SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of Securities
Exchange Act of 1934
For Quarter Ended June 30, 1995
-------------
Commission File Number 1-4373
------
THREE-FIVE SYSTEMS, INC.
--------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 86-0654102
------------------- -------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
1600 North Desert Drive, Tempe, Arizona 85281
---------------------------------------- -------
(Address of principal executive offices) (Zip Code)
(602)389-8600
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, at the latest practical date.
CLASS OUTSTANDING AS OF June 30, 1995
----- -------------------------------
Common 7,709,004
Par value $.01 per share
<PAGE>
THREE-FIVE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED June 30, 1995
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets-
June 30, 1995 and December 31, 1994...........................
Consolidated Statements of Income-
Three Months and Six Months
Ended June 30, 1995 and 1994 .................................
Consolidated Statements of Cash Flows-
Six Months Ended June 30, 1995 and 1994 ......................
Notes to Consolidated Financial Statements ........................
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION .............................
PART II - OTHER INFORMATION
ITEM 4 SUBMIS8IONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.................
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.....................................
SIGNATURES ...................................................................
<PAGE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
JUNE 30, DECEMBER 31,
1995 1994
---------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,206 $ 27,136
Accounts receivable, net 11,123 8,721
Inventories, net 12,673 9,657
Deferred tax asset 1,048 1,048
Other current assets 892 478
---------- ----------
Total current assets 35,942 47,040
PROPERTY, PLANT AND EQUIPMENT, net 25,660 8,791
ASSETS HELD FOR SALE -- 240
COST IN EXCESS OF NET ASSETS ACQUIRED, net 189 209
---------- ----------
$ 61,791 $ 56,280
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,003 $ 5,088
Accrued liabilities 931 2,598
Current maturities of long-term debt - 26
Current taxes payable 991 1,690
---------- ----------
Total current liabilities 8,925 9,402
---------- ----------
LONG-TERM DEBT, net of current maturities - 156
---------- ----------
DEFERRED TAX LIABILITY 161 161
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 77 77
Additional paid-in capital 32,065 32,052
Retained earnings 20,563 14,430
Cumulative translation adjustment -- 2
---------- ----------
Total stockholders' equity 52,705 46,561
---------- ----------
$ 61,791 $ 56,280
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
<TABLE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except share amounts)
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 22,105 $ 21,247 $ 46,588 $ 37,668
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 16,138 13,802 33,720 25,350
Selling, general and administrative 1,213 1,288 2,485 2,660
Research and development 401 373 806 640
---------- ---------- ---------- ----------
17,752 15,463 37,011 28,650
---------- ---------- ---------- ----------
Operating income 4,353 5,784 9,577 9,018
OTHER INCOME (EXPENSE):
Interest income, net 279 265 621 256
Other, net 27 (62) (15) (91)
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,659 5,987 10,183 9,183
Provision for income taxes 1,840 2,502 4,050 3,722
---------- ---------- ---------- ----------
NET INCOME $ 2,819 $ 3,485 $ 6,133 $ 5,461
========== ========== ========== ==========
EARNINGS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ 0.35 $ 0.43 $ 0.76 $ 0.71
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE EQUIVALENTS
OUTSTANDING 8,094,207 8,095,000 8,088,704 7,686,556
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
SIX MONTHS ENDED
JUNE 30,
----------------
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,133 $ 5,461
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 929 466
Provision (reduction) of accounts
receivable valuation reserves (224) 181
Provision of inventory valuation reserves 369 588
(Gain) loss on disposal of assets (35) 3
Change in assets and liabilities:
Increase in accounts receivable (2,178) (2,734)
Increase in inventories (3,385) (2,811)
Increase in other assets (414) (371)
Increase in accounts payable
and accrued liabilities 248 4,243
Increase (decrease) in taxes payable, net (699) 2,188
-------- --------
Net cash provided by
operating activities 744 7,214
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (17,778) (1,799)
Proceeds from sale of plant and equipment 275 2
-------- --------
Net cash used for investing activities (17,503) (1,797)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under notes payable to banks - 6
Principal payments on and
retirement of long-term debt (182) (12)
Stock options exercised 13 20
Proceeds from sale of common stock, net - 23,261
-------- --------
Net cash provided by (used for)
financing activities (169) 23,275
-------- --------
Effect of exchange rate changes
on cash and cash equivalents (2) 9
-------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (16,930) 28,701
CASH AND CASH EQUIVALENTS,
beginning of period 27,136 781
-------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 10,206 $ 29,482
======== ========
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
ITEM 1.
Three-Five Systems, Inc. and Subsidiaries Notes to Consolidated
---------------------------------------------------------------
Financial Statements
--------------------
Note A - The accompanying unaudited Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions
to Form 10-Q. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of
operations and cash flows for all periods presented have been made.
The results of operations for the three and six-month periods ended
June 30, 1995 are not necessarily indicative of the operating
results that may be expected for the entire year ending December
31, 1995. These financial statements should be read in conjunction
with the Company's December 31, 1994 financial statements and
accompanying notes thereto.
Note B - Earnings per share is computed by dividing net earnings by the
weighted average number of common shares and common share
equivalents assumed outstanding during the three and six-month
periods. Fully diluted earnings per share is considered equal to
primary earnings per share in all periods presented.
Note C - Inventories consist of the following at:
June 30, 1995 December 31, 1994
------------- -----------------
(Unaudited)
(in thousands)
Raw Materials $ 8,754 $ 6,926
Work-In-Progress 1,476 697
Finished Goods 2,443 2,034
----- -----
$12,673 $ 9,657
====== =====
Note D - Property, plant and equipment consist of the following at:
June 30, 1995 December 31, 1994
------------- -----------------
(Unaudited)
(in thousands)
Furniture and
equipment $24,045 $10,056
Construction-in-
process 5,615 1,825
----- -----
29,660 11,881
Less-accumulated
depreciation (4,000) (3,090)
------- -------
$25,660 $ 8,791
====== =====
ITEM 2. Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------------
Financial Condition
-------------------
Three Months Ended June 30, 1995 Compared to Three Months Ended June 30, 1994
-----------------------------------------------------------------------------
Results of Operations
Net sales were $22,105,000 for the quarter ended June 30, 1995, an
increase of 4.0% compared with net sales of $21,247,000 for the quarter ended
June 30, 1994. The sales increase resulted primarily from higher order rates
from a major wireless communications customer for existing as well as new
product programs.
Cost of sales, as a percentage of net sales, increased to 73.0% for the
quarter ended June 30, 1995 as compared with 65.0% for the quarter ended June
30, 1994. This increase was primarily due to product mix.
Selling, general and administrative expenses decreased to $1,213,000
for the quarter ended June 30, 1995 from $1,288,000 for the quarter ended June
30, 1994. The 5.8% decrease resulted primarily from lower bonus accruals.
Selling, general and administrative expenses decreased as a percentage of net
sales to 5.5% for the quarter ended June 30, 1995 from 6.1% for the quarter
ended June 30, 1994, primarily as a result of increased sales and a continued
emphasis on cost containment.
Research and development expenditures totaled $401,000, or 1.8% of net
sales, for the quarter ended June 30, 1995 as compared with $373,000, or 1.8% of
net sales, for the quarter ended June 30, 1994. The increase in research and
development expenditures represented in-house development efforts related to the
LCD laboratory located in Tempe, Arizona.
Interest income (net) for the quarter ended June 30, 1995 was $279,000,
an increase from interest income (net) of $265,000 for the quarter ended June
30, 1994. The interest income was the result of investing the unexpended net
proceeds from the Company's public offering in March 1994, as well as excess
cash generated from operations. Other income (net) increased to $27,000 for the
quarter ended June 30, 1995 from other expense (net) of $62,000 for the quarter
ended June 30, 1994. The increase was due to an increase in foreign currency
exchange gains, a decrease in expenses related to the closed Eastern design
center and a gain on the sale of the Eastern design center in the quarter ended
June 30, 1995.
The provision for income taxes decreased to $1,840,000 for the quarter
ended June 30, 1995 from $2,502,000 in the quarter ended June 30, 1994. This
resulted primarily from lower pre-tax income.
Net income decreased to $2,819,000, or $0.35 per share, for the quarter
ended June 30, 1995 from $3,485,000, or $0.43 per share, in the quarter ended
June 30, 1994.
Six Months ended June 30, 1995 Compared to Six Months Ended June 30, 1994
-------------------------------------------------------------------------
Net sales were $46,588,000 for the six months ended June 30, 1995, an
increase of 23.7% compared with net sales of $37,668,000 for the six months
ended June 30, 1994. The sales increase resulted primarily from higher order
rates from a major wireless communications customer for existing as well as new
products.
Cost of sales, as a percentage of sales, increased to 72.4% for the six
months ended June 30, 1995 as compared with 67.3% for the six months ended June
30, 1994. This increase was primarily due to product mix.
Selling, general and administrative expenses decreased to $2,485,000
for the six months ended June 30, 1995 from $2,660,000 for the six months ended
June 30, 1994. The 6.6% decrease resulted primarily from decreased legal
expenses and lower bonus accruals. Selling, general and administrative expenses
decreased as a percentage of net sales to 5.3% for the six months ended June 30,
1995 from 7.1% for the six months ended June 30, 1994, primarily as a result of
increased sales and a continued emphasis on cost containment.
Research and development expenditures totaled $806,000, or 1.7% of net
sales, for the six months ended June 30, 1995 as compared with $640,000, or 1.7%
of net sales, for the six months ended June 30, 1994. The increase in research
and development expenditures represented in-house development efforts related to
the LCD laboratory located in Tempe, Arizona.
Interest income (net) for the six months ended June 30, 1995 was
$621,000, an increase from interest income (net) of $256,000 for the six months
ended June 30, 1994. The interest income was the result of investing the
unexpended net proceeds from the Company's public offering in March 1994, as
well as excess cash generated from operations. Other expense (net) decreased to
$15,000 for the six months ended June 30, 1995 from $91,000 for the six months
ended June 30, 1994. The decrease was due to a decrease in foreign currency
exchange losses, decrease in the expenses related to the closed Eastern design
center and a gain from the sale of the Eastern design center.
The provision for income taxes increased to $4,050,000 for the six
months ended June 30, 1995 from $3,722,000 in the six months ended June 30,
1994. This resulted primarily from higher pre-tax income.
Net income increased to $6,133,000, or $0.76 per share, for the six
months ended June 30, 1995 from $5,461,000, or $0.71 per share, in the six
months ended June 30, 1994.
Liquidity and Capital Resources
During the six months ended June 30, 1995, the Company generated
$744,000 in cash flow from operations as compared with $7,214,000 during the
same period in 1994. The decrease in cash flow from operations was pricipally
due to the Company's purchase of significant amounts of materials for products
whose production was delayed and the Company's inability to defer current income
tax payments in 1995 as was available under the applicable tax regulations for
1994. The Company's working capital decreased to $27,017,000 at June 30, 1995
from $37,638,000 at December 31, 1994, primarily as a result of payments related
to the Company's new facility in Tempe, Arizona. The Company's current ratio at
June 30, 1995 was 4.0-to-1 as compared with a current ratio of 5.0-to-1 at
December 31, 1994.
In June 1995, the Company entered into a new $5,000,000 unsecured
revolving line of credit, which matures May 31, 1997, with its primary lender
First Interstate Bank of Arizona. The new unsecured revolving line of credit
replaces the $5,000,000 revolving line of credit entered into during 1994. No
borrowings were outstanding under this new credit facility at June 30, 1995.
Advances under the revolving line may be made as Prime Rate Advances, which
accrue interest payable monthly, at the bank's prime lending rate or as LIBOR
Rate Advances which bear interest at 1.50% in excess of the LIBOR Base Rate. The
Company's subsidiary, Three-Five Systems Limited, has established an annually
renewable credit facility with a United Kingdom bank, Barclays Bank PLC, in
order to fund its working capital requirements. The facility provides $350,000
of borrowing capacity secured by accounts receivable and inventories of
Three-Five Systems Limited. Advances are based on 70% of eligible accounts
receivable, as defined, and 30% of inventory, as defined. Advances under the
credit facility accrue interest, which is payable quarterly, at the bank's base
rate plus 2.0%. Management renewed the United Kingdom credit facility for a
one-year term ending April 1, 1996. Three-Five Systems Limited had no borrowings
outstanding under this line of credit at June 30, 1995.
During the six months ended June 30, 1995, the Company repaid $182,000
of long-term debt with cash flow from operations.
Capital expenditures during the six months ended June 30, 1995 were
approximately $17,778,000, as compared with $1,799,000 during the same period in
1994. Expenditures for the six months ended June 30, 1995 consisted primarily of
progress payments on its new manufacturing and headquarters facility in Tempe,
Arizona as well as equipment for its operations. Expenditures for the six months
ended June 30, 1994 consisted primarily of manufacturing equipment for the
Company's manufacturing facility in Manila, the Philippines. The new design,
manufacturing, and corporate headquarters facility containing approximately
97,000 square feet has been completed at an expected cost of approximately
$10,350,000, of which $5,220,000 in progress payments had been made through June
30, 1995. Expenditures during 1995 to equip the new facility are expected to be
approximately $14,900,000 of which $12,900,000 had been expended as of June 30,
1995.
The Company believes that its capital, together with loan commitments
described above, anticipated cash flows from operations, and the unexpended net
proceeds of its public offering in March 1994, provide adequate sources to fund
operations in the near term. The Company anticipates that any additional cash
requirements as the result of operations or capital expenditures will be
financed through cash from operations or by borrowing from the Company's primary
lender.
Effects of Inflation and Foreign Currency Exchange Fluctuations:
The results of operations of the Company for the periods discussed have
not been significantly affected by inflation or foreign currency fluctuations.
The Company generally sells its products and services and negotiates purchase
orders with its foreign suppliers in United States dollars. Such transactions
expose the Company to exchange rate fluctuations for the period of time from
inception of the transaction until it is settled. Although the Company has not
incurred any material exchange gains or losses to date, there can be no
assurance that fluctuations in the currency exchange rates in the future will
not have an adverse effect on the Company's operations. The Company has entered
and from time to time will enter into hedging transactions in order to minimize
its exposure to currency rate fluctuations.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on April 26,
1995. All of the nominees were elected to the Company's Board of Directors as
set forth in the Proxy Statement as follows:
Nominees Votes in Favor Against Abstain
-------- -------------- ------- -------
David R. Buchanan 6,392,872 19,832 4,410
David C. Malmberg 6,392,372 20,332 4,410
Burton E. McGillivray 6,394,222 18,482 4,410
Jeffrey A. Wilson 6,390,512 22,192 4,410
The following item were also voted upon by the Stockholders:
Also voted upon by the Stockholders was the appointment of Arthur Andersen LLP
as the independent auditors of the Company for the fiscal year ending December
31, 1995.
Votes in Favor Opposed Abstain
-------------- ------- -------
6,392,965 7,127 17,022
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT 11: Statement Re: Computation of Per Share Earnings.
(b) Reports on Form 8-K: None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THREE-FIVE SYSTEMS, INC.
(Registrant)
Dated: August 14, 1995 By /s/ Randal L. Buness
---------------- ---------------------------------------
Randal L. Buness
Its Vice President Finance & Administration
---------------------------------------
Chief Financial Officer
By /s/ David R. Buchanan
---------------------------------------
David R. Buchanan
Its President, Chairman
---------------------------------------
(Chief Executive Officer)
<TABLE>
THREE-FIVE SYSTEMS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common shares outstanding beginning
of period 7,703,024 7,649,244 7,691,524 6,641,944
Effect of Weighting Shares:
Employee stock options exercised 3,846 3,843 11,989 8,064
Employee stock options outstanding 387,337 441,913 385,191 445,388
Issuance of common stock -- -- -- 591,160
--------- --------- --------- ---------
Primary 8,094,207 8,095,000 8,088,704 7,686,556
========= ========= ========= =========
Common shares outstanding beginning
of period 7,703,024 7,649,244 7,691,524 6,641,944
Effect of Weighting Shares:
Employee stock options exercised 3,846 3,843 11,989 8,064
Employee stock options outstanding 400,851 445,678 397,837 448,209
Issuance of common stock -- -- -- 591,160
--------- --------- --------- ---------
Fully diluted 8,107,721 8,098,765 8,101,350 7,689,377
========= ========= ========= =========
Net income $2,819,000 $3,485,000 $6,133,000 $5,461,000
========= ========= ========= =========
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARES:
Net income per share
Primary $ 0.35 $ 0.43 $ 0.76 $ 0.71
========= ========= ========= =========
Fully diluted $ 0.35 $ 0.43 $ 0.76 $ 0.71
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1995 AND THE RELATED CONSOLIDATED
STATEMENTS OF INCOME AND OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30,
1995 OF THREE-FIVE SYSTEMS, INC. AND ITS SUBSIDIARIES AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 10,206
<SECURITIES> 0
<RECEIVABLES> 11,123
<ALLOWANCES> 0
<INVENTORY> 12,673
<CURRENT-ASSETS> 892
<PP&E> 25,660
<DEPRECIATION> 0
<TOTAL-ASSETS> 61,791
<CURRENT-LIABILITIES> 8,925
<BONDS> 0
<COMMON> 77
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 61,791
<SALES> 46,588
<TOTAL-REVENUES> 46,588
<CGS> 33,720
<TOTAL-COSTS> 37,011
<OTHER-EXPENSES> 15
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,183
<INCOME-TAX> 4,050
<INCOME-CONTINUING> 6,133
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,133
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.76
</TABLE>
