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 September 30, 1995
------------------
Commission File Number 1-4373
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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
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(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 September 30, 1995
- ----- ------------------------------------
Common 7,724,545
Par value $.01 per share
<PAGE>
THREE-FIVE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets-
September 30, 1995 and December 31, 1994...................
Consolidated Statements of Income-
Three Months and Nine Months Ended
September 30, 1995 and 1994................................
Consolidated Statements of Cash Flows-
Nine Months Ended September 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 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................
SIGNATURES......................................................................
<PAGE>
<TABLE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(Unaudited)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,129 $ 27,136
Accounts receivable, net 12,281 8,721
Inventories, net 15,549 9,657
Deferred tax asset 1,048 1,048
Other current assets 1,028 478
--------------- --------------
Total current assets 32,035 47,040
PROPERTY, PLANT AND EQUIPMENT, net 33,387 8,791
ASSETS HELD FOR SALE - 240
COST IN EXCESS OF NET ASSETS ACQUIRED, net 179 209
--------------- --------------
$ 65,601 $ 56,280
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 9,841 $ 5,088
Accrued liabilities 1,051 2,598
Current maturities of long-term debt - 26
Current taxes payable 444 1,690
--------------- --------------
Total current liabilities 11,336 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 32,081 32,052
Retained earnings 21,946 14,430
Cumulative translation adjustment - 2
--------------- --------------
Total stockholders' equity 54,104 46,561
--------------- --------------
$ 65,601 $ 56,280
=============== ==============
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
<PAGE>
<TABLE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except share amounts)
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 24,217 $ 23,669 $ 70,805 $ 61,337
---------- ---------- --------- ----------
COSTS AND EXPENSES:
Cost of sales 19,790 16,752 53,510 42,102
Selling, general and administrative 1,419 1,170 3,904 3,830
Research and development 770 310 1,576 950
---------- ---------- --------- ----------
21,979 18,232 58,990 46,882
---------- ---------- --------- ----------
Operating income 2,238 5,437 11,815 14,455
OTHER INCOME (EXPENSE):
Interest income, net 120 298 741 554
Other, net (14) (33) (29) (124)
---------- ---------- --------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,344 5,702 12,527 14,885
Provision for income taxes 961 2,306 5,011 6,028
---------- ---------- --------- ----------
NET INCOME $ 1,383 $ 3,396 $ 7,516 $ 8,857
========== ========== ========= ==========
EARNINGS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ 0.17 $ 0.42 $ 0.93 $ 1.13
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE EQUIVALENTS
OUTSTANDING 8,088,318 8,099,436 8,086,454 7,811,758
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,516 $ 8,857
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,553 793
Provision (reduction) of accounts
receivable valuation reserves (61) 307
Provision of inventory valuation reserves 1,076 830
Gain on disposal of assets (38) -
Change in assets and liabilities:
Increase in accounts receivable (3,499) (3,241)
Increase in inventories (6,968) (6,571)
Increase in other assets (550) (406)
Increase in accounts payable and accrued liabilities 3,206 6,302
Increase (decrease) in taxes payable, net (1,246) 1,858
-------- --------
Net cash provided by operating activities 989 8,729
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (26,119) (3,911)
Proceeds from sale of plant and equipment 278 5
-------- --------
Net cash used in investing activities (25,841) (3,906)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable to banks - 7
Principal payments on and retirement of long-term debt (182) (18)
Stock options exercised 29 61
Proceeds from sale of common stock, net - 23,260
-------- --------
Net cash provided by (used in) financing activities (153) 23,310
-------- --------
Effect of exchange rate changes on cash and cash equivalents (2) 10
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (25,007) 28,143
CASH AND CASH EQUIVALENTS, beginning of period 27,136 781
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 2,129 $ 28,924
======== ========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
ITEM 1. (continued)
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 nine-month periods ended
September 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 income by the
weighted average number of common shares and common share
equivalents assumed outstanding during the three and nine-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:
September 30, 1995 December 31, 1994
------------------ -----------------
(Unaudited)
(in thousands)
Raw Materials $ 11,627 $ 6,926
Work-In-Progress 1,423 697
Finished Goods 2,499 2,034
-------- -------
$ 15,549 $ 9,657
======== =======
Note D - Property, plant and equipment consist of the following at:
September 30, 1995 December 31, 1994
------------------ -----------------
(Unaudited)
(in thousands)
Property, plant, and
equipment $37,994 $10,056
Construction-in-process - 1,825
------- -------
37,994 11,881
Less-accumulated
depreciation (4,607) (3,090)
------- -------
$33,387 $ 8,791
======= =======
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Three Months Ended September 30, 1995 Compared to Three Months Ended
- ---------------------------------------------------------------------
September 30, 1994
- ------------------
Results of Operations
Net sales were $24,217,000 for the quarter ended September 30, 1995, an
increase of 2.3% compared with net sales of $23,669,000 for the quarter ended
September 30, 1994. The sales increase resulted primarily from new product
programs as well as higher order rates from an existing major wireless
communications customer. The rate of sales growth has decreased significantly
from the comparable period of 1994 due primarily to the Company's inability to
bring two new major programs into production during the quarter as well as the
loss of sales from other older programs that were being phased out of
production.
Cost of sales, as a percentage of net sales, increased to 81.7% for the
quarter ended September 30, 1995 as compared with 70.8% for the quarter ended
September 30, 1994. This increase was primarily due to manufacturing
inefficiencies from design delays, new program introductions, and product mix.
Selling, general and administrative expenses increased to $1,419,000
for the quarter ended September 30, 1995 from $1,170,000 for the quarter ended
September 30, 1994. The 21.3% increase resulted primarily from expenses related
to expanding the Company's sales force. Selling, general and administrative
expenses increased as a percentage of net sales to 5.9% for the quarter ended
September 30, 1995 from 4.9% for the quarter ended September 30, 1994.
Research and development expenditures totaled $770,000, or 3.2% of net
sales, for the quarter ended September 30, 1995 as compared with $310,000, or
1.3% of net sales, for the quarter ended September 30, 1994. The increase in
research and development expenditures represented in-house development efforts
related to the LCD laboratory and high-volume manufacturing line located in
Tempe, Arizona.
Interest income (net) for the quarter ended September 30, 1995 was
$120,000, a decrease from $298,000 for the quarter ended September 30, 1994. The
decrease in interest income was the result of investing lower average cash
balances during the quarter. Other expense (net) decreased to $14,000 for the
quarter ended September 30, 1995 from $33,000 for the quarter ended September
30, 1994. The decrease was due to a decrease in foreign currency exchange losses
and a decrease in expenses related to the closed Eastern design center.
The provision for income taxes decreased to $961,000 (41% effective
rate) for the quarter ended September 30, 1995 from $2,306,000 (40% effective
rate) in the quarter ended September 30, 1994. This resulted primarily from
lower pre-tax income.
Net income decreased to $1,383,000, or $0.17 per share, for the quarter
ended September 30, 1995 from $3,396,000, or $0.42 per share, in the quarter
ended September 30, 1994.
Nine Months ended September 30, 1995 Compared to Nine Months Ended
- ------------------------------------------------------------------
September 30, 1994
- ------------------
Net sales were $70,805,000 for the nine months ended September 30,
1995, an increase of 15.4% compared to net sales of $61,337,000 for the nine
months ended September 30, 1994. The sales increase resulted primarily from
higher order rates from a major wireless communications customer for existing as
well as new products. The rate of sales growth has decreased significantly from
the comparable period of 1994 due primarily to the Company's inability to bring
two new major programs into production during the period as well as the loss of
sales from other older programs that were being phased out of production.
Cost of sales, as a percentage of sales, increased to 75.6% for the
nine months ended September 30, 1995 as compared to 68.6% for the nine months
ended September 30, 1994. This increase was primarily due to manufacturing
inefficiencies from design delays, new program introductions, and product mix.
Selling, general and administrative expenses increased to $3,904,000
for the nine months ended September 30, 1995 from $3,830,000 for the nine months
ended September 30, 1994. The 1.9% increase resulted primarily from expenses
related to expanding the sales force offset by decreased legal expenses and
lower bonus accruals. Selling, general and administrative expenses decreased as
a percentage of net sales to 5.5% for the nine months ended September 30, 1995
from 6.2% for the nine months ended September 30, 1994, primarily as a result of
increased sales and a continued emphasis on cost containment.
Research and development expenditures totaled $1,576,000, or 2.2% of
net sales, for the nine months ended September 30, 1995 as compared with
$950,000, or 1.5% of net sales, for the nine months ended September 30, 1994.
The increase in research and development expenditures represented in-house
development efforts related to the LCD laboratory and high-volume manufacturing
line located in Tempe, Arizona.
Interest income (net) for the nine months ended September 30, 1995 was
$741,000, an increase from $554,000 for the nine months ended September 30,
1994. The increase in interest income was the result of investing higher average
cash balances during the period. Other expense (net) decreased to $29,000 for
the nine months ended September 30, 1995 from $124,000 for the nine months ended
September 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 decreased to $5,011,000 (40% effective
rate) for the nine months ended September 30, 1995 from $6,028,000 (40%
effective rate) in the nine months ended September 30, 1994. This resulted
primarily from lower pre-tax income.
Net income decreased to $7,516,000, or $0.93 per share, for the nine
months ended September 30, 1995 from $8,857,000, or $1.13 per share, in the nine
months ended September 30, 1994.
Liquidity and Capital Resources
During the nine months ended September 30, 1995, the Company generated
$989,000 in cash flow from operations as compared with $8,729,000 during the
same period in 1994. The decrease in cash flow from operations was principally
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 possible under the applicable tax regulations for
1994. The Company's working capital decreased to $20,699,000 at September 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 September 30, 1995 was 2.8-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 September 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 September 30, 1995.
During the nine months ended September 30, 1995, the Company repaid
$182,000 of long-term debt with cash flow from operations.
Capital expenditures during the nine months ended September 30, 1995
were approximately $26,119,000, as compared with $3,911,000 during the same
period in 1994. For the nine months ended September 30, 1995, approximately
$23,000,000 was used to complete the construction of and to facilitize the
Company's new Tempe, Arizona facility and automated high-volume LCD
manufacturing line. Additionally, over $3,500,000 of new manufacturing equipment
was placed in service at the Company's high-volume facility in Manila, the
Philippines. Expenditures for the nine months ended September 30, 1994 consisted
primarily of manufacturing equipment for the Company's manufacturing facility in
Manila, the Philippines.
The Company believes that its capital, together with loan commitments
described above and anticipated cash flows from operations, 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 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) EXHIBIT 11: Statement Re: Computation of Per Share Earnings.
(b) EXHIBIT 27: Financial Data Schedule
(c) 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: October 20, 1995 By /S/ Randal L. Buness
---------------- ----------------------------
Randal L. Buness
Its Vice President Finance & Administration
-------------------------------------------
Chief Financial Officer
<TABLE>
THREE-FIVE SYSTEMS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common shares outstanding beginning of period 7,709,004 7,654,744 7,691,524 6,641,944
Effect of Weighting Shares:
Employee stock options exercised 12,273 18,385 17,976 15,855
Employee stock options outstanding 367,041 426,307 376,954 425,021
Issuance of common stock - - - 728,938
---------- ---------- ---------- ----------
Primary 8,088,318 8,099,436 8,086,454 7,811,758
========== ========== ========== ==========
Common shares outstanding beginning of period 7,709,004 7,654,744 7,691,524 6,641,944
Effect of Weighting Shares:
Employee stock options exercised 12,273 18,385 17,976 15,855
Employee stock options outstanding 367,028 426,376 376,956 442,211
Issuance of common stock - - - 728,938
---------- ---------- ---------- ----------
Fully diluted 8,088,305 8,099,505 8,086,456 7,828,948
========== ========== ========== ==========
Net income $1,383,000 $3,396,000 $7,516,000 $8,857,000
========== ========== ========== ==========
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARES:
Net income per share
Primary $ 0.17 $ 0.42 $ 0.93 $ 1.13
========== ========== ========== ==========
Fully diluted $ 0.17 $ 0.42 $ 0.93 $ 1.13
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1995 AND THE RELATED
CONSOLIDATED STATEMENTS OF INCOME AND OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 2129
<SECURITIES> 0
<RECEIVABLES> 12281
<ALLOWANCES> 0
<INVENTORY> 15549
<CURRENT-ASSETS> 1028
<PP&E> 33387
<DEPRECIATION> 0
<TOTAL-ASSETS> 65601
<CURRENT-LIABILITIES> 11336
<BONDS> 0
<COMMON> 77
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 65601
<SALES> 70805
<TOTAL-REVENUES> 70805
<CGS> 53510
<TOTAL-COSTS> 58990
<OTHER-EXPENSES> 29
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12527
<INCOME-TAX> 5011
<INCOME-CONTINUING> 7516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7516
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.93
</TABLE>
