicable duties. See "Foreign Issuer Considerations."
Since we are dependent upon outside suppliers for all of our raw material needs,
including plastic resins, the results of our operations are subject to price
fluctuations in these raw materials. The plastic resins used by us are derived
from natural gas liquids. Plastic resin prices may fluctuate as a result of
changes in natural gas and crude oil prices, and the relative capacity, supply
and demand for resin and petrochemical intermediates from which the resins are
produced. We have no long-term supply contracts for the purchase of plastic
resin, although we do generally maintain a 90-day supply. In recent months
plastic pricing has been very volatile and current prices are 60% higher than a
year ago. We work closely with our customers and suppliers in order to minimize
the amount of inventory of raw materials we keep on hand and we are working on
improving our automated inventory maintenance and control system to assist us in
doing this. In order to expedite the production process and reduce the risk of
delays caused by the non-delivery of supplies, it is our general policy to
source each component from two or more suppliers. This multi-source approach is
intended to ensure the delivery of the components necessary in the manufacturing
process should one supplier be unable to deliver. Historically, we have not
experienced any difficulty in obtaining component parts.
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Major Customers
Sales to seven major customers, Royal Appliance Manufacturing Company (which
sells under the brand name Dirt Devil ), Morphy Richards Limited (which sells
under the brand name Morphy Richards ), Global Marketing Corp. (whose customer
sells under the brand name Gevalia), Hamilton Beach/Proctor-Silex, Helen of Troy
Limited (which sells under the brand names Vidal Sassoon and Revlon amongst
others), Moulinex S.A. (which sold under the brand names Moulinex and Krups) and
Sunbeam Corporation (which also sells under the brand names Oster and Mr.
Coffee), accounted for 51.7%, 73.3% and 83.8% of our net sales during fiscal
2000, 2001 and 2002, respectively. In fiscal 2003, sales to seven major
customers with Black & Decker (which sells under the brand name Black & Decker),
Kenwood , and Eureka replacing Moulinex, Sunbeam and Hamilton Beach accounted
for 86.8% of our net sales in fiscal 2003. In fiscal 2004, sales to those same
seven major customers, accounted for 94.3% of our net sales in fiscal 2004.
During each of past three fiscal years, sales to the following customers
accounted for more than 10% of our total net sales in any one year:
Fiscal Year Ended March 31,
2002 2003 2004
Royal Appliance Manufacturing Co. 42.5 % 44.3 % 48.4 %
The Eureka Company 0.0 5.7 26.1
Morphy Richards Limited 12.2 1.2 1.1
Global Marketing Corp. 13.9 12.2 0.1
Black & Decker 4.9 13.3 4.3
The increase in percentage sales to major customers from 86.8% in fiscal 2003 to
94.3% in fiscal 2004 is primarily due to sales of floor care products to Eureka,
a new customer in fiscal 2003. In fiscal 2004, sales to this customer were
approximately $17.5 million or 26.1% of our net sales as compared to $4.3
million, or 5.7% of our net sales in fiscal 2003. Sales of floor care products
to our major customer, Royal Appliance Manufacturing Company ("Royal") decreased
in dollars from $33.4 million, or 44.3% of net sales, in fiscal 2003 to $32.4
million, or 48.4% of net sales in fiscal 2004. On December 17, 2002, Techtronic
Industries Company Limited ("TTI") and Royal jointly announced that they had
entered into a definitive agreement for TTI to acquire Royal. Effective April
23, 2003, TTI announced its acquisition of Royal by way of merger. Following the
completion of the merger, Royal has operated as a wholly owned subsidiary of
TTI. TTI, like the Company, is a full-line electrical products manufacturer
based in Hong Kong and China and eventually is likely to produce all Royal
products. We have not received any formal or informal notice from Royal and we
cannot predict when TTI will begin producing all of Royal products and stop
buying from us, but believe such a result is likely to occur within the
reasonably near future. Net sales are expected to decline unless we are able to
replace Royal with another major floor care company as a customer in the near
future.
Although the relative percentage of sales to each of our major customers changes
each year, we expect that in the foreseeable future we will be dependent on
between four and seven major customers during each fiscal year. While we may
enter into contracts with general terms for the purchase of products with
certain of our major customers, sales are generally made by purchase orders
received by us from time to time without any firm commitment for sales levels
over a long-term period.
Marketing
Our worldwide sales and marketing activities are managed by a team of executives
based in Hong Kong and Macau who maintain frequent contact with our customers.
We maintain relationships with our customers by employing senior marketing
personnel who understand the culture of our customers' local market and share
the same language with the employees of our customers who make purchasing
decisions. For a breakdown by geographical markets of our net sales during the
past three fiscal years, see Note 26(a) of Notes to Consolidated Financial
Statements.
Our marketing programs are designed to give exposure to our comprehensive
selection of innovative, high-quality and cost-effective merchandise. Generally,
we emphasize personal contact with our customers and potential customers in our
facilities and frequently at their headquarters. While our customers rely on us
for high-quality
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products, the ultimate consumers of the products rely on the customers' brand
name and generally do not know the identity of the manufacturer. The primary
concern of our customers in maintaining a relationship with us is buying better
products at lower prices. We believe that innovation is the key for both our
customers and us in this regard. In that respect, replacing old products with
new products at the same retail price is a winning strategy for retailers and
brand marketers. It is our goal to see that this is achieved without diminishing
our profit margins.
One of the most important areas of the marketing process is communication with
the customer. The marketing group maintains contact with the customer after the
sale is made, serving as their liaison during the manufacturing and delivery
process. These relationships and methods have been cultivated over years and we
believe that we have a stable relationship with our major customers. Many of our
customers, including most of our largest customers, have purchased goods from us
for many years. Long-standing relationships, innovation, quality and our
reputation in the industry remain the essential elements of our marketing
program.
Our newly established subsidiary, Global Display, intends to market display
products the same way. Display products currently being planned include various
sizes of LCD TVs, front and rear projectors, eye-viewers, medical monitors and
Plasma TVs. Initially, we plan to target the medium-size brands that can react
quickly and require only smaller quantities of a particular product. Twelve to
eighteen months after such product introduction, we intend to begin to contract
manufacture for brand marketers and buying groups, which need to procure higher
quality display products at a lower cost. We believe that our competitive
advantage lies in our ability to manufacture high quality, innovative products
at competitive prices while allowing our customers to provide us with the
concepts, designs and specifications to satisfy their needs and the needs of
their customers. We also currently plan to market our display products to yacht
manufacturers, hotel chains, computer companies and e-commerce businesses that
require specialized displays not available from the leading consumer brands.
Competition
We believe that the markets for our core products are mature and highly
competitive and that competition is based upon several factors, including price,
product features and enhancements and new product introductions. We compete with
established companies in Hong Kong and China, a number of which have
substantially greater technical, financial and marketing resources than us. For
ODM products, competition is based on uniqueness of features, combination of
features offered and brand name, as well as unit price, product quality and
availability and service. Competition for contract manufacturing products is
based primarily on unit price, product quality and availability and service.
Except for opening price point products, we believe that we compete favorably in
each of these areas, especially if the product is relatively sophisticated to
manufacture. We believe that we possess a competitive advantage in our ability
to sell innovative products based on our proven design and development
capabilities and our ability to introduce them at competitive prices. In
addition, while individual contract manufacturing customers may have preferences
among their approved suppliers, management believes that no company dominates
the market as contract manufacturing customers tend to order from several
different suppliers in order to lessen dependence on any one entity.
In our display business we face competitors from Japan, Korea and Taiwan as well
as China. There are a significant number of these that have their own "fab"
plants and well regarded brands. As a niche marketer concentrating on design,
low cost and innovation, we are unlikely to compete directly with them. We
intend to compete with the Taiwan and Chinese producers in the same way as we do
with our core products.
A number of companies in Hong Kong, Taiwan and Korea have invested in OLED
production facilities but many of them do not have the same key license we have
to enable them to market in the developed countries where the original patents
have been registered. We also believe that demand will exceed supply for a
number of years and therefore competition will not be a significant factor in
the OECD countries.
Intellectual Property Rights
We currently hold 68 patents, of which four were approved in fiscal 2004. Our
patents are registered in various jurisdictions, including the United States,
the United Kingdom and France. We hold the exclusive rights with respect to
certain technology included in our products. We rely primarily upon a
combination of trademark, copyright, know-how, trade secrets and contractual
restrictions to protect our intellectual property rights. We
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believe that such measures afford only limited protection and, accordingly,
there can be no assurance that the steps taken by us to protect these
proprietary rights will be adequate to prevent misappropriation of the
technology or the independent development of similar technology by others.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or obtain and use information that we
regard as proprietary.
Significant and protracted litigation may be necessary to protect our
intellectual property rights, to determine the scope of the proprietary rights
of others or to defend against claims of infringement. We believe that our
systems do not infringe any existing third-party proprietary rights. There can
be no assurance, however, that third-party claims alleging infringement will not
be asserted against us in the future. If infringement is alleged, we could be
required to
discontinue the use of certain software codes or processes,
cease the manufacture, use and sale of infringing products,
incur significant litigation damages, costs and expenses, and
develop non-infringing technology or obtain licenses to the alleged
infringing technology.
There can be no assurance that we would be able to develop any such alternative
technologies or obtain any such licenses on terms commercially acceptable to us.
Any infringement claim or other litigation against us could have a material
adverse affect on our business, operating results and financial condition. After
considering all the facts known to us and based on the advice of legal counsel,
however, we do not believe that any current asserted claims or actions will have
such a material adverse effect and the likelihood of a negative effect on our
operating results is remote.
Certain agreements with our ODM customers include indemnification provisions
against patent infringement claims relating to such products. Along with a
customer, we are currently defending a patent infringement claim relating to one
of our deep fryer models, a product line, that represented 9.2%, 2.0%, 0.5%,
0.3% and 6.2% of our net sales in fiscal 2000, 2001, 2002, 2003 and 2004,
respectively. See "Item 8.A-Financial Information-Legal Proceedings." No
assurance can be given that this infringement claim will be resolved in our
favor or the customer or that other parties will not assert infringement claims
against us in the future.
At the time of Lite Array's acquisition, we also acquired a license for small
molecule passive matrix ("PM") OLED display technology. Under the license, we
may use the patents and proprietary technology in our manufacturing and
marketing of OLED products and it gives us the right to purchase from the
licensor certain patented materials for use in the manufacture of OLED products.
PM OLEDs are well suited for low manufacturing cost, low-content applications
such as an alphanumeric display. We believe that in the future when there are
wider product applications and increased market demand for OLED products,
development of full color active matrix OLED will be further stimulated and its
technology will also become more mature. There can be no assurance at this time,
however, that our OLED program will be financially successful.
Foreign Issuer Considerations
Because we are a foreign issuer incorporated in the British Virgin Islands and
we conduct our operations and own assets primarily in China and Hong Kong, our
operations and assets are subject to significant political, economic, legal and
other uncertainties in China, Hong Kong and, in some instances, the British
Virgin Islands. These uncertainties include the following.
Conditions in China. China is a socialist state which, since 1949, has been
controlled by the Communist Party of China. Changes in the top political
leadership of the Chinese government may have a significant impact on policy and
the political and economic environment in China. Moreover, economic reforms and
growth in China have been more successful in certain provinces than in others
and the continuation or increase of such disparities could affect political or
social stability. In December 2001, China was admitted to the World Trade
Organization
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after 15 years of negotiations and was granted the full trading rights of a WTO
member country, but is still considered to be a high risk nation for business
and investment in the Asian region. Although recently China has permitted
greater provincial and local economic autonomy and private economic activities,
the government of China has exercised and continues to exercise substantial
control over virtually every section of the Chinese economy through regulation
and state ownership. Accordingly, government actions in the future, including
any decision not to continue to support the economic reform program that
commenced in the late 1970's and possibly to return to the more
centrally-planned economy that existed prior thereto, could have a significant
effect on economic conditions in China and on our operations. Also, the legal
system of China relating to foreign investments is both new and continually
evolving, and there can be no certainty as to the application of its laws and
regulations in particular instances.
On June 29, 2003, China and the Hong Kong Special Administrative Region
("HKSAR") entered the Closer Economic Partnership Agreement ("CEPA"), which was
implemented on January 1, 2004. Under CEPA, Hong Kong companies can benefit from
liberalized measures beyond the scope of China's commitments in its WTO
accession treaty. The Arrangement covers three areas: trade in goods; trade in
services and trade and investment facilitation. Under CEPA, 90% of Hong Kong
domestic exports to China can enjoy zero tariffs. CEPA also opens 18 service
sectors to Hong Kong companies. In this respect, China has given Hong Kong an
advantage under CEPA in that Hong Kong companies can enjoy more benefits under
CEPA compared with the provisions of the WTO. The Arrangement presently has no
direct positive impact on us since our products are shipped to overseas
customers but it could possibly benefit our display and OLED business in the
future.
All of our products are currently manufactured in China and approximately 90% of
the net book value of our total fixed assets are located in China. We are a
party to agreements with certain agencies of the government of China and we sell
products to entities based principally in the United States and Europe.
International operations and sales may be subject to political and economic
risks, including political instability, currency controls and exchange rate
fluctuations, and changes in import/export regulations, tariff and freight
rates. In addition, various forms of protectionist trade legislation have been
proposed on occasion in the United States and certain European countries.
Changes in tariff structures or other trade policies could adversely affect us.
Our location in Southern China offers us low overhead and competitive (although
higher than the Northern provinces in China) labor rates. The location of our
factory in Dongguan Township, Guangdong province provides us with the ability to
manage factory operations from Hong Kong and facilitates transportation of our
products to markets outside China.
Any re-occurrence of Severe Acute Respiratory Syndrome ("SARS") and Avian
Influenza in China could also significantly impact our manufacturing plant
located in Dongguan, China. Inability to travel by our Hong Kong based
supervisory staff and other labor problems could seriously disrupt our
manufacturing operation and cause significant delays in production.
Chinese government regulation. Our operations and assets in China are subject to
significant political, economic, legal and other uncertainties. Changes in
policies by the Chinese or local governments resulting in
changes in laws and regulations, or the interpretation and enforcement
of existing laws and regulations,
confiscatory or increased taxation,
restrictions on currency conversion, imports and sources of supply,
import duties,
currency devaluations, or
the expropriation of private enterprise
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could have a material adverse effect on our business, results of operations and
financial condition. Under its current leadership, the Chinese government has
been pursuing economic reform policies, including the encouragement of private
economic activity and greater economic decentralization. There can be no
assurance, however, that the Chinese government will continue to pursue such
policies, that such policies will be successful if pursued or that such policies
will not be significantly altered from time to time without notice. There also
can be no assurance that business operations in China would not become subject
to the risk of nationalization, which could result in the total loss of
investment in that country. Following the Chinese government's program of
privatizing many state-owned enterprises, the government has attempted to
augment its revenues through increased tax collection. Continued efforts to
increase tax revenues could result in increased taxation expense being incurred
by us. Economic development may be limited as well by
the imposition of austerity measures intended to reduce inflation,
increase taxes or reform unprofitable state-owned enterprises,
the inadequate development of infrastructure, and
the potential unavailability of adequate power and water supplies,
transportation, communications and raw materials and parts.
The Chinese government regulates the import into China of certain raw materials
used by us in our manufacturing process and taxes the importation of certain
capital equipment. The approval of imports by the government is based to some
extent on the lack of qualified domestically-produced products and strategic
plans for the development of local Chinese industry. There can be no assurance
that the government's policies will continue to allow the raw materials we
require to be imported into China. There also can be no assurance that the
government's policies will not impose import fees which raise the cost of raw
materials or capital equipment. Imposing such fees could have a material adverse
effect on our business, results of operations and financial condition.
Chinese legal system. China's legal system is a civil law system that is based
on written statutes and in which decided legal cases have little precedential
value. China does not have a well-developed, consolidated body of laws governing
foreign investment enterprises. As a result, the administration of laws and
regulations by government agencies may be subject to considerable discretion. As
legal systems in China develop, foreign business entities may be adversely
affected by new laws, changes to existing laws or interpretations of existing
laws and preemption of provincial or local laws by national laws. In
circumstances where adequate laws exist, it may not be possible to obtain swift
and equitable enforcement of the laws.
Chinese environmental law. Environmental protection in China is regulated in
accordance with the Environmental Protection Law of the People's Republic of
China, which became effective on December 26, 1989. The law sets national
standards for environmental quality and monitoring, as well as the utilization
of natural resources and the reduction of pollution. As a manufacturer, we are
subject to annual inspections by local branch of the State Environment
Protection Administration (SEPA). We have passed our most recent inspection and
believe that we are in material compliance with all applicable environmental
laws. There can be no assurance, however, that we will continue to pass future
inspections or that we will continue to be in material compliance with all
applicable environmental laws in the future. Environmental regulation is
evolving in China and the imposition of additional or more stringent
environmental laws by China, or more stringent enforcement of existing laws,
could cause us to have to make substantial additional capital expenditures to
maintain compliance in the future. The necessity to make such additional capital
expenditures could have a material adverse effect upon our results of operations
and financial condition.
Conditions in Hong Kong. Hong Kong, the jurisdiction of incorporation of six of
our subsidiaries and the location of our headquarters, was restored to China on
July 1, 1997. We conduct sales, marketing, product design and development,
administration and other activities in Hong Kong. Accordingly, we may be
materially adversely affected by factors affecting Hong Kong's political
situation and its economy or its international political and economic relations.
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As of July 1, 1997, Hong Kong became a Special Administrative Region, or SAR, of
China, with certain autonomy from the Chinese government, including being a
separate customs territory from China with separate tariff rates and export
control procedures and maintaining a separate intellectual property registration
system. All land leases in effect at the time of the transfer of sovereignty
were extended for a period of 50 years, except for those leases without a
renewal option expiring after June 30, 1997 and before June 30, 2047. Hong Kong
continues to be a member of the WTO and the Hong Kong dollar continues to be
legal tender, freely convertible into Renminbi, and not subject to foreign
exchange controls. The Hong Kong SAR government, as set up by China, has sole
responsibility for tax policies. Notwithstanding the provisions of these
international agreements, there can be no assurance as to the continued
stability of political, economic or commercial conditions in Hong Kong.
No treaty exists between Hong Kong and the United States providing for the
reciprocal enforcement of foreign judgments. Accordingly, Hong Kong courts might
not enforce judgments predicated on the federal securities laws of the United
States, whether arising from actions brought in the United States or, if
permitted, in Hong Kong.
Conditions in Macau. Macau, the jurisdiction of incorporation of one of our
subsidiaries, was restored to China on December 19, 1999. We established an
office in Macau on November 8, 2001. We conduct sales, marketing, administration
and other activities in Macau.
Macau was founded by the Portuguese in 1557. It lies approximately 40 miles west
of Hong Kong and has a population of approximately of 500,000. Portugal signed
the Sino-Portuguese Joint Declaration with China on April 13, 1987 providing the
return to Chinese administration. In the Sino-Portuguese Joint Declaration,
China has promised to respect Macau's existing social and economic systems and
lifestyle for 50 years. Similar to Hong Kong, Macau has been set up as a SAR
with its own legal and economic systems. Notwithstanding the provision of these
international agreements, there can be no assurance as to the continual
stability of political, economic or commercial condition in Macau.
C. Organizational structure.
The following table sets forth the significant subsidiaries owned, directly or
indirectly, by us.
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
Pentalpha 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
Global Display Limited # Hong Kong 100.0
GT Investments (BVI) Limited British Virgin Islands 100.0
Dongguan Lite Array Company Limited China 100.0
Lite-Array (OLED) H.K. Limited1 Hong Kong 100.0
Global Optics (HK) Limited2 Hong Kong 100.0
MasterWerke Ltd. 3 United States 100.0
Global-Tech Appliances Inc. is a holding company of the above subsidiaries. It
does not engage in daily business operations. GT Investments (BVI) Limited is an
intermediate holding company of Pentalpha Hong Kong Ltd., Pentalpha Enterprises
Limited, Kwong Lee Shun Trading Company Limited and Global Display Limited.
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Global Lite Array (BVI) Limited is an investment holding company of Lite Array
(BVI) Company Limited and Lite Array, Inc.
Wing Shing Products (BVI) Company Limited is primarily engaged in selling
finished goods to our 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 our customers. Kwong Lee Shun
Trading Company Limited is a service company that provides management services
to us. Dongguan Wing Shing Electrical Products Factory Company Limited and
Dongguan Lite Array Company Limited are our manufacturing facilities located in
Dongguan, China. Global-Tech USA, Inc. provides investor relations and
consulting services to us. Pentalpha Macau Commercial Offshore Limited is
primarily engaged in selling finished goods to our customers. Lite Array (BVI)
Company Limited is primarily engaged in buying raw materials and selling organic
solid state flat-panel displays to our customers. Lite Array, Inc. is primarily
engaged in research and development of organic and inorganic solid-state
flat-panel displays. Global Display Limited is primarily engaged in marketing
and developing electronic products utilizing multimedia flat panel displays.
We recently established two new subsidiaries, Lite Array (OLED) HK Limited and
Global Optics (HK) Limited. Lite Array (OLED) HK Limited is primarily engaged in
procuring and marketing OLED displays and Global Optics (HK) Limited is
primarily engaged in designing and procuring optical systems for use in
microdisplays and projection televisions.
* 100% owned by Global Lite Array (BVI) Limited.
# 100% owned by GT Investments (BVI) Limited
1 Lite-Array (OLED) H.K. Limited was incorporated in Hong Kong on June 4, 2004.
2 Global Optics (HK) Limited was incorporated in Hong Kong on June 11 2004.
3 MasterWerke Ltd was acquired by Global-Tech USA, Inc as a subsidiary on
April 30, 2004. Masterwerke is primary engaged in product evaluation.
D. Property, plant and equipment.
China
Our manufacturing facility located in Dongguan, China, has been expanded to 1.85
million square feet. The manufacturing complex includes 49 buildings, of which
16 buildings are dormitories with accommodations for up to 4,500 employees and
cafeterias and recreational areas. The remaining buildings house manufacturing,
quality control, warehousing, product development and administrative functions.
We own all of the 49 buildings on the site and have freely transferable land use
rights for a period of 50 years for the land upon which our buildings and
facilities are located. Excluding dormitories, cafeterias and recreation areas,
roads and a portion of land reserved for future expansion, our completed
production area is approximately 1.56 million square feet. The land use rights
lease for the Dongguan facility between us and the People's Government of Qingxi
Town, Dongguan City, Guangdong Province is for a term of 50 years ending August
7, 2043. In fiscal 2004, we had paid approximately $200,000 for the outstanding
land transfer fees for the formal grant of the lease rights. As of March 31,
2004, we still owed approximately $91,000 in transfer fees with respect to this
transaction. We will not receive a formal grant of lease rights until the
transfer fees are paid and the appropriate documents are processed by the
government agencies in China. The formal grant of lease rights is required
should we decide to sell this property or lease it to a third party. We have no
present intention to pursue either of these alternatives. Upon expiration of the
50-year lease term of the land, we have the right to extend the lease for a
further 20 years upon payment of a fee of $23.00 per square meter, or a total of
$160,000 for the whole land use right extension. Currently we are in the process
of incorporating the manufacturing facilities of Global Display and Lite Array
into our manufacturing complex. Global Display has completed trial production
runs and has produced samples for our customers. It is anticipated that mass
production high definition flat panel televisions will commence in mid fiscal
2005.
Since fiscal 2001, we have gradually transferred some of our product design and
engineering functions to an office in Shenzhen, China. We selected Shenzhen
because of its close proximity to our Dongguan factory and Hong Kong
administrative office. This location makes it easier for our engineers and R&D
staff to provide assistance at both locations. Additionally, this location
allows us to recruit qualified staff from local universities and other
provinces. With the continued expanding need for R&D functions, effective March
2003, we relocated the
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R&D center to another location in Shenzhen with more space for housing
additional staff and equipment. The new R&D center is approximately 9,800 square
feet and is leased through July 2005 at an annual rent of approximately $40,000.
Currently, we have a team of approximately 30 engineers and technical staff in
the Shenzhen R&D office, engaged in new product design and engineering.
Our subsidiary, Lite Array operated a joint venture in Jiangmen, China to
produce 1/4 VGA or smaller monochrome TFEL displays. As we have explained under
"Item 4.B- - Business Overview," Global Lite Array's board of directors decided
to discontinue production of TFEL displays and cease funding the joint venture
in China as of September 30, 2002. We decided 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. 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 shares that Lite Array owns in a joint venture manufacturing facility in
Jiangmen, China to the former management of Lite Array.
Hong Kong
On April 17, 2002, we renewed our lease with our affiliate Wing Shing Products
Company Ltd. (see "Item 7.B-Related Party Transactions"), for office space
located in the Kin Teck Industrial Building in Aberdeen, Hong Kong. From the
Company's founding to September 10, 2002, we had operated our administrative
offices and sales and marketing, purchasing, accounting and finance, product
design and development and limited warehousing out of this space. Pursuant to
the lease, we had paid annual rent of approximately $102,000. The lease will
expire on March 31, 2005.
On July 29, 2002, we entered into a lease of 77 months for office space located
in 21/F., Citicorp Centre, 18 Whitfield Road, Causeway Bay, Hong Kong. The total
office space is approximately 13,961 square feet at an annual rent of
approximately $248,000. We relocated our administrative office to this space
effective September 10, 2002 and ceased paying rent on the office portion of the
lease in the Kin Teck Industrial Building effective September 30, 2002. On
September 17, 2002, we entered into an amendment of the lease agreement with
Wing Shing Products Company Ltd., to lease two floors for warehousing. The
amended lease will expire on March 31, 2005.
On June 15, 2003, we entered into a 24-month lease for office space located on
the twelfth floor of the Kin Teck Industrial Building, Aberdeen, Hong Kong. The
total office space is approximately 7,400 square feet and is occupied by the
product development group of Global Display. Annual rent for this space is
approximately $51,000. Effective from April 1, 2004, we leased some office space
on the thirteenth floor of the Kin Teck Industrial Building, Aberdeen, Hong
Kong. The total office space is approximately 3,670 square feet and is occupied
by the product development group of our home appliances business. Annual rent is
approximately $20,000. Both leases were with a related party.
Macau
On October 15, 2001, we entered into a 24-month lease for office space on the
15th floor of the Macau Finance Centre, Rua de Pequim 244/246, Macau. The lease
expired on October 2003 and was renewed for a further twelve months. The total
office space is approximately 1,400 square feet and is occupied by the sales and
accounting staff of Pentalpha Macau Commercial Offshore Limited. Annual rent for
this space is approximately $17,000.
We believe that our administrative office space in Hong Kong, Shenzhen, China
and Macau will be adequate for the operation of our business for the foreseeable
future. We believe that with expansion of our manufacturing facility in
Dongguan, we have sufficient manufacturing capacity for at least the next
several years. This factory is currently utilized at considerably less than full
capacity. We anticipate that any further expansion and diversification of our
floor care product line or expansion of our display business could increase
utilization at the Dongguan facility and require us to fit out more of the
infrastructure and purchase additional equipment.
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