SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the
fiscal year ended December 31, 1995
Commission File Number 1-4373
THREE-FIVE SYSTEMS, INC.
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(Name of Issuer Specified in Its Charter)
Delaware 86-0654102
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1600 North Desert Drive, Tempe, Arizona 85281
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(Address of Principal Executive Offices) (Zip Code)
(602) 389-8600
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, Par Value $.01 Per Share New York Stock Exchange
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Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
State issuer's revenues for its most recent fiscal year. $91,585,000
As of March 5, 1996, the aggregate market value of the voting stock
held by non-affiliates of the issuer, computed by reference to the price at
which stock was sold as of such date in the stock market as reported on the New
York Stock Exchange, was $115,303,557. Shares of Common Stock held by each
officer and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily conclusive
and does not constitute an admission of affiliate status.
As of March 5, 1996, there were 7,736,345 shares of the issuer's Common
Stock outstanding.
Documents incorporated by reference: Portions of the issuer's
definitive Proxy Statement for the 1996 Annual Meeting of Stockholders are
incorporated by reference into Part III hereof.
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THREE-FIVE SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1995
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS....................................1
ITEM 2. DESCRIPTION OF PROPERTY...................................15
ITEM 3. LEGAL PROCEEDINGS.........................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.......................................15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................16
ITEM 6. SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION
AND ANALYSIS..............................................17
ITEM 7. FINANCIAL STATEMENTS......................................22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................22
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT.......................................22
ITEM 10. EXECUTIVE COMPENSATION....................................22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.....................................22
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............22
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K..........................22
SIGNATURES..........................................................24
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ITEM 1. DESCRIPTION OF BUSINESS
Introduction
The Company designs and manufactures a wide range of user interface
devices for operational control and informational display functions required in
the end products of original equipment manufacturers ("OEMs"). Most of the
Company's sales consist of custom devices developed in close collaboration with
its customers. Devices designed and manufactured by the Company find application
in cellular telephones and other wireless communication devices as well as in
medical equipment, office automation equipment, industrial process controls,
instrumentation, consumer electronic products, automotive equipment, and
industrial and military control products. The Company currently specializes in
liquid crystal display ("LCD") and light emitting diode ("LED") components and
technology in providing its design and manufacturing services for its customers.
The Company markets its services primarily in North America, Europe, and Asia
through direct technical sales persons and, to a much lesser extent, through an
independent sales and distribution network.
The Company has experienced substantial growth over the last three
years with net sales increasing from $38.0 million in 1993 to $91.6 million in
1995 and net income increasing from $5.1 million in 1993 to $8.4 million in 1995
as the Company has participated in the substantial growth in the wireless
communications market. As a result of its growing operations, in 1995 the
Company completed the construction of a new facility in Tempe, Arizona, to
consolidate its U.S. design, manufacturing, research, development, engineering,
marketing, and corporate operations and to house one of the largest LCD glass
production facilities in North America which, when fully operational, will
enable the Company to produce a substantial portion of its LCD glass
requirements.
The Company believes that it is positioned to continue its growth as a
result of its strength in designing, prototyping, and producing, on a timely and
cost-efficient basis, a wide range of innovative, distinctive, and high-quality
user interface devices required in the end products of OEMs. The Company's
design processes utilize advanced computer-aided design software to provide
custom solutions for customers' products in time frames and on cost-bases that
it believes are substantially shorter and lower priced than industry norms. The
Company utilizes flexible manufacturing systems that can accommodate low-volume
production runs or highly sophisticated applications in Arizona and high-volume,
price sensitive runs in Manila, the Philippines.
The Company maintains its principal executive offices at 1600 North
Desert Drive, Tempe, Arizona 85281, and its telephone number is (602) 389-8600.
Unless the context indicates otherwise, all references to the "Company" refer to
Three-Five Systems, Inc., its subsidiaries and predecessors.
Technology
Since the commercial introduction of the first light emitting diodes in
the 1960s and twisted nematic liquid crystal displays in the 1970s, the use of
LCD and LED indicators has become widespread in industrial and consumer
electronic products. Prior to these innovations, the most common displays or
indicators had substantial limitations as to their use, especially in terms of
size and life. LCD and LED technologies were developed in order to overcome
these limitations.
An LCD modifies light that passes through it rather than emitting light
like an LED. An LCD generally consists of a layer of liquid crystals suspended
between two glass plates. The crystal aligns itself in a predictable manner when
stimulated electrically. This alignment produces a visual representation when
used in conjunction with a polarizer and either natural or artificial ambient
light.
An LED chip produces light as the result of the application of direct
current at a low voltage. Different wavelengths (colors) can be produced in a
product depending upon the manufacturing process and the dopant (impurity) added
to the gallium arsenide or gallium phosphide wafer that makes up the chip. These
wavelengths are classified as visible or non-visible. In the visible range, LED
chips produce red, yellow, and green colors.
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In the non-visible range (infrared), the Company's devices utilize 880 nanometer
wavelength or 940 nanometer wavelength chips.
Industry Overview
The Company has benefitted from the determination by certain OEMs in
the electronics industry to outsource the design and production of certain
components included in their end products. The Company believes that the
following factors have contributed to this growing trend among OEMs:
o As technology has become increasingly sophisticated and complex, it
has become more difficult for even the leading OEMs to maintain the
necessary technology, expertise, personnel, and equipment to design
and produce internally all of the various components necessary for
their products.
o Advanced design and manufacturing procedures require increasingly
greater investments for research and development, personnel, and
equipment.
o Competitive market conditions require OEMs to reduce the period of
time from product conception to delivery, to differentiate their
products from those of their competitors, to improve user
friendliness, and continually to enhance product performance and
reduce product cost during the life cycle of the product.
OEMs often design their products to contain user interface devices
(including those relating to operational control and informational display) as a
low-cost but highly effective means of differentiating their products from
competing products. OEMs then face the choice of whether to use standard
devices, to design and produce the devices in-house, or to outsource with a
third party for design and production. In making this decision, companies often
recognize that their greatest strengths consist of consumer recognition of brand
names, market research and product development expertise, and highly developed
sales and distribution channels. OEMs also recognize that the desired devices
often cannot be obtained "off-the-shelf" and that time constraints and
limitations on available resources often preclude them from maintaining the
specialized in-house expertise and equipment necessary to design and manufacture
the desired devices. OEMs often conclude that the logical solution is to focus
their resources on those areas (such as marketing and distribution) where they
possess the greatest leverage and to outsource the production of devices and
components in which they lack the requisite technology and expertise.
Outsourcing enables OEMs to obtain the following desired benefits:
o To gain access to specialized design and manufacturing technology and
expertise.
o To accelerate the design process and to reduce design and
manufacturing costs by utilizing the specialized personnel,
equipment, and facilities of the supplier.
o To reduce their own investment in personnel, equipment, and
facilities necessary for specialized design and production
capabilities.
o To streamline their own operations by concentrating their resources
on the design, production, and distribution of their core products.
By eliminating the duplication and overlap of investment and resources,
outsourcing permits the OEMs and the Company to work together and grow at a
faster rate than would otherwise be possible. Outsourcing greatly reduces the
Company's need to devote time and resources on market development for specific
products and allows the Company to concentrate on the development of its
technology and its application to a multitude of products.
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Products and Services
The Company currently emphasizes custom designed user interface devices
for operational control and informational display functions, but also designs
and produces standard or "off-the-shelf" devices. The Company believes that
custom devices represent the source of its greatest profits and growth
potential. For each custom device, the Company works directly with its customer
to develop and produce the original design and to manufacture the device in
accordance with the customer's specifications. Standard devices involve designs
that are adaptable to various fixed end uses without modification.
The Company pursues a strategy designed to enable it to enhance its
position as a major, worldwide supplier of custom-designed and manufactured user
interface devices for products of leading OEMs in various high growth
industries. The Company attempts to identify industries that present the
greatest long-term potential for growth at any given time. The Company seeks to
establish strong and long-lasting customer relationships by aligning its
prospects with those of its customers and by seeking to make its engineering and
production staff seamless extensions of the product design and production
departments of its customers. The Company engages in a careful customer
selection process because it recognizes that its own growth and development will
be closely aligned with the growth and development of the customers it serves.
Current targeted industries include the areas of cellular telephones and other
wireless communications, office automation, medical devices, and industrial
process controls.
Custom Devices
LCD and LED custom displays currently account for approximately 94
percent of the Company's revenue. A manufacturer of a complete system or product
requiring a specific type of visual display (such as a cellular telephone,
medical instrument, business machine, or hand-held data collection device)
represents a typical buyer for a custom device.
The Company has developed a sophisticated design process to meet the
specific needs of its customers' applications. Each design project normally
involves a team of Company engineers who are assigned to a customer program. The
team consults with the customer's engineers throughout the design phase,
prototype development, and manufacturing process. The Company continues to
supply engineering support after the design solution has been developed and
integrated into the manufacturing process.
Standard Devices
Standard devices encompass a wide variety of LCD and LED devices having
varied applications. "Visible" LCD and LED standard devices include (i) solid
state lamps used for indicators, status lights, on-board circuit monitors, and
instrumentation; (ii) single and dual digit displays and multi-digit numerical
displays used for calculators, industrial controls, data terminals,
instrumentation timers, hand-held instruments, event counters, and PCB
diagnostics; (iii) integrated displays (with on-board integrated circuit
drivers) and alpha numeric displays used for hand-held terminals, minicomputers,
telecommunications, and instrumentation word processors; (iv) bar graph displays
used for power meters in stereo systems, Ham and CB radio meters, VU meters in
tape recorders, process control meters and replacements for edge meters; (v)
multi-digit numeric displays used for industrial controls, data terminals, test
equipment, point of sale, mini-computer readout, and home consumer applications;
and (vi) clock modules used for clock radio timers, alarm clocks, desk clocks,
auto, marine and aviation clocks, portable instruments, and time/temperature
displays.
Standard infrared devices include (a) infrared emitters and silicon
detectors used for TV remote controls, disk drives, tape drives, printers,
encoders, solid state relays, photoelectric controls, slotted switches,
reflective switches, intrusion alarms, touch screens, wireless data entry and
positioning sensors; and (b) optocouplers used for AC power controls, DC power
controls, solid state relays, logic to power interfaces and power supplies.
3
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Manufacturing Services
The Company has geographically organized its manufacturing capabilities
in a manner that optimizes the combination of technology and human resources.
This enables the Company to compete solely on the basis of cost, if necessary,
with suppliers of similar products and services throughout the world. Advanced
manufacturing techniques include surface mount technologies, chip-on-board,
chip-on-flex, flip-chip, tape automated bonding, and sophisticated testing
systems throughout the process. The Company maintains at each of its facilities
quality systems and processes that meet or exceed the demanding standards set by
leading OEMs in targeted industries.
The Company seeks to increase its value to its customers by providing
responsive, flexible, total manufacturing services. To date, manufacturing
services have been concentrated toward the manufacture of LCDs and assembly of
Company-designed user interface module assemblies. However, the Company has
recognized an increased demand for extended manufacturing services beyond these
core services. These services may include adding additional components, such as
a keypad, microphone, card reader, product housing, or non-display electronic
sub-assembly, or the turn-key manufacture of a complete OEM product. The Company
intends to pursue these extended manufacturing opportunities when it can perform
such services at acceptable margins.
Manufacturing Facilities
The Company currently conducts manufacturing operations in Tempe,
Arizona and in Manila, the Philippines. The Company completed the construction
of its new principal U.S. facility in March 1995. See "Description of Property"
contained in Item 2 of this Report. The Arizona facility houses a Class 1000
"clean room" and LCD fabrication and prototyping operation. The Company utilizes
the facility primarily to conduct LCD research and development, to produce
prototype and pre-production runs of devices for customer approval, to conduct
full production runs of low-volume devices, and to develop advanced
manufacturing processes that can be applied in Manila during full-scale
production. In addition, the facility has one of the largest LCD glass
production capacities in North America which, when fully operational, will
permit the Company to reduce its dependence on foreign suppliers for LCD glass.
Facility personnel includes a team of experts ranging from LCD research
scientists to specialized engineers with backgrounds in electronics, mechanics,
chemistry, physics, and manufacturing. The Company maintains a complete array of
state-of-the-art testing and quality control equipment at the facility.
The Company is a party to an agreement (the "Sub-Assembly Agreement")
with Technology Electronic Assembly and Management Pacific Corporation ("TEAM"),
pursuant to which TEAM manufactures, assembles, and tests user interface devices
for the Company at a facility owned by TEAM located in Manila, the Philippines.
TEAM manufactures, assembles, and tests devices designed by the Company pursuant
to procedures set forth in the Sub-Assembly Agreement in accordance with
specifications supplied by the Company. The Company owns the manufacturing,
assembling, and testing equipment (including automated die attach and wire bond
equipment with automatic pattern recognition features for die and wire placement
for LED die) as well as the processes and documentation used by TEAM at the
Manila facilities. See "Description of Property" contained in Item 2 of this
Report. Pursuant to the Sub-Assembly Agreement, the Company supplies all direct
materials to TEAM that are necessary to meet forecasted production levels
specified by the Company. The Company pays TEAM for the sub-assembly of the
Company's devices based upon a negotiated hourly rate. The Company also employs
professional personnel, including an Operations Manager, with a support staff
consisting of manufacturing, quality, and process engineers, and logistics
personnel at the Manila facility.
The Sub-Assembly Agreement between the Company and TEAM was renewed on
February 22, 1995 and extends through December 31, 1999 and from year to year
thereafter. The Sub-Assembly Agreement requires minimum production levels to be
maintained. The termination of the Sub-Assembly Agreement or the inability of
TEAM to fulfill its requirements under the Sub-Assembly Agreement would require
the Company to acquire additional manufacturing facilities or to contract for
additional manufacturing services. The Philippines has been subject to volcanic
eruptions, typhoons, and substantial civil disturbances, including attempted
military coups against the government. These circumstances could affect the
Company's ability to obtain products pursuant to the Sub-
4
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Assembly Agreement, although there has not been any material interruption of
operations to date. The termination of or the inability of the Company to obtain
products pursuant to the Sub-Assembly Agreement, even for a relatively short
period, would have a material adverse effect on the operations and profitability
of the Company. See "Special Considerations - Manufacturing Operations in the
Philippines" contained in Item 1 of this Report.
The Company has implemented an aggressive quality control program. The
program is based upon Statistical Process Control, which advocates continual
quantitative measurements of crucial parameters and uses those measurements in a
closed-loop feedback system to control the manufacturing process. Product life
testing is performed to help ensure long-term product reliability. The results
of life tests are analyzed and actions taken to refine the manufacturing process
or enhance the product design.
The Company engages in a continuing equipment acquisition program at
both the Arizona and Philippine manufacturing locations. In 1995, the Company
placed in service approximately $13.6 million of manufacturing equipment in
Arizona and approximately $4.9 million in the Philippines.
Sales and Marketing
The Company markets its services primarily in North America, Europe,
and Asia through direct technical sales persons and, to a much lesser extent,
through an independent sales and distribution network. This network includes two
franchised distributors in approximately 71 sales offices. A staff of in-house,
Arizona-based sales and marketing personnel directs and aids the franchised
distributors. The Company also has sales engineers in Arlington Heights,
Illinois, Southfield, Michigan, and Norcross, Georgia.
The Company's sales to customers in Europe represented approximately 73
percent of net sales in 1995. The Company distributes products in Europe through
a network of distributors, augmented in some regions by marketing
representatives. This network receives support from the marketing, customer
service, and support staff employed by the Company's subsidiary, Three-Five
Systems Limited, located in Swindon, England. The European staff and network of
distributors provide marketing, consulting, and product design locally for
customers throughout Western Europe.
Customers
The Company's strategy involves concentrating its efforts on providing
design and production services to leading companies in a limited number of a
fast growing industries. As a result, the Company generally derives its revenue
from services provided to a limited number of customers. The Company's largest
customer is Motorola, Inc. ("Motorola"). Sales to Motorola are made through
eleven buyers operating in five separate product divisions. The Company
currently designs and manufactures user interface devices used in approximately
40 individual product programs for Motorola. During 1995, the five largest of
these programs accounted for 19.4 percent, 9.3 percent, 8.4 percent, 5.2
percent, and 4.7 percent, respectively, of the Company's total revenue, and the
remaining product programs in the aggregate accounted for approximately 33.5
percent of the Company's total revenue. Devices that are used in cellular
telephones accounted for substantially all of the Company's sales to Motorola in
1995. See "Special Considerations -Substantial Reliance on Certain Customers"
contained in Item I of this Report.
Backlog
As of December 31, 1995, the Company had a backlog of orders of
approximately $21.3 million, all of which orders are believed to be firm and all
of which are expected to be filled during fiscal 1996. The backlog of orders at
December 31, 1994 was approximately $20.5 million. The Company's business has
not been seasonal to date.
5
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Patents and Trademarks
The Company's business does not depend on patent or trademark
protection.
Raw Materials
The principal raw materials used in producing the Company's displays
consist of gallium arsenide and gallium phosphorous wafers and die, LCD glass,
driver die, circuit boards, molded plastic parts, lead frames, wire, chips, and
packaging materials. The Company believes that there are alternative sources of
supplies for most of these materials. Many of such materials, however, must be
obtained from foreign suppliers which subjects the Company to the risks inherent
in obtaining materials from foreign sources, including supply interruptions and
currency fluctuations. The Company's suppliers are adequately meeting the
requirements of the Company. The Company's ability to produce a significant
percentage of its requirements of LCD glass in its new facility is expected to
reduce the Company's dependence on foreign suppliers. See "Special
Considerations - Shortage of Raw Materials and Supplies" contained in Item 1 of
this Report.
Competition
The Company believes that Optrex America, Inc., Seiko-Epson, Vikay
Industrial Pte. Limited, PCI Limited, and Philips Components B.V. compete with
the Company's LCD devices. Hewlett-Packard, Rohm Co., Ltd., LiteOn, Inc.,
Stanley Electric Company, Ltd., and Quality Technologies Corp. constitute its
principal competitors for its LED devices. Most of these competitors are large
companies that have greater financial, technical, marketing, manufacturing, and
personnel resources than the Company. The revenue, profitability, and success of
the Company depend substantially upon its ability to compete with other
providers of user interface devices. No assurance can be given that the Company
will continue to be able to successfully compete with such organizations.
The Company currently competes principally on the basis of the
technical innovation and performance of its product solutions, including their
ease of use and reliability, as well as on their cost, timely design, and
manufacturing and delivery schedules. The Company's competitive position could
be adversely affected if one or more of its customers, particularly Motorola,
determine to design and manufacture their user interface devices internally or
secure them from other parties. See "Special Considerations - Competition"
contained in Item 1 of this Report.
Research and Development
The Company conducts an active and ongoing research, development, and
engineering program that focuses on developing improved design and manufacturing
processes, automating and perfecting design and manufacturing techniques, and
improving the overall quality of services that the Company provides. Research
and development concentrates on LCD process development, qualifying new
materials for high volume LCD manufacturing, testing new liquid crystal
mixtures, and quick-turn prototyping. Additionally, the Company focuses on
developing advanced manufacturing processes that can be applied during
full-scale production.
Environmental Regulation
The operations of the Company result in the creation of small amounts
of hazardous waste, including various epoxies, gases, inks, solvents and other
wastes. The amount of hazardous waste produced by the Company may increase in
the future depending on changes in the Company's operations. The disposal of
hazardous waste has received increasing focus from federal, state, local, and
international governments and agencies and has been subject to increasing
regulation. See "Special Considerations - Environmental Regulation" contained in
Item 1 of this Report.
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On January 24, 1991, the Company received a notice of potential
liability at the Barkhamsted-New Hartford Landfill Site in Barkhamsted,
Connecticut from the United States Environmental Protection Agency ("EPA").
Fifty- seven other entities received similar letters. The letter states that the
EPA has documented releases of hazardous substances from the site and has listed
it on the National Priorities List. The letter also indicates that EPA has spent
and is considering spending public funds on actions to investigate and control
such releases or threatened releases at the site. Unless EPA reaches an
agreement under which a responsible party or parties will properly perform or
finance such actions, EPA will itself perform these actions pursuant to Section
104 of the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") and seek reimbursement from the responsible party or parties. On
January 9, 1992, the Company received an additional 104(e) questionnaire from
the EPA which was completed and submitted during 1992. To the Company's
knowledge, no complaint has been filed. No further administrative action against
the Company has been taken.
Some of the 57 other entities notified by the EPA have formed a group
to respond to the EPA letter, and so-called special notice letters were
subsequently sent to them but not the Company. The Company currently is
evaluating its potential liability at the site and whether to participate in any
such activities.
In a separate matter, the Company conducted a clean-up of limited
chemical contamination at its former property located in Barkhamsted,
Connecticut. The contamination was caused by the previous owner of the property,
and not as a result of any of the Company's operations. The Company has
contracted with an environmental consulting firm for assistance with the
clean-up process and has complied with the requests and recommendations of the
Connecticut Environmental Protection Agency throughout the process. The Company
believes that the source of the contamination has been removed from the property
and that the clean-up is substantially complete as of the date of this Report.
Four monitoring wells have been installed to permit periodic chemical analysis
to be made at the property. The property was sold on June 25, 1995, subject to
the Company making its best efforts to obtain from either the Connecticut or
federal Environmental Protection Agency documentation to the effect that the
property is clean and that there is no actionable contamination in the vicinity
of the property.
Employees
As of December 31, 1995, the Company employed a total of 174 persons.
This number includes 127 full-time and approximately 30 temporary employees at
its principal U.S. facility in Tempe, Arizona. The Company considers its
relationship with its employees to be good, and none of its employees currently
are represented by a union in collective bargaining with the Company.
TEAM provides the personnel engaged in the assembly of the Company's
devices in Manila pursuant to the Sub-Assembly Agreement between the Company and
TEAM. See "Description of Business - Manufacturing Facilities" contained in Item
1 of this Report. As of December 31, 1995, approximately 1,700 persons performed
direct and indirect labor operations at the Manila facility through the
Sub-Assembly Agreement with TEAM.
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Executive Officers
The following table sets forth information concerning each of the
executive officers of the Company:
Name Age Position
---- --- --------
David R. Buchanan 63 Chairman of the Board, President, and
Chief Executive Officer
David M. Rzasa 44 Executive Vice President and Chief
Operating Officer
Randal L. Buness 39 Vice President-Finance and Administration,
Chief Financial Officer, Secretary, and Treasurer
Dan J. Schott 56 Vice President-Technology
James F. Bowser 54 Vice President-Sales and Marketing
Vincent C. Hren 45 Vice President-Manufacturing Operations
David R. Buchanan has been Chairman of the Board, President, Chief
Executive Officer, and a Director of the Company since its formation in February
1990. Mr. Buchanan served as Treasurer of the Company from May 1990 until
January 1994 and as Chairman of the Board and Chief Executive Officer,
President, and a Director of one of the predecessors of the Company from October
1986, February 1987, and November 1985, respectively, until the predecessor's
merger into the Company in May 1990.
David M. Rzasa has been Executive Vice President and Chief Operating
Officer of the Company since September 1995. From 1991 to September 1995, Mr.
Rzasa served as President, Executive Vice President, and General Manager of
Rosemount Analytical, Inc. ("Rosemount"), a division of Emerson Electric's
Fisher-Rosemount instrumentation group. Mr. Rzasa served as General Manager of
Rosemount's European operations from 1987 to 1991 and held various other
operations and engineering positions with Rosemount from 1979 to 1987.
Randal L. Buness has been Vice President-Finance and Administration,
Chief Financial Officer, Secretary, and Treasurer of the Company since September
1994. Mr. Buness served as Chief Financial Officer, Secretary, and Treasurer of
United Medical Network from January 1993 until September 1994. From January 1989
until January 1993, he worked as a self-employed financial consultant. Mr.
Buness served as principal and manager with Arthur Young from January 1986 until
January 1989 and served as a manager, senior, and staff accountant with Price
Waterhouse from July 1979 until January 1986. Mr. Buness is a Certified Public
Accountant.
Dan J. Schott has been Vice President-Technology of the Company since
January 1994. From 1988 to January 1994, Mr. Schott was an Associate Director
with Honeywell Inc., where his responsibilities included research and
development and program management. From 1981 until 1987, he held various
engineering positions with Sperry Rand Corp.
James F. Bowser has been Vice President-Sales and Marketing of the
Company since January 1996. Mr. Bowser served as Vice President-Manufacturing
Operations of the Company from January 1994 until January 1996, as Director of
Marketing and New Product Development of the Company from July 1992 until
January 1994, as Vice President of Marketing and New Product Development from
January 1992 until July 1992, and as Senior Vice President of Sales and
Marketing from August 1990 until January 1992. From January 1985 until August
1990, he held a variety of executive positions with National Computer Systems,
Inc.
Vincent C. Hren has been Vice President-Manufacturing Operations of the
Company since January 1996. Mr. Hren served as Vice President-Worldwide
Automotive of Graco Inc. from 1994 to 1995. Mr. Hren served as Vice
President-Worldwide Operations for Fisher-Rosemount Systems, Inc. from 1993 to
1994, General Manager of Rosemount Analytical, Inc. from 1992 to 1993, and held
various management positions with Fisher-Rosemount, Inc. from 1974 to 1992.
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SPECIAL CONSIDERATIONS
Certain Factors Affecting Operating Results
The Company's operating results are affected by a wide variety of
factors which could adversely impact its net sales and profitability. These
factors, many of which are beyond the control of the Company, include the
Company's ability to identify industries which have significant growth potential
and to establish strong and long- lasting relationships with companies in those
industries; its ability to provide significant design and manufacturing services
for those companies on a timely and cost-effective basis; its success in
maintaining customer satisfaction with the Company's design and manufacturing
services; market acceptance of products of its customers incorporating devices
designed and manufactured by the Company; the level and timing of orders placed
by customers which the Company can complete in a quarter; customer order
patterns and seasonality; changes in order mix; the performance and reliability
of devices designed and manufactured by the Company; the life cycles of its
customers' products; the availability and utilization of manufacturing capacity;
fluctuations in manufacturing yield and productivity; the availability and cost
of raw materials, equipment, and supplies; the timing of expenditures in
anticipation of orders; the cyclical nature of the industries and the markets
served by the Company; technological changes; and competition and competitive
pressures on prices.
The Company's ability to increase its design and manufacturing capacity
to meet customer demand and maintain satisfactory delivery schedules will be an
important factor in its long-term prospects. The Company's product solutions are
incorporated into a wide variety of communications, consumer, medical, office
automation, and industrial products. A slowdown in demand for products which
utilize the Company's devices as a result of economic or other conditions in the
United States or worldwide markets served by the Company or other broad based
factors would adversely affect the Company's operating results.
Dependence on New Products and Technologies
The Company operates in fast changing industries. Technological
advances, the introduction of new products, and new design and manufacturing
techniques could adversely affect the Company's operations unless the Company is
able to adapt to the resulting changing conditions. As a result, the Company
will be required to expend substantial funds for and commit significant
resources to the conduct of continuing research and development activities, the
engagement of additional engineering and other technical personnel, the purchase
of advanced design, production and test equipment, and the enhancement of design
and manufacturing processes and techniques.
The Company's future operating results will depend to a significant
extent on its ability to continue to provide design and manufacturing services
for new products that compare favorably on the basis of time to introduction,
cost, and performance with the design and manufacturing capabilities of OEMs and
other third-party suppliers. The success of new design and manufacturing
services depends on various factors, including proper customer selection,
utilization of advances in technology, innovative development of new solutions
for customer products, efficient and cost-effective services, timely completion
and delivery of new product solutions, and market acceptance of customers' end
products. Because of the complexity of the Company's design and manufacturing
services, the Company may experience delays from time to time in completing the
design and manufacture of new product solutions. In addition, there can be no
assurance that any new product solutions will receive or maintain customer or
market acceptance. If the Company were unable to design and manufacture
solutions for new products of its customers on a timely and cost-effective
basis, its future operating results would be adversely affected. See
"Description of Business - Products and Services" contained in Item 1 of this
Report.
Substantial Reliance on Certain Customers
The Company's strategy involves concentrating its efforts on providing
design and production services to leading companies in a limited number of very
fast growing industries. As a result, the Company generally derives
9
<PAGE>
its revenue from services provided to a limited number of customers. The
Company's largest customer is Motorola. Sales to Motorola are made through
eleven buyers operating in five separate product divisions. The Company
currently designs and manufactures user interface devices for use in
approximately 40 individual product programs for Motorola. During 1995, the five
largest of these programs accounted for 19.4 percent, 9.3 percent, 8.4 percent,
5.2 percent, and 4.7 percent, respectively, of the Company's total revenue, and
the remaining product programs in the aggregate accounted for approximately 33.5
percent of the Company's total revenue. Devices that are used in cellular
telephones accounted for substantially all of the Company's sales to Motorola in
1995.
Although the Company has long-established relationships with many of
its customers, the Company does not have long-term supply contracts with any
customers. Customers also generally do not commit to long-term production
schedules. In addition, customer orders generally can be cancelled and volume
levels changed or delayed. The timely replacement of cancelled, delayed, or
reduced orders cannot be assured. A decrease in business from any of the
Company's major customers, particularly Motorola, would have a material adverse
effect on the Company's results of operations.
Manufacturing Operations in the Philippines
The Company has maintained its primary manufacturing facility in
Manila, the Philippines since 1986. TEAM, a third party subcontractor, operates
the facility under a subcontract agreement with the Company utilizing equipment,
processes, and documentation owned and supervisory personnel employed by the
Company. The subcontractor owns the facility, which is located on land it leases
from the Philippine government, and provides production personnel. The
subcontractor also utilizes the facility to produce products for other entities
unrelated to the Company. The subcontract agreement, which was renewed on
February 22, 1995, has a current term extending through December 31, 1999 and
from year to year thereafter.
The Company has made cumulative capital investments in the Philippines
amounting to approximately $10.3 million through December 31, 1995. The
Company's reliance on personnel and facilities in the Philippines and its
maintenance of inventories abroad expose the Company to certain economic and
political risks, including the business and financial condition of the
subcontractor, political instability and expropriation, supply disruption,
currency controls, and exchange fluctuations as well as changes in tax laws,
tariffs, and freight rates. The Company has not experienced any significant
interruptions in its business operations in the Philippines to date despite the
fact that the Philippines has been subject to volcanic eruptions, typhoons, and
substantial civil disturbances, including attempted military coups against the
government. The Company has made advance payments to the subcontractor to assist
the subcontractor in meeting its working capital needs while it negotiates new
financing arrangements. Advances, net of amounts payable to TEAM, totalled
approximately $500,000 at December 31, 1995 and are secured by future payments
for subcontracting services to be provided to the Company as well as other
assets of the subcontractor. The Company believes that its manufacturing
operations in the Philippines constitute one of the Company's most important
resources and that it would be difficult for it to replace the low-cost,
high-performance facility or the high-quality and hardworking production staff
if its manufacturing operations in the Philippines were disrupted or terminated.
As a result, the Company's operations would be adversely affected if operations
in the Philippines or air transportation with the Philippines were disrupted or
terminated, even for a relatively short period of time. See "Description of
Business -Manufacturing Facilities" contained in Item I of this Report.
International Trade and Currency Exchange
Approximately 73 percent of the Company's net sales in 1995 were to
international customers. In addition, the Company purchases a substantial
portion of its raw materials and equipment from foreign suppliers and incurs
labor costs in foreign locations. The foreign sale of products and the purchase
of raw materials and equipment from foreign suppliers may be adversely affected
by political and economic conditions abroad. Protectionist trade legislation in
either the United States or foreign countries, such as a change in the current
tariff structures, export compliance laws, or other trade policies, could
adversely affect the Company's ability to sell devices in foreign markets and
purchase materials or equipment from foreign suppliers.
10
<PAGE>
A small portion of the Company's foreign transactions are denominated
in currencies other than the U.S. dollar. 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.
Manufacturing Yields and Capacity
The design and manufacture of user interface devices are highly complex
processes that are sensitive to a wide variety of factors, including the level
of contaminants in the manufacturing environment, impurities in the materials
used, and the performance of the design and production personnel and equipment.
As is typical in the industry, the Company from time to time has experienced
lower than anticipated manufacturing yields and lengthening of delivery
schedules. During the past three fiscal years, the Company has increased its
manufacturing productivity, achieved higher manufacturing yields, and reduced
design and manufacturing errors, all of which have been positive factors in its
operating results. In addition, the Company has instituted procedures to assure
its ability to meet delivery schedules to satisfy increased business. The
Company's operating results would be adversely affected if it were unable to
maintain high levels of productivity or to maintain satisfactory delivery
schedules.
Manufacturing yields and delivery schedules also may be affected as the
Company expands its Manila manufacturing capacity. Operating results could be
adversely affected if the expansion of the Company's manufacturing capacity is
delayed or inefficiently implemented. Other companies in the industry have
experienced difficulty in expanding manufacturing capacity, with such difficulty
resulting in reduced yields or delays in product deliveries. No assurance can be
given that the Company will not experience manufacturing yield or delivery
problems in the future. Such problems could materially affect the Company's
operating results. See "Description of Business - Manufacturing Facilities"
contained in Item 1 of this Report.
Utilization of New Facility
The Company made substantial expenditures in constructing and equipping
its new facility in Tempe, Arizona during 1995. The Company intends to utilize a
significant portion of the facility to produce a substantial portion of its own
requirements for LCD glass. The successful utilization of the facility will
require the Company (i) to produce LCD glass on a timely and cost-effective
basis at quality levels at least equal to the LCD glass available from
independent suppliers and (ii) to utilize the LCD glass it produces in devices
it designs and manufactures in a manner satisfactory to its customers. No
assurance can be given that the Company will not experience problems or delays
in implementing or conducting its LCD glass manufacturing operations. Any such
problems could result in the lengthening of the Company's delivery schedules,
reductions in the quality or performance of the Company's design and
manufacturing services, and reduced customer satisfaction. Such problems also
could require the Company to purchase its LCD glass requirements from third
parties and result in the inability of the Company to recover its investment in
the facility.
Management of Growth
The Company currently is experiencing a period of significant growth.
The Company's ability to manage its growth effectively will require it to
enhance its operational, financial, and management systems, to expand its
facilities and equipment, and to successfully hire, train, and motivate
additional employees, including the technical personnel necessary to operate its
new LCD glass production facility in Arizona. The failure of the Company to
manage its growth on an effective basis could have a material adverse effect on
the Company's operations.
The Company may be required to increase staffing and other expenses as
well as its expenditures on capital equipment and leasehold improvements in
order to meet the anticipated demand of its customers. Customers, however,
generally do not commit to firm production schedules for more than a short time
in advance. The
11
<PAGE>
Company's profitability would be adversely affected if the Company increases its
expenditures in anticipation of future orders that do not materialize. Customers
also may require rapid increases in design and production services which place
an excessive short-term burden on the Company's resources.
Dependence on Key Personnel
The Company's development and operations to date have been, and its
proposed operations will be, substantially dependent on the efforts and
abilities of its senior management and technical personnel including David R.
Buchanan, who serves as the Chairman of the Board, President, and Chief
Executive Officer of the Company. The competition for qualified management and
technical personnel is intense. The loss of services of one or more of its key
employees or the inability to add key personnel (including those required for
its new LCD glass production facility) could have a material adverse effect on
the Company. See "Description of Business - Executive Officers" contained in
Item 1 of this Report. The Company does not have an employment agreement with,
or key person life insurance covering any officer or employee. The Company,
however, maintains noncompetition and nondisclosure agreements with its key
personnel.
Possible Volatility of Stock Price
The market price of the Company's Common Stock increased dramatically
during the three-year period ended December 31, 1994, but declined significantly
during 1995. See "Price Range of Common Stock" contained in Item 5 of this
Report. The trading price of the Company's Common Stock in the future could
continue to be subject to wide fluctuations in response to various factors,
including quarterly variations in operating results of the Company, actual or
anticipated announcements of technical innovations or new product developments
by the Company or its competitors, changes in analysts' estimates of the
Company's financial performance, general conditions in the electronics industry,
worldwide economic and financial conditions, and other events or factors. In
addition, the stock market has experienced extreme price and volume fluctuations
which have particularly affected the market prices for many high technology
companies and which often have been unrelated to the operating performance of
such companies. These broad market fluctuations and other factors may adversely
affect the market price of the Company's Common Stock.
Competition
The industries which the Company serves are intensely competitive and
have been characterized by price erosion, rapid technological change, and
foreign competition. The Company competes with major domestic and international
companies, many of which have greater market recognition and substantially
greater financial, technical, marketing, distribution, and other resources than
the Company possesses. Emerging companies also may increase their participation
in the user interface device market. The ability of the Company to compete
successfully depends on a number of factors both within and outside its control,
including the quality, performance, reliability, features, ease of use, pricing,
and diversity of its product solutions; the quality of its customer services;
its ability to address the needs of its customers; its success in designing and
manufacturing new product solutions, including those implementing new
technologies; the availability of adequate sources of raw materials and other
supplies at acceptable prices; its efficiency of production; the rate at which
customers incorporate the Company's user interface devices into their own
products; product solution introductions by the Company's competitors; the
number, nature, and success of its competitors in a given market; and general
market and economic conditions. The Company currently competes principally on
the basis of the technical innovation and performance of its user interface
devices, including their ease of use and reliability, as well as on cost and
timely design, manufacturing, and delivery schedules. The Company's competitive
position could be adversely affected if one or more of these customers increase
their own capacity and decide to design and manufacture their own user interface
devices, to use standard devices, or to outsource with a competitor. There is no
assurance that the Company will continue to be able to compete successfully in
the future. See "Description of Business - Competition" contained in Item 1 of
this Report.
12
<PAGE>
Shortage of Raw Materials and Supplies
The principal raw materials used in producing the Company's product
solutions consist of gallium arsenide and gallium phosphorous wafers and die,
LCD glass, driver die, circuit boards, molded plastic parts, lead frames, wire,
chips, and packaging materials, most of which are acquired from Asian sources.
The Company does not have long-term contracts with its suppliers.
The Company believes that there are alternative sources of supplies for
most of these materials. Many of such materials, however, must be obtained from
foreign suppliers, which subjects the Company to certain risks, including supply
interruptions and currency price fluctuations. Purchasers of these materials,
including the Company, experience difficulty from time to time in obtaining such
materials. The Company's suppliers currently are adequately meeting the
requirements of the Company, and the Company's ability to produce a substantial
portion of its own requirements for LCD glass in its new facility is expected to
reduce the Company's dependence on foreign suppliers of LCD glass.
The Electronics Industry: Cyclicity and Capital Requirements
The electronics industry has experienced significant economic downturns
at various times, characterized by diminished product demand, accelerated
erosion of average selling prices, and production over-capacity. In addition,
the electronics industry has been characterized by cyclicity. The Company has
sought to reduce its exposure to industry downturns and cyclicity by providing
design and production services for leading companies in rapidly expanding
segments of the electronics industry. However, the Company may experience
substantial period-to-period fluctuations in future operating results because of
general industry conditions or events occurring in the general economy. There is
no assurance that the Company will continue to experience increased demand.
To remain competitive, the Company must continue to make significant
investments in research and development, equipment, and facilities. As a result
of the increase in fixed costs and operating expenses related to these capital
expenditures, the Company's operating results may be adversely affected if its
net sales do not increase sufficiently to offset the increased costs. The
Company from time to time may seek additional equity or debt financing to
provide for the capital expenditures required to maintain or expand the
Company's design and production facilities and equipment. The timing and amount
of any such capital requirements cannot be predicted at this time. There can be
no assurance that any such financing will be available on acceptable terms. If
such financing is not available on satisfactory terms, the Company may be unable
to expand its business or develop new customers at the rate desired and its
operating results may be adversely affected. Debt financing increases expenses
and must be repaid regardless of operating results. Equity financing could
result in additional dilution to existing stockholders. See "Management's
Discussion and Analysis - Liquidity and Capital Resources" contained in Item 6
of this Report.
Environmental Regulation
The operations of the Company result in the creation of small amounts
of hazardous waste, including various epoxies, gases, inks, solvents, and other
wastes. The Company, therefore, is subject to federal, state, and local
governmental regulations related to the use, storage, discharge, and disposal of
toxic, volatile, or otherwise hazardous chemicals used in its design and
manufacturing processes. The amount of hazardous waste produced by the Company
may increase in the future depending on changes in the Company's operations. The
failure by the Company to comply with present or future environmental
regulations could result in fines being imposed on the Company, suspension of
production, or a cessation of operations. Compliance with such regulations could
require the Company to acquire costly equipment or to incur other significant
expenses. Any failure by the Company to control the use of, or adequately
restrict the discharge of, hazardous substances could subject it to future
liabilities.
In January 1991, the Company received a notice of potential liability
respecting a landfill site near the Company's former property in Barkhamsted,
Connecticut from the United States Environmental Protection Agency.
13
<PAGE>
In a separate matter, the Company expended a total of approximately $9,500
during 1993, 1994 and 1995 to remove contamination at the Company's former
Connecticut property. There can be no assurance that other environmental
problems will not be discovered in the future which could subject the Company to
future costs or liabilities. See "Description of Business - Environmental
Regulation" contained in Item 1 of this Report.
Change in Control Provisions
The Company's Restated Certificate of Incorporation (the "Restated
Certificate") and the Delaware General Corporation Law (the "Delaware GCL")
contain provisions that may have the effect of making more difficult or delaying
attempts by others to obtain control of the Company, even when these attempts
may be in the best interests of stockholders. The Restated Certificate also
authorizes the Board of Directors, without stockholder approval, to issue one or
more series of Preferred Stock which could have voting and conversion rights
that adversely affect or dilute the voting power of the holders of Common Stock.
The Delaware GCL also imposes conditions on certain business combination
transactions with "interested stockholders" (as defined therein).
Rights to Acquire Shares
At December 31, 1995, a total of 6,500 shares of Common Stock were
reserved for issuance upon exercise of options previously granted under the
Company's 1994 Automatic Stock Option Plan for Non-employee Directors, at a
weighted average exercise price of $27.89 per share. In addition, a total of
220,500 shares of Common Stock were reserved for issuance upon exercise of
options previously granted under the Company's 1993 Stock Option Plan, at a
weighted average exercise price of $17.61 per share, and a total of 312,576
shares of Common Stock were reserved for issuance upon exercise of options
previously granted under the Company's 1990 Stock Option Plan at a weighted
average exercise price of $.92 per share. During the terms of such options, the
holders thereof will have an opportunity to profit from an increase in the
market price of Common Stock with resulting dilution in the interests of holders
of Common Stock. The existence of such stock options may adversely affect the
terms on which the Company can obtain additional financing, and the holders of
such options can be expected to exercise such options at a time when the
Company, in all likelihood, would be able to obtain additional capital by
offering shares of its Common Stock on terms more favorable to the Company than
those provided by the exercise of such options.
Shares Eligible for Future Sale
Sales of substantial amounts of "restricted securities" (as that term
is used in Rule 144 under the Securities Act of 1933, as amended) in the public
market could adversely affect prevailing market prices. Of the 7,735,745 shares
of Common Stock outstanding on December 31, 1995, approximately 7,712,615 shares
were eligible for resale in the public market without restriction, and
approximately an additional 23,130 shares were "restricted securities" and were
eligible for resale in the public market subject to compliance with Rule 144
under the Securities Act of 1933, as amended.
Dividends
The Company has never paid any cash dividends on its Common Stock and
does not anticipate that it will pay cash dividends in the near term. Instead,
the Company intends to apply any earnings to the expansion and development of
its business. See "Price Range of Common Stock" contained in Item 5 of this
Report.
14
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
During 1995, the Company completed the construction of its new
principal facility to house its U.S.-based manufacturing operations; its
research, development, engineering, design, and corporate functions; and one of
the largest LCD glass manufacturing operations in North America. The facility
contains 97,000 square feet of space located on a 5.7 acre site in the Papago
Park Center in Tempe, Arizona. The Company entered into a ground lease through
December 31, 2069, subject to renewal and purchase options as well as early
termination provisions. Costs to construct, furnish, and equip the new facility
were approximately $24.0 million, of which payments of $22.2 million were made
during 1995.
The Company leases approximately 3,500 square feet of office space in
Swindon, United Kingdom, where it maintains its European administrative and
executive offices.
The Company leases approximately 60,000 square feet of manufacturing
space in Manila, the Philippines. Approximately 40,000 square feet is subject to
a lease which expires on December 31, 1999 and the remaining 20,000 square feet
is subject to a lease which expires on March 1, 1997, with renewal options for
two additional years.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company is a party or to
which any of its properties are subject, other than routine litigation incident
to the Company's business which is covered by insurance or an indemnity or which
are not expected to have a material adverse effect on the Company. It is
possible, however, that the Company could incur claims for which it is not
insured or that exceed the amount of its insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
15
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Company's Common Stock has been listed on the New York Stock
Exchange ("NYSE") under the symbol "TFS" since December 29, 1994. The Company's
Common Stock was listed on the American Stock Exchange ("AMEX") from January 28,
1993 through December 28, 1994. The Company's Common Stock was listed on the
AMEX Emerging Company Marketplace from March 18, 1992 until January 27, 1993,
and on the Nasdaq National Market system from May 1, 1990 until March 17, 1992.
The following table sets forth the quarterly high and low prices of the
Company's Common Stock for the periods indicated, adjusted to reflect the
two-for-one split of the Common Stock effected as a stock dividend in May 1994.
High Low
---- ---
1993:
First Quarter........................................ $ 3 7/8 $ 1 3/4
Second Quarter....................................... 8 3 7/16
Third Quarter........................................ 12 1/16 6 3/8
Fourth Quarter....................................... 17 5/8 10 7/8
1994:
First Quarter........................................ $ 30 7/8 $ 16 9/16
Second Quarter....................................... 29 15/16 20
Third Quarter........................................ 46 1/2 26 1/4
Fourth Quarter....................................... 50 28 3/4
1995:
First Quarter........................................ $ 38 3/8 $ 20 5/8
Second Quarter....................................... 38 7/8 22 3/8
Third Quarter........................................ 36 3/4 24 1/4
Fourth Quarter....................................... 26 1/2 16
As of December 31, 1995, there were approximately 1,309 holders of
record of the Company's Common Stock.
The present policy of the Company is to retain earnings to provide
funds for the operation and expansion of its business. The Company has not paid
dividends on its Common Stock and does not anticipate that it will do so in the
near term. Furthermore, the Company's line of credit with First Interstate Bank
of Arizona, N.A. ("First Interstate") does not permit the payment of dividends
without the consent of First Interstate. The payment of dividends in the future
will depend on the Company's growth, profitability, financial condition, and
other factors which the directors may deem relevant.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table summarizes certain selected consolidated financial
data of the Company and is qualified in its entirety by the more detailed
consolidated financial statements and notes thereto appearing elsewhere herein.
The data have been derived from the consolidated financial statements of the
Company audited by Arthur Andersen LLP, independent public accountants. All
share amounts and per share data have been adjusted to reflect the two-for-one
split of the Company's Common Stock effected as a stock dividend in May 1994.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1995 1994 1993(1) 1992 1991
---- ---- ------- ---- ----
(in thousands, except per share amounts)
Consolidated Statements of Income:
<S> <C> <C> <C> <C> <C>
Net Sales $91,585 $85,477 $38,002 $20,833 $18,699
------- ------- ------- ------- -------
Costs and expenses:
Cost of sales 70,481 59,409 26,725 15,388 14,698
Selling, general and administrative 5,386 4,867 3,853 3,469 3,198
Research and development 2,396 1,270 857 468 164
----- ----- --- --- ---
78,263 65,546 31,435 19,325 18,060
------ ------ ------ ------ ------
Operating income 13,322 19,931 6,567 1,508 639
------ ------ ----- ----- ---
Other income (expense)
Interest income (expense), net 765 859 (117) (179) (187)
Other, net (122) (135) (277) (160) (200)
---- ---- ---- ---- ----
643 724 (394) (339) (387)
--- --- ---- ---- ----
Income before provision for income taxes
and cumulative effect of accounting change 13,965 20,655 6,173 1,169 252
Provision for income taxes 5,548 8,109 2,043 147 18
----- ----- ----- --- --
Income before cumulative effect of
accounting change 8,417 12,546 4,130 1,022 234
Cumulative effect of accounting change -- -- 924 -- --
----- ------ ----- ----- ----
Net income $8,417 $12,546 $5,054 $1,022 $234
====== ======= ====== ====== ====
Earnings per common share and common
share equivalent:
Income before cumulative effect of
accounting change $1.04 $1.59 $0.59 $0.14 $0.03
Cumulative effect of accounting change -- -- 0.13 -- --
---- ---- ---- ---- ----
Net income $1.04 $1.59 $0.72 $0.14 $0.03
===== ===== ===== ===== =====
Weighted average number of common
shares and common share equivalents
outstanding 8,084 7,882 7,040 7,225 7,705
Consolidated Balance Sheet Data
(at end of period):
Working capital $22,400 $37,638 $7,427 $4,450 $2,766
Total assets 63,780 56,280 17,470 9,811 8,413
Notes payable to banks and long-term debt 3,000 182 223 2,184 1,953
Stockholders' equity 55,224 46,561 10,202 4,661 4,112
</TABLE>
- -----------------
(1) The Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," effective January 1, 1993. The
presentation above includes the cumulative effect of the change in
accounting principle which increased net income by $924,000 or $0.13
per share, for the year ended December 31, 1993.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
General
The Company derives its net sales primarily from sales to original
equipment manufacturers ("OEMs"). The Company recognizes revenue upon shipment
to its customers. Operating results are affected by a number of factors,
including raw material costs, operating efficiencies, and price competition.
Share amounts and per share data reflect the two-for-one split of the Company's
Common Stock effected as a stock dividend in May 1994.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of net sales of certain items in the Consolidated Financial
Statements of the Company. The table and the discussion below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto.
Year Ended December 31,
----------------------------
1995 1994 1993
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 77.0 69.5 70.3
Selling, general and administrative 5.9 5.7 10.1
Research and development 2.6 1.5 2.3
--- --- ---
85.5 76.7 82.7
---- ---- ----
Operating Income 14.5 23.3 17.3
---- ---- ----
Other income (expense):
Interest income (expense), net 0.8 1.0 (0.3)
Other, net (0.1) (0.1) (0.8)
---- ---- ----
0.7 0.9 (1.1)
--- --- ----
Income before provision for income taxes and
cumulative effect of accounting change 15.2 24.2 16.2
Provision for income taxes 6.1 9.5 5.3
--- --- ---
Income before cumulative effect of
accounting change 9.1 14.7 10.9
Cumulative effect of accounting change -- -- 2.4
--- ---- ---
Net income 9.1% 14.7% 13.3%
=== ==== ====
Year Ended December 31, 1995 Compared with Year Ended December 31,1994
Net sales were $91.6 million during 1995, an increase of 7.1 percent
compared with net sales of $85.5 million during 1994. The sales increase was
primarily a result of higher order rates from a major wireless communications
customer for existing as well as new product programs. The rate of sales growth
decreased significantly in 1995, as compared to 1994, primarily as a result of
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. Unit volumes of the Company's highest volume,
longest running cellular telephone program are expected to decrease at an
accelerated pace during 1996 due to a product changeover being effected
18
<PAGE>
by the Company's major customer. Newer replacement programs in both the cellular
and non-cellular industries are not expected to produce sufficient revenue to
replace the revenue from the phased-out program before the end of 1996.
Accordingly, these circumstances are expected to have a material adverse effect
on revenues and profits in 1996.
Cost of sales, as a percentage of net sales, increased to 77.0 percent
in 1995 as compared with 69.5 percent in 1994. This increase was primarily due
to manufacturing inefficiencies from design delays, new program introductions,
and product mix.
Selling, general and administrative expense increased to $5.4 million
during 1995 from $4.9 million during 1994. The 10.2 percent increase resulted
primarily from expenses related to expanding the Company's sales force offset by
decreased bonus accruals. Selling, general and administrative expense increased
as a percentage of net sales to 5.9 percent for 1995 from 5.7 percent for 1994.
Research and development expense totaled $2.4 million, or 2.6 percent
of net sales, in 1995 as compared with $1.3 million, or 1.5 percent of net
sales, in 1994. The increase in research and development expense represented
in-house development efforts related to the LCD laboratory and high-volume
manufacturing line located in Tempe, Arizona.
Interest income (net) for 1995 was $765,000, down from $859,000 for
1994. The decrease in interest income was the result of investing lower average
cash balances during the year. Other expense (net) decreased to $122,000 for
1995 from $135,000 for 1994. The decrease was due primarily to decreased net
foreign exchange losses and decreased net losses on dispositions of fixed
assets.
The provision for income taxes decreased to $5.5 million in 1995 from
$8.1 million in 1994. This resulted primarily from lower pre-tax income in 1995
as compared with 1994.
Net income decreased to $8.4 million, or $1.04 per share, in 1995 from
$12.5 million, or $1.59 per share, in 1994.
Year Ended December 31, 1994 Compared with Year Ended December 31,1993
Net sales were $85.5 million during 1994, an increase of 125 percent
compared with net sales of $38.0 million during 1993. 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, decreased to 69.5 percent
in 1994 as compared with 70.3 percent in 1993. This decrease was primarily due
to product mix, as well as higher production volumes and improved manufacturing
efficiencies.
Selling, general and administrative expense increased to $4.9 million
during 1994 from $3.9 million during 1993. The 25.6 percent increase resulted
primarily from increased personnel costs, corporate fees, consultant/outside
services, directors and officers insurance, legal, and investor relations
expenses. Selling, general and administrative expense decreased as a percentage
of net sales to 5.7 percent for 1994 from 10.1 percent for 1993, primarily as a
result of increased sales and a continued emphasis on cost containment.
Research and development expense totaled $1.3 million, or 1.5 percent
of net sales, in 1994 as compared with $857,000, or 2.3 percent of net sales, in
1993. The increase in research and development expense represented in-house
development efforts related to the LCD laboratory located in Tempe, Arizona.
Interest income (net) for 1994 was $859,000, an increase from interest
expense (net) of $117,000 for 1993. The interest income was the result of
investing the net proceeds from the Company's public offering in March
19
<PAGE>
1994, as well as excess cash generated from operations. Other expense (net)
decreased to $135,000 for 1994 from $277,000 for 1993. The decrease was due
primarily to a decrease in the loss on disposal of assets to $54,000 in 1994
from $165,000 in 1993.
The provision for income taxes increased to $8.1 million in 1994 from
$2.0 million in 1993. This resulted primarily from higher pre-tax income and the
Company's utilization of the majority of its net operating loss carryforwards
and other tax credits early in 1993.
Income before cumulative effect of accounting change increased to $12.5
million, or $1.59 per share, in 1994 from $4.1 million, or $.59 per share, in
1993.
Quarterly Results of Operations
The following table presents unaudited consolidated financial results
for each of the eight quarters in the period ended December 31, 1995. The
Company believes that all necessary adjustments have been included to present
fairly the quarterly information when read in conjunction with the Consolidated
Financial Statements. The operating results for any quarter are not necessarily
indicative of the results for any subsequent quarter.
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------------------------------------------------------------
1995 1994
------------------------------------- ---------------------------------------------
Mar 31 June 30 Sept 30 Dec 31 Mar 31 June 30 Sept 30 Dec 31
------ ------- ------- ------ ------ ------- ------- ------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $24,483 $22,105 $24,217 $20,780 $16,421 $21,247 $23,669 $24,140
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of sales 17,582 16,138 19,790 16,971 11,548 13,802 16,752 17,307
Selling, general and
administrative 1,272 1,213 1,419 1,482 1,372 1,288 1,170 1,037
Research and development 405 401 770 820 267 373 310 320
--- --- --- --- --- --- --- ---
19,259 17,752 21,979 19,273 13,187 15,463 18,232 18,664
------ ------ ------ ------ ------ ------ ------ ------
Operating income 5,224 4,353 2,238 1,507 3,234 5,784 5,437 5,476
----- ----- ----- ----- ----- ----- ----- -----
Other income (expense):
Interest income (expense), net 342 279 120 24 (9) 265 298 305
Other, net (42) 27 (14) (93) (29) (62) (33) (11)
--- -- --- --- --- --- --- ---
300 306 106 (69) (38) 203 265 294
--- --- --- --- --- --- --- ---
Income before provision for
income taxes 5,524 4,659 2,344 1,438 3,196 5,987 5,702 5,770
Provision for income taxes 2,210 1,840 961 537 1,220 2,502 2,306 2,081
----- ----- --- --- ----- ----- ----- -----
Net income $ 3,314 $ 2,819 $ 1,383 $ 901 $1,976 $3,485 $3,396 $3,689
======= ======= ======= ===== ====== ====== ====== ======
Earnings per common share and
common share equivalent $ 0.41 $ 0.35 $ 0.17 $ 0.11 $ 0.27 $ 0.43 $ 0.42 $ 0.46
======= ====== ====== ====== ====== ====== ====== ======
Weighted average number of
common shares and common
share equivalents outstanding 8,086 8,094 8,088 8,053 7,274 8,095 8,099 8,091
</TABLE>
Quarterly results can be affected by a number of factors, including the
timing of orders from major customers, customer delivery requirements,
production delays or inefficiencies, the mix of product programs, and raw
material availability.
20
<PAGE>
Seasonality
The Company's net sales have not been subject to any significant
seasonal fluctuations or variations.
Liquidity and Capital Resources
During 1995, the Company generated $1.3 million in cash flow from
operations as compared with $10.5 million during 1994. The decrease in cash flow
from operations was primarily due to the Company's purchase of significant
amounts of materials for products for which production was delayed, the
liquidation during 1995 of significant payables and accrued liabilities
outstanding at December 31, 1994 and the Company's inability to defer current
income tax payments in 1995 as had been possible under the applicable tax
regulations in 1994. The Company's working capital decreased to $22.4 million at
December 31, 1995 from $37.6 million at December 31, 1994, primarily as a result
of the cash purchase of the Company's new facility in Tempe, Arizona and related
equipment. The Company's current ratio at December 31, 1995 was 4.0-to-1 as
compared with a current ratio of 5.0-to-1 at December 31, 1994.
During 1995, the Company generated cash flow from financing activities
totalling $2.9 million. In December 1995, the Company entered into a new $15.0
million 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 modified the $5.0 million revolving line of credit entered into
in June 1995. At December 31, 1995, $3.0 million had been borrowed and was
outstanding under this credit facility. 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 150
basis points 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 200 basis
points. The United Kingdom credit facility matures May 18, 1996. Three-Five
Systems Limited had no borrowings outstanding under this line of credit at
December 31, 1995. During 1995, the Company repaid $182,000 of long-term debt
with cash flow from operations.
Capital expenditures during 1995 were approximately $27.1 million, as
compared with $7.4 million during 1994. During 1995, approximately $22.2 million
of working capital was used to complete the construction of and to furnish and
equip the Company's new Tempe, Arizona facility and automated high-volume LCD
manufacturing line. The facility was constructed on a 5.7-acre site, which is
subject to a ground lease with purchase options. Annual lease payments under the
ground lease, which will expire on December 31, 2069, subject to renewal and
purchase options as well as termination provisions, will average approximately
$100,000 over the term of the lease, subject to certain escalation provisions.
In addition, the Company placed in service approximately $4.9 million of new
manufacturing equipment at the Company's high-volume facility in Manila, the
Philippines. Capital expenditures for 1994 consisted primarily of manufacturing
equipment for its operations in Manila and Arizona.
The Company believes that its capital, together with loan commitments
described above and anticipated cash flow from operations, will 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 cashflow 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
21
<PAGE>
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.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the financial statements, the report thereon, the
notes thereto and the supplementary data commencing at page F-1 of this Report,
which financial statements, report, notes and data are incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item relating to directors of the
Company is incorporated by reference to the definitive Proxy Statement filed
pursuant to Regulation 14A for the Company's 1996 Annual Meeting of
Stockholders. The information required by this Item relating to executive
officers of the Company is included in "Description of Business - Executive
Officers" contained in Item 1 of this report.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement filed pursuant to Regulation 14A for
the Company's 1996 Annual Meeting of Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement filed pursuant to Regulation 14A for
the Company's 1996 Annual Meeting of Stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Exhibits
- -------------- --------
2 Amended and Restated Agreement and Plan of Reorganization(1)
3(a) Restated Certificate of Incorporation of the Company(2)
3(b) Bylaws of the Company(1)
3 Voting Trust Dissolution Certificates effective April 30, 1991
and July 31, 1992(3)
10(a) 1990 Incentive Stock Option Plan(1)
22
<PAGE>
10(b) Line of Credit Agreements between the Company and First
Interstate Bank of Arizona, N.A.(4)
10(c) Line of Credit Agreement between Three-Five Systems Limited and
Barclays Bank, PLC(1)
10(d) Sub-Assembly Agreement between Three-Five Systems, Inc. and
TEAM Pacific Corporation dated February 22, 1995(4)
10(e) Lease Agreement between Three-Five Systems, Inc. and Phoenix
Tech Center I(1)
10(f) Second Amendment to Lease between Three-Five Systems, Inc. and
Phoenix Tech Center I(5)
10(g) Form of Three-Five Systems, Inc. Distributor Franchise
Agreement(5)
10(h) Form of Three-Five Systems, Inc. Sales Representative
Agreement(5)
10(i) Lease between Three-Five Systems, Inc. and Aetna Life Insurance
Company(6)
10(j) 1993 Stock Option Plan(5)
10(k) 1994 Automatic Stock Option Plan for Non-employee Directors(7)
10(l) Lease Agreement between Technology Electronic Assembly and
Management (T.E.A.M.) Pacific Corporation and Three-Five
Systems Pacific, Inc.
10(m) Lease Agreement between Regent Apparel Corporation and
Three-Five Systems Pacific, Inc.
10(n) Second Modification Agreement between First Interstate Bank,
N.A. and Three-Five Systems, Inc., together with Revolving
Promissory Note for $15,000,000
11 Statement re: Computation of Per Share Earnings
21 List of Subsidiaries
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
- -------------
(1) Incorporated by reference to the Registration Statement on Form S-4 of
TF Consolidation, Inc. (Registration No. 33-33944) filed March 27, 1990
and declared effective March 27, 1990.
(2) Incorporated by reference to the Registrant's Form 10-QSB for the
quarter ended March 31, 1994 filed with the Commission on or about May
12, 1994.
(3) Incorporated by reference to the Registrant's Form 10-KSB for the fiscal
year ended December 31, 1992 filed with the Commission on or about
February 27, 1993.
(4) Incorporated by reference to the Registrant's Form 10-KSB for the fiscal
year ended December 31, 1994 filed with the Commission on March 22,
1995, as amended by Form 10-KSB/A as filed with the Commission on April
28, 1995.
(5) Incorporated by reference to the Registration Statement on Form S-1
(Registration No. 33-74788) filed on February 3, 1994 and declared
effective March 15, 1994.
(6) Incorporated by reference to the Registrant's Form 10-KSB for the fiscal
year ended December 31, 1991 filed with the Commission on or about March
27, 1992.
(7) Incorporated by reference to the Registration Statement on Form S-8
(Registration No. 33-88706) filed on January 24, 1995.
(b) Financial Statements and Financial Statement Schedule
(1) Financial Statements are listed in the Index to Financial
Statements on page F-1 of this Report.
(2) Financial Statement Schedule on page S-1.
Schedule II Valuation and Qualifying Accounts and Reserves
Other schedules are omitted because they are not applicable, not
required or because required information is included in the consolidated
financial statements or notes thereto.
(c) Reports on Form 8-K
Not applicable.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 8, 1996 By /s/ David R. Buchanan
-----------------------------------------
David R. Buchanan, Chairman of the Board,
President, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated.
Name Title Date
---- ----- ----
/s/ David R. Buchanan Chairman of the Board, President, March 8, 1996
- --------------------- and Chief Executive Officer
David R. Buchanan (Principal Executive Officer)
/s/ Randal L. Buness Vice President - Finance and March 8, 1996
- -------------------- Administration, Chief Financial
Randal L. Buness Officer, Secretary, and Treasurer
(Principal Financial and
Accounting Officer)
/s/ David C. Malmberg Director March 8, 1996
- ---------------------
David C. Malmberg
/s/ Burton E. McGillivray Director March 8, 1996
- -------------------------
Burton E. McGillivray
/s/ Jeffrey A. Wilson Director March 8, 1996
- ---------------------
Jeffrey A. Wilson
24
<PAGE>
THREE-FIVE SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Page
Report of Independent Public Accountants .............................. F-1
Consolidated Balance Sheets as of December 31, 1995 and 1994 .......... F-2
Consolidated Statements of Income for the years ended
December 31, 1995, 1994 and 1993.....................................F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1994 and 1993 ........................F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993.................................... F-5
Notes to Consolidated Financial Statements .............................F-6
Schedule II - Valuation and Qualifying Accounts and Reserves
for the years ended December 31, 1995, 1994 and 1993................ S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Three-Five Systems, Inc.:
We have audited the accompanying consolidated balance sheets of THREE-FIVE
SYSTEMS, INC. (a Delaware corporation) and Subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Three-Five Systems, Inc. and
Subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
January 20, 1996.
F-1
<PAGE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS
December 31,
------------
1995 1994
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 4,551 $ 27,136
Accounts receivable, net (Note 3) 9,346 8,721
Inventories, net (Note 3) 13,703 9,657
Deferred tax asset (Note 7) 1,826 1,048
Other current assets 491 478
------- ------
Total current assets 29,917 47,040
PROPERTY, PLANT AND EQUIPMENT, net (Note 2) 33,493 8,791
COST IN EXCESS OF NET ASSETS ACQUIRED, net (Note 2) 170 209
OTHER ASSETS (Note 2) 200 240
---------- ----------
$ 63,780 $ 56,280
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,199 $ 5,088
Accrued liabilities (Note 2) 1,318 2,598
Current maturities of long-term debt (Note 3) 3,000 26
Current taxes payable (Note 7) - 1,690
------ ------
Total current liabilities 7,517 9,402
LONG-TERM DEBT, net of current maturities (Note 3) - 156
DEFERRED TAX LIABILITY (Note 7) 1,039 161
1,039 317
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Notes 4 and 5):
Preferred stock, $.01 par value; 1,000,000
shares authorized -- --
Common stock, $.01 par value; 15,000,000 shares
authorized, 7,735,745 shares issued and
outstanding at December 31, 1995; 7,691,524
shares issued and outstanding at December 31, 1994 77 77
Additional paid-in capital 32,286 32,052
Retained earnings 22,847 14,430
Cumulative translation adjustment 14 2
------ ------
Total stockholders' equity 55,224 46,561
------ ------
$ 63,780 $ 56,280
====== ======
The accompanying notes are an integral part of these consolidated
balance sheets.
F-2
<PAGE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
NET SALES (Notes 2, 6 and 9) $ 91,585 $ 85,477 $ 38,002
------ ------ ------
COSTS AND EXPENSES:
Cost of sales 70,481 59,409 26,725
Selling, general and administrative 5,386 4,867 3,853
Research and development 2,396 1,270 857
----- ----- ---
78,263 65,546 31,435
------ ------ ------
Operating income 13,322 19,931 6,567
------ ------ -----
OTHER INCOME (EXPENSE):
Interest, net 765 859 (117)
Other, net (122) (135) (277)
------ ------ -----
643 724 (394)
------ ------ -----
INCOME BEFORE PROVISION FOR INCOME TAXES
AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 13,965 20,655 6,173
Provision for income taxes (Note 7) 5,548 8,109 2,043
- ------ ------ -----
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 8,417 12,546 4,130
Cumulative effective of accounting
change (Note 7) -- -- 924
- ------ ------ -----
NET INCOME $ 8,417 $ 12,546 $ 5,054
------ ------ -----
EARNINGS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT (Notes 2 and 4):
Income before cumulative effect of
accounting change $ 1.04 $ 1.59 $ 0.59
Cumulative effect of accounting
change (Note 7) -- -- 0.13
------ ----- ----
Net income $ 1.04 $ 1.59 $ 0.72
------ ------- ------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE
EQUIVALENTS OUTSTANDING (Notes 2 and 4) 8,083,551 7,882,011 7,040,118
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
<PAGE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock
------------
Additional Cumulative
Shares Paid-in Retained Translation
Issued Amount Capital Earnings Adjustment Total
------ ------ ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992 6,426,260 $ 64 $ 7,767 $ (3,170) $ - $ 4,661
Stock options exercised 215,684 2 36 - - 38
Tax benefit from early disposition of
incentive stock options (Note 5) - - 440 - - 440
Net income - - - 5,054 - 5,054
Translation adjustment - - - - 9 9
-------- --- ----- ----- --- -----
BALANCE, December 31, 1993 6,641,944 66 8,243 1,884 9 10,202
Stock options exercised 49,580 1 64 - - 65
Tax benefit from early disposition of
incentive stock options (Note 5) - - 500 - - 500
Sale of common stock, net 1,000,000 10 23,245 - - 23,255
Net income - - - 12,546 - 12,546
Translation adjustment - - - - (7) (7)
-------- --- ------ ------ --- ------
BALANCE, December 31, 1994 7,691,524 77 32,052 14,430 2 46,561
Stock options exercised 44,221 - 32 - - 32
Tax benefit from early disposition
of incentive stock options (Note 5) - - 202 - - 202
Net income - - - 8,417 - 8,417
Translation adjustment - - - - 12 12
--------- --- ------ ------ --- -----
BALANCE, December 31, 1995 7,735,745 $ 77 $ 32,286 $ 22,847 $ 14 $ 55,224
========= === ====== ====== === ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 8,417 $ 12,546 $ 5,054
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 2,278 1,215 545
Cumulative effect of accounting change - - (924)
Provision (recovery) of accounts receivable valuation reserves (1) 205 52
Provision (reduction) of inventory valuation reserves 1,218 857 (107)
Loss on disposal of assets 24 54 165
Changes in assets and liabilities-
Increase in accounts receivable (624) (3,609) (2,153)
Increase in inventories (5,264) (3,406) (2,976)
Increase in other assets (32) (225) (185)
Increase (decrease) in accounts payable and accrued liabilities (3,170) 1,788 3,036
Increase (decrease) in taxes payable, net (1,568) 1,065 1,498
------ ------ -----
Net cash provided by operating activities 1,278 10,490 4,005
------ ------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (27,051) (7,412) (1,883)
Proceeds from sale of property, plant and equipment 326 5 -
------ ----- -----
Net cash used for investing activities (26,725) (7,407) (1,883)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) notes payable to banks 3,000 (17) (1,390)
Principal payments on and retirement of long-term debt (182) (24) (571)
Stock options exercised 32 65 38
Proceeds from sale of common stock, net (Note 4) - 23,255 -
----- ------ -----
Net cash provided by (used for) financing activities 2,850 23,279 (1,923)
----- ------ ------
Effect of exchange rate changes on cash 12 (7) 9
----- ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (22,585) 26,355 208
CASH AND CASH EQUIVALENTS, beginning of year 27,136 781 573
------ ------ ---
CASH AND CASH EQUIVALENTS, end of year $ 4,551 $ 27,136 $ 781
------ ------ ------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 12 $ 21 $ 93
------ ------ ------
Income taxes paid $ 7,296 $ 7,103 $ 609
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) ORGANIZATION:
Three-Five Systems, Inc. (the Company) was incorporated under the laws of the
state of Delaware on February 13, 1990, under the name of TF Consolidation, Inc.
On February 14, 1990, the Company entered into an amended and restated agreement
and plan of reorganization providing for the merger of Electronic Research
Associates, Inc. (ERA; a New Jersey corporation) and Three-Five Systems, Inc. (a
privately owned Delaware corporation) into the Company. The merger became
effective May 1, 1990, following stockholder approval. The Company was the
surviving corporation; the separate corporate existences of ERA and Three-Five
Systems, Inc. ceased; and the Company changed its corporate name to Three-Five
Systems, Inc.
The Company designs and manufactures a wide range of user interface devices for
operational control and informational display functions required in the end
products of original equipment manufacturers. Most of the Company's sales
consist of custom user interface devices developed in close collaboration with
its customers. The Company maintains its primary manufacturing facility in
Manila, the Philippines. A third-party subcontractor operates the facility under
a sub-assembly agreement with the Company utilizing equipment, processes and
documentation owned by the Company. The sub-assembly agreement has a current
term extending through December 31, 1999, and from year to year thereafter, but
may be terminated by either party upon 180 days written notice. The termination
of or the inability of the Company to obtain products pursuant to the
sub-assembly agreement, even for a relatively short period, would have a
material adverse effect on the operations and profitability of the Company.
Since December 1994, the Company has made advances totaling approximately $1.5
million to the subcontractor that operates the sub-assembly facility to help the
subcontractor in meeting its working capital needs. The balance of the advances
outstanding, in excess of amounts payable to the subcontractor at December 31,
1995, was approximately $500,000. These advances are secured by future payments
for subcontracting services to be provided to the Company as well as other
assets of the subcontractor.
Three-Five Systems Limited (Limited), a wholly owned subsidiary of the Company,
is incorporated in the United Kingdom. Limited sells and distributes the
Company's products to customers on the European continent.
During 1994, the Company dissolved its wholly owned subsidiary, Certified
Electronics Ltd. (CEL). CEL, a Taiwan corporation , procured materials from
Taiwanese vendors. This function is now performed directly by the Company.
F-6
<PAGE>
During 1995, the Company formed a wholly owned subsidiary, Three-Five Systems
Pacific, Inc. (Pacific). Pacific, a Philippines corporation, procures supplies
primarily from Philippine vendors.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation and Preparation of Financial Statements
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany transactions have been
eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, all highly liquid investments with
a maturity of three months or less at the time of purchase are considered to be
cash equivalents. Cash equivalents consist primarily of United States government
agencies' obligations classified as held-to-maturity in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. At December 31, 1994, the aggregate
amortized cost and fair value of these cash equivalents totaled $23,820,000 with
maturity dates from January 23, 1995 through March 2, 1995. There were no cash
equivalents at December 31, 1995.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value. Reserves are established against Company-owned inventories for
excess, slow-moving and obsolete items and for items where the net realizable
value is less than cost.
Inventories consist of the following at December 31:
1995 1994
---- ----
(in thousands)
Raw materials $ 9,257 $ 6,926
Work-in-process 2,002 697
Finished goods 2,444 2,034
----- -----
$ 13,703 $ 9,657
====== =====
F-7
<PAGE>
Other Assets
In December 1991, the Company decided to dispose of its Connecticut facility
and, as a result, stopped depreciation and classified the facility (primarily
land and building) in other assets on the accompanying consolidated balance
sheets. Provisions of approximately $50,000 and $110,000 were recorded to reduce
the facility to its estimated net realizable value during 1994 and 1993,
respectively. The Company sold the facility in June 1995 and reported the net
gain in other, net, in the accompanying consolidated statements of income.
Revenue Recognition
The Company recognizes revenues upon shipment. The Company's distributor
agreements provide for stock (inventory) rotation and price protection. Reserves
are provided for each of these programs based on past return experience. These
reserves are established at the time of shipment and reduce gross sales to
arrive at net sales as presented in the accompanying consolidated statements of
income. These reserves are reflected as a reserve against accounts receivable
from sales to distributors and totaled $140,000 and $366,000 at December 31,
1995 and 1994, respectively. The Company's distributors generally offset any
returns and allowances against payments on accounts receivable. The Company also
provides reserves for uncollectible accounts receivable. These reserves totaled
$463,000 and $238,000 at December 31, 1995 and 1994, respectively.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which range from 3 to 39 years. Property, plant and equipment consist of the
following at December 31:
1995 1994
---- ----
(in thousands)
Building $ 10,375 $ -
Furniture and equipment 27,971 10,056
Construction-in-process (Note 8) - 1,825
------ ------
38,346 11,881
Less- accumulated depreciation (4,853) (3,090)
------ ------
$ 33,493 $ 8,791
====== =====
At December 31, 1994, $1,825,000 of progress payments made by the Company toward
the construction of its new design, manufacturing and corporate headquarters
facility were included in property, plant and equipment on the accompanying
consolidated balance sheets.
During 1995, the Company completed the construction and equipping of its new
facility described above. The Company intends to utilize a significant portion
of the facility to produce a substantial portion of its own requirements for LCD
glass. The successful utilization of the facility will require the Company (i)
to produce LCD glass on a timely and cost-effective basis at quality levels at
least equal to the LCD glass available from independent suppliers and (ii) to
utilize the LCD glass it produces in devices it designs and manufactures in a
manner
F-8
<PAGE>
satisfactory to its customers. Although management believes that the facility
will be successfully utilized, no assurance can be given that the Company will
not experience problems or delays in implementing or conducting its LCD glass
manufacturing operations. Such problems could require the Company to continue to
purchase its LCD glass requirements from third parties and result in the
inability of the Company to recover its investment in the facility.
Cost in Excess of Net Assets Acquired
The merger between Three-Five Systems, Inc. and ERA was accounted for as a
purchase in accordance with Accounting Principles Board Opinion No. 16 with
Three-Five Systems, Inc. considered the acquiring entity. The excess of the cost
over the net assets of ERA acquired in the amount of $379,100 is being amortized
over ten years. Accumulated amortization totaled $209,600 and $170,000 at
December 31, 1995 and 1994, respectively.
Accrued Liabilities
Accrued liabilities includes accrued compensation of $441,000 and $1,462,000 at
December 31, 1995 and 1994, respectively.
Foreign Currency Translation
Financial information relating to the Company's foreign subsidiaries is reported
in accordance with Statement of Financial Accounting Standards No. 52, Foreign
Currency Translation. The net foreign currency transaction gain (loss) in 1995,
1994 and 1993 was $(32,000), $(41,000) and $1,000, respectively, and has been
included in other expenses in the accompanying statements of income. The gain
(loss) resulting from the translation of the subsidiaries' financial statements
has been included as a separate component of stockholders' equity.
Earnings Per Common Share
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 year. Fully diluted earnings per share is considered equal to primary
earnings per share in all periods presented.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which is required to be adopted by the Company in fiscal 1996, is not expected
to have a material effect on the Company's financial position or its results of
operations upon adoption. The Company also is required to adopt Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123) in fiscal 1996. Pursuant to the provisions of SFAS No. 123, the
Company will continue to account for transactions with its employees pursuant to
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Therefore, this statement is not expected to have a material effect
on the Company's financial position or its results of operations when adopted.
F-9
<PAGE>
(3) LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
1995 1994
---- ----
(in thousands)
$15,000,000 revolving line of credit,
interest due monthly at the bank's prime
rate (8.5% at December 31, 1995) or at the
LIBOR base rate (5.5% to 5.7% at December 31,
1995) plus 1.50%, unpaid balance due May 31, 1997 $ 3,000 $ -
$350,000 United Kingdom credit facility,
interest due quarterly at the bank's base
rate (5.375% at December 31, 1995) plus 2%,
unpaid balance due May 18, 1996, secured by
United Kingdom accounts receivable and inventory - -
Mortgage payable to Connecticut Development
Authority (Note 2) - 182
----- ---
3,000 182
Less- current maturities (3,000) (26)
----- ---
$ - $ 156
----- ---
In December 1995, the Company entered into a $15.0 million unsecured revolving
line of credit which matures May 31, 1997. The unsecured revolving line of
credit replaced a $5.0 million revolving line of credit. The weighted average
interest rate on borrowings outstanding under the line of credit during 1995 was
7.31%. The Company intends to pay down the outstanding balance under the line of
credit during fiscal 1996 and has therefore classified the balance as current on
the accompanying balance sheets. The unsecured revolving line of credit contains
certain restrictive covenants which include, among other things, restrictions on
the declaration or payment of dividends and the amount of capital expenditures.
The line also requires the Company to maintain a specified net worth, as
defined, to maintain a required debt to equity ratio and to maintain certain
other financial ratios.
Advances under the United Kingdom credit facility are based on 70% of eligible
accounts receivable, as defined, and 30% of inventory, as defined. Management
intends to renew the United Kingdom credit facility and does not anticipate any
material changes to the existing terms.
(4) STOCKHOLDERS' EQUITY:
During 1994, the Company's Board of Directors declared a two-for-one stock split
effected in the form of a 100 percent stock dividend whereby the number of
common shares outstanding was increased from 3,824,622 to 7,649,244. The
3,824,622 additional shares of common stock were distributed on May 4, 1994, to
holders of record on April 22, 1994. All share amounts and per share data have
been restated for all periods presented to reflect this split. In addition
during 1994, the Company's stockholders approved an amendment to the Certificate
of
F-10
<PAGE>
Incorporation which increased the authorized shares of common stock, par value
$.01 per share, from 5,000,000 to 15,000,000 and eliminated the authorization to
issue shares of Class A Preferred stock, par value $.01 per share, Class B
Preferred stock, no par value, and Class C Preferred stock, par value $.01 per
share. The Company's authorized capital stock also includes 1,000,000 shares of
serial preferred stock, par value $.01 per share.
In March 1994, the Company completed a public offering of 2,120,000 shares, of
which 1,000,000 shares of common stock were sold by the Company and 1,120,000
were sold by a selling stockholder. Net proceeds to the Company totaled
approximately $23.3 million, net of issuance costs of $1,745,000.
(5) EMPLOYEE BENEFIT PLANS:
1994 Non-Employee Directors Stock Option Plan
The Non-Employee Directors Stock Option Plan (1994 Plan) provides for the
automatic grant of stock options to non-employee directors to purchase up to
100,000 shares. Under the 1994 Plan, options to acquire 500 shares of common
stock will be automatically granted to each non-employee director at the meeting
of the Board of Directors held immediately after each annual meeting of
stockholders, with such options to vest in a series of 12 equal and successive
monthly installments commencing one month after the annual automatic grant date.
In addition, each non-employee director serving on the Board of Directors on the
date the 1994 Plan was approved by the Company's stockholders received an
automatic grant of options to acquire 1,000 shares of common stock and each
subsequent newly elected non-employee member of the Board of Directors will
receive an automatic grant of options to acquire 1,000 shares of common stock on
the date of their first appointment or election to the Board of Directors. Those
options become exercisable and vest in a series of three equal and successive
annual installments, with the first such installment becoming exercisable 13
months after the automatic grant date. A non-employee member of the Board of
Directors is not eligible to receive the 500 share automatic option grant if
that option grant date is within 30 days of such non-employee member receiving
the 1,000 share automatic option grant. The exercise price per share of common
stock subject to options granted under the 1994 Plan will be equal to 100% of
the fair market value of the Company's common stock on the date such options are
granted. There were outstanding options to acquire 6,500 shares of the Company's
common stock under the 1994 Plan at December 31, 1995.
1993 Stock Option Plan
The 1993 Stock Option Plan (1993 Plan) provides for the granting of options to
purchase up to 385,454 shares of the Company's common stock (which includes
85,454 shares previously reserved for issuance under the Company's 1990 Stock
Option Plan), the direct granting of common stock (stock awards), the granting
of stock appreciation rights (SARs) and the granting of other cash awards (cash
awards) (stock awards, SARs and cash awards are collectively referred to herein
as Awards). Under the 1993 Plan, options and Awards may be issued to key
personnel and others providing valuable services to the Company and its
subsidiaries. The options issued may be incentive stock options or nonqualified
stock options.
F-11
<PAGE>
If any option or SAR terminates or expires without having been exercised in
full, stock not issued under such option or SAR will again be available for the
purposes of the 1993 Plan. There were outstanding options to acquire 220,500
shares of the Company's common stock under the 1993 Plan at December 31, 1995.
To the extent that granted options are incentive stock options, the terms and
conditions of those options must be consistent with the qualification
requirement set forth in the Internal Revenue Code of 1986. The expiration date,
maximum number of shares purchasable and the other provisions of the options
will be established at the time of grant. Options may be granted for terms of up
to ten years and become exercisable in whole or in one or more installments at
such time as may be determined by the plan administrator upon grant of the
options. The exercise prices of options will be determined by the plan
administrator, but may not be less than 100 percent (110 percent if the option
is granted to a stockholder who at the time the option is granted owns stock
representing more than ten percent of the total combined voting power of all
classes of stock of the Company) of the fair market value of the common stock at
the time of the grant. The 1993 Plan will remain in force until February 24,
2003.
1990 Stock Option Plan
In conjunction with the 1990 merger with ERA, the Three-Five Systems, Inc. 1987
Incentive Stock Option Plan (1987 Plan) was replaced with a new Incentive Stock
Option Plan ("1990 Plan"). Options issued under the 1987 Plan were assumed under
the 1990 Plan. Under the 1990 Plan, there are 312,576 options issued but
unexercised as of December 31, 1995. In conjunction with stockholder approval of
the 1993 Plan, the Board terminated the 1990 Plan with respect to unissued
options to purchase 85,454 shares of common stock which remained and were
unissued as of the date the 1993 Plan was adopted. The 1990 Plan will remain in
force through May 1, 2000.
The expiration date, maximum number of shares purchasable, and the other
provisions of the options granted under the 1990 Plan were established at the
time of grant. Options were granted for terms of up to ten years and become
exercisable in whole or in one or more installments at such times as were
determined by the Board of Directors upon grant of the options.
The exercise price of incentive stock options granted and assumed under the 1990
Plan range from $0.255 to $1.595 per share. These exercise prices are not less
than 100% (110% if the option was granted to a stockholder who at the time the
option was granted owned stock representing more than 10% of the total combined
voting power of all classes of stock of the Company) of the closing price the
day before the date of original grant.
Tax benefits from early disposition of common stock by optionees under the 1993
and 1990 Plans and from the exercise of nonqualified options are credited to
additional paid-in capital.
F-12
<PAGE>
The following summarizes the combined activity for the 1994 Plan, 1993 Plan and
1990 Plan:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
Number of Option Number of Option
Shares Price Per Share Shares Price Per Share
------ --------------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 465,326 $ 0.255 - $34.3750 523,406 $ 0.255 - $10.065
Granted 178,000 $ 16.625 - $35.8750 88,000 $ 16.938 - $44.375
Canceled (59,500) $ 1.190 - $35.8750 (96,500) $ 1.531 - $44.375
Exercised (44,250) $ 0.255 - $ 9.5625 (49,580) $ 0.255 - $ 4.375
------- -------
Options outstanding at
end of year 539,576 $ 0.255 - $ 34.375 465,326 $ 0.255 - $34.375
------- -------
Options available for grant 356,454 474,954
------- -------
Exercisable at end of year 300,543 $ 0.255 - $34.375 307,826 $ 0.255 - $ 3.00
------- -------
</TABLE>
401(k) Profit Sharing Plan
Effective September 1, 1990, the Company adopted a profit sharing plan (401(k)
Plan) pursuant to Section 401(k) of the Internal Revenue Code of 1986. The
401(k) Plan covers substantially all full-time employees who meet the
eligibility requirements and provides for a discretionary profit sharing
contribution by the Company and an employee elective contribution with a
discretionary Company matching provision. The Company expensed discretionary
contributions pursuant to the 401(k) Plan in the amount of $0, $94,000, and
$95,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
(6) MAJOR CUSTOMERS:
The Company's strategy involves concentrating its efforts on providing design
and production services to leading companies in a limited number of fast growing
industries. Sales to the Company's largest customer are made through 11 buyers
operating in five separate product divisions. During 1995, the Company
manufactured approximately 40 individual product programs for this customer.
Devices that are used in cellular telephones accounted for substantially all of
the Company's sales to this customer in 1995.
The percentages of net sales to customers to whom sales exceed 10% of total net
sales were as follows:
1995 1994 1993
---- ---- ----
Customer #1 81% 84% 64%
Customer #2 3% 4% 11%
(7) INCOME TAXES:
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), Accounting for Income Taxes. SFAS No. 109
requires the use of an asset and liability approach in accounting for income
taxes. Deferred tax assets and liabilities are
F-13
<PAGE>
recorded based on the differences between the financial statement and tax bases
of assets and liabilities and the tax rates in effect when these differences are
expected to reverse. Upon adoption of SFAS No. 109, the Company recorded a
cumulative effect of the change in accounting principle of $924,000.
The provision for income taxes consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current, net of operating loss carryforwards
and tax credits utilized
Federal, net of tax benefit from early
termination of incentive stock options $ 2,775 $ 5,102 $ 321
State 790 1,389 312
Foreign 1,681 1,403 810
5,246 7,894 1,443
----- ----- -----
Deferred provision (benefit) 100 (285) 160
Tax benefit from early termination of incentive
stock options, reflected in stockholders' equity 202 500 440
--- --- ---
Provision for income taxes $ 5,548 $ 8,109 $2,043
===== ===== ======
</TABLE>
In accordance with SFAS No. 109, a tax benefit for net operating losses of
approximately $67,000, $67,000, and $363,000 and tax credits of approximately
$0, $1,478,000, and $537,000 utilized in 1995, 1994 and 1993, respectively, are
included as a reduction of the provision for income taxes in the consolidated
statements of income.
The components of deferred taxes are as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Net long-term deferred tax liabilities:
Excess of book basis over tax basis in facility $ - $ 41
Accelerated tax depreciation 1,002 124
Other 37 (4)
----- ---
$ 1,039 $ 161
----- ---
Net short-term deferred tax assets:
Tax effect of regular U.S. net operating loss carryforward $ 212 $ 516
Inventory reserve 1,080 587
Uniform capitalization 456 189
Allowance for doubtful accounts 159 80
Other 101 125
----- -----
2,008 1,497
Valuation allowance (182) (449)
----- -----
$ 1,826 $ 1,048
===== =====
</TABLE>
F-14
<PAGE>
SFAS No. 109 requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized. As a
result of certain limitations on the use of net operating loss carryforwards
acquired in the ERA acquisition, a valuation allowance has been established for
those net operating losses not likely to be realized.
A reconciliation of the U.S. federal statutory rate to the Company's effective
tax rate is as follows:
1995 1994 1993
---- ---- ----
Statutory federal rate 34% 35% 34%
Effect of foreign operations - 4 1
Effect of state taxes 6 7 6
Benefit of net operating loss - - (6)
Effect of tax credits - (7) (2)
40% 39% 33%
Net operating loss carryforwards for federal tax purposes totaled approximately
$624,000 at December 31, 1995. The use of these carryforwards is limited to
$67,000 per year and they expire through 2003.
(8) COMMITMENTS AND CONTINGENCIES:
In March 1995, the Company entered into a noncancelable operating lease for its
primary manufacturing facility in Manila, the Philippines. The lease expires
December 31, 1999. In April 1995, the Company entered into a noncancelable
operating lease for an additional manufacturing facility in Manila, the
Philippines. The lease expires March 31, 1997.
Rent expense was approximately $683,000, $280,000 and $223,000 for the years
ended December 31, 1995, 1994, and 1993, respectively.
In April 1994, the Company entered into a ground lease (with purchase options)
on a 5.7 acre site in Tempe, Arizona. Annual lease payments under the ground
lease, which will expire on March 31, 2069, subject to renewal and purchase
options as well as termination provisions, will average approximately $100,000
over the term of the lease subject to certain escalation provisions. A new
design, manufacturing, and corporate headquarters facility containing
approximately 97,000 square feet was completed on the land in 1995 at a cost of
approximately $10.4 million.
The Company's future lease commitments under the noncancelable operating leases
as of December 31, 1995, are as follows:
1996 $ 491,000
1997 377,000
1998 357,000
1999 357,000
2000 100,000
Thereafter 6,825,000
---------
$ 8,507,000
=============
F-15
<PAGE>
On January 24, 1991, the Company received from the United States Environmental
Protection Agency (EPA) a notice of potential liability at the Barkhamsted-New
Hartford Landfill site in Barkhamsted, Connecticut. The notice was to notify the
Company of its potential liability with respect to the site and request the
Company's voluntary participation in undertaking cleanup activities at the site.
On January 9, 1992, the Company received an additional 104(e) questionnaire
which was completed and submitted during 1992. This matter is still in discovery
and therefore, the Company and its consultants are unable to determine the
outcome or potential range of loss, if any.
The Company is involved in certain administrative proceedings arising in the
normal course of business. In the opinion of management, the Company's potential
exposure under the pending administrative proceedings is adequately provided for
in the accompanying financial statements.
(9) GEOGRAPHIC SEGMENTS:
Sales by geographic area and identifiable assets for the years ended December
31, 1995, 1994, and 1993 were as follows:
<TABLE>
<CAPTION>
North
America Europe Taiwan Pacific Rim Eliminations Consolidated
------- ------ ------ ----------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995:
Net sales $ 24,235 $ 67,350 $ - $ - $ - $ 91,585
Transfers to Europe 60,361 - - - (60,361) -
Transfers to North America - - - 1,437 (1,437) -
------ ------ ---- ----- ------ ------
Total revenue $ 84,596 $ 67,350 $ - $ 1,437 $ (61,798) $ 91,585
------ ------ ---- ----- ------ ------
Net income (loss) $ 5,093 $ 3,353 $ - $ (46) $ 17 $ 8,417
------ ------ ---- ----- ------ ------
Identifiable assets $ 50,779 $ 8,491 $ - $ 7,789 $ (3,279) $ 63,780
------ ------ ---- ----- ------ ------
December 31, 1994:
Net sales $ 33,774 $ 51,703 $ - $ - $ - $ 85,477
Transfers to Europe 46,813 - - - (46,813) -
Transfers to North America - - 1,750 - (1,750) -
------ ------ ----- ----- ------ ------
Total revenue $ 80,587 $ 51,703 $ 1,750 $ - $ (48,563) $ 85,477
------ ------ ----- ----- ------ ------
Net income (loss) $ 12,668 $ (457) $ 637 $ - $ (302) $ 12,546
------ ------ ----- ----- ------ ------
Identifiable assets $ 48,743 $ 7,912 $ 2 $ 4,292 $ (4,669) $ 56,280
------ ------ ----- ----- ------ ------
December 31, 1993:
Net sales $ 24,200 $ 13,802 $ - $ - $ - $ 38,002
Transfers to Europe 10,128 - - - (10,128) -
Transfers to North America - - 1,991 - (1,991) -
------ ------- ----- ----- ------ ------
Total revenue $ 34,328 $ 13,802 $ 1,991 $ - $ (12,119) $ 38,002
------ ------ ----- ----- ------ ------
Net income $ 3,535 $ 769 $ 722 $ - $ 28 $ 5,054
------ ------ ----- ----- ------ ------
Identifiable assets $ 14,251 $ 2,417 $ 2,090 $ 1,121 $ (2,409) $ 17,470
------ ------ ----- ----- ------ ------
</TABLE>
F-16
<PAGE>
THREE-FIVE SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
of Period Expenses Accounts Other of Period
--------- -------- -------- ----- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and sales
returns and allowances:
Year ended
December 31, 1995 $604 (36) 35(1) - $603
Year ended
December 31, 1994 $399 248 (60)(1) 17(2) $604
Year ended
December 31, 1993 $346 179 (70)(1) (56)(2) $399
Inventory Reserve:
Year ended
December 31, 1995 $1,548 1,563 391(4) (735)(3) $2,767
Year ended
December 31, 1994 $691 1,855 78(4) (1,076)(3) $1,548
Year ended
December 31, 1993 $798 893 30(4) (1,030)(3) $691
</TABLE>
(1) Actual return activity
(2) Accounts written off
(3) Obsolete Inventory written off
(4) Inventory Adjustments
CONTRACT OF LEASE
This Contract of Lease is made and entered into by and between:
TECHNOLOGY ELECTRONIC ASSEMBLY AND MANAGEMENT (T.E.A.M.) PACIFIC
CORPORATION, a corporation duly organized and existing under Philippine law with
its address at Electronics Avenue, FTI Complex, Taguig, Metro Manila
(hereinafter referred to as the "LESSOR").
-and-
THREE-FIVE SYSTEMS PACIFIC, INC., a corporation duly organized and
existing under Philippine law with its address at Electronics Avenue, FTI
Complex, Taguig, Metro Manila (hereinafter referred to as the "LESSEE").
- WITNESSETH: That-
WHEREAS, LESSOR is the sole and absolute owner of the two story factory building
on leased land located at Electronics Avenue, FTI Complex, Taguig, Metro Manila,
of which a portion covering an area of 3,888 sq. meters or 41,851 sq. ft. on the
second floor indicated in the floor plan attached herewith as Exhibit "A" is
available for lease (hereinafter referred to as "leased premises"):
WHEREAS, LESSEE has offered to lease the described leased premises from LESSOR
and LESSOR has agreed to lease the described leased premises to LESSEE under the
terms and conditions herein set forth.
NOW, THEREFORE, the LESSOR hereby leases to LESSEE the leased premises described
above, and the LESSEE accepts the same under lease subject to the following
terms and conditions:
1. TERM
This Contract of Lease shall begin on March 1, 1995 and shall expire on
December 31, 1999, renewable under such terms and conditions as the parties
hereto may mutually agree upon. If such renewal is agreed upon, then this
Contract of Lease shall automatically expire at the end of the stipulated period
without necessity of notice to the LESSEE and other persons claiming under it
shall immediately vacate the leased premises upon such termination of Contract
of Lease.
This Contract of Lease shall automatically be extended for an
additional twelve (12) months provided that both Three-Five (as defined in
Section 3 below) and LESSOR shall have the right to terminate the twelve (12)
month extension at any time by giving one hundred eighty (180) days written
notice.
<PAGE>
2. RENTALS
The monthly rental for the leased premises shall be US$21,384.00
(US$5.50 per square meter). The monthly rental shall be payable in advance on or
before the first day of each and every month at the office of the LESSOR without
necessity of notice or demand. The LESSEE shall be allowed to withhold from the
rentals and remit to the Bureau of Internal Revenue (BIR) the applicable
creditable withholding tax on rentals as required by law and the BIR
Regulations. Payment shall be made by bank wire or by a check drawn on a
Philippine bank account. The rent is payable in U.S. dollars or its Philippine
Peso equivalent on the date of payment.
3. PURPOSE AND USE
The leased premises shall be used solely to house assembly lines
dedicated exclusively to the assembly and testing of products for LESSEE and
Three-Five Systems, Inc. (hereinafter "Three-Five"), an affiliate of the LESSEE.
For this purpose., LESSEE shall locate in the leased premises, all consigned
equipment and tools belonging to LESSEE which may be necessary for these captive
assembly lines. In this regard, LESSOR hereby disclaims and waives any
statutory, common law, or other lien, claim or interest, including any so-called
"landlord's lien" it may have against the furniture, fixtures, machinery, and/or
equipment of LESSEE or Three-Five located within the leased premises. The LESSEE
shall have a right to allow the use of the leased premises to any company which
has a valid assembly or sub-assembly contract with Three-Five for the assembly
and testing of products for Three-Five.
4. IMPROVEMENTS
The LESSEE shall secure the prior written approval of the LESSOR, which
shall not be unreasonably withheld, for any renovation or improvement in the
existing structures, layout of machinery and equipment or improvements, in the
leased premises, complying with all laws, ordinances, rules, and regulations
applicable thereto with the LESSEE shouldering all costs in connection
therewith. Said improvements shall exclusively belong to the LESSOR after the
expiration of this Contract of Lease without reimbursement for all expenses
incurred therefor. It is understood that the LESSEE cannot remove any or all
permanent parts and materials related to the building.
5. TRANSFERABILITY
The LESSEE shall secure the prior written approval of the LESSOR which
shall not be unreasonably withheld to sub-lease, transfer, sell, assign,
mortgage, alienate or dispose of a portion or whole of the leased premises and
any rights under this Contract of Lease.
<PAGE>
6. DILIGENCE
The LESSEE shall take care of the leased premises as if it were its
own. It shall be responsible for the cleanliness, ordinary repairs to and the
day-to-day maintenance of the leased premises. LESSOR shall be responsible for
any extraordinary or structural repairs to the leased premises not made
necessary by the neglect or default of LESSEE and LESSOR shall repair and
maintain the building in which the leased premises is situate in good condition
and repair. The LESSEE also binds itself not to store explosive/combustible
materials, or dump garbage, rubbish or waste on any vacant space within or
outside the leased premises that may adversely affect the LESSOR and neighbors
of the leased premises.
7. COMPLIANCE WITH LAWS AND REGULATIONS
The LESSEE shall be responsible for all acts and omissions done by its
agents, employees, guests and all the other persons entering the leased premises
with its knowledge or consent. It shall comply with all existing laws and
regulations regarding safety, sanitation, cleanliness and beautification of the
government. If any future law or regulation requires structural or extraordinary
modifications to the leased premises solely as a result of the particular use of
the leased premises by LESSEE, LESSEE shall perform such structural or
extraordinary repairs and modifications. If, however, such future law or
regulation is applicable to premises generally, LESSOR shall make such
extraordinary repair or structural modification. The LESSEE shall strictly
comply with all uniformly imposed non-discriminatory rules and regulations
provided by the LESSOR concerning security, safety and sanitation as may be
updated or modified by the LESSOR at its sole discretion; provided, however, no
such rule or regulation shall abrogate any right granted to LESSEE or to
Three-Five in this Contract of Lease. The LESSEE is solely responsible and
liable for the non-compliance or violation of all laws, ordinances or
regulations with regard to its business, obligating itself not to use the leased
premises for any illegal or immoral purposes, and should such unauthorized acts
be committed by the LESSEE in violation of such law or ordinances, it shall hold
the LESSOR free and harmless from any and all liabilities or responsibilities,
whether civil or criminal or for any claim for damages or other causes of
actions, or for that matter any inconvenience, investigation, arrest or
interrogation regarding any matters concerning said business, the LESSEE being
solely answerable therefor.
8. UTILITIES
During the period of lease, LESSEE may at its expense apply for
telephone connections for the leased premises. The LESSEE may provide at its own
expense a separate meter device which shall accurately register the actual
electrical consumption in the leased premises.
LESSOR represents that it will pay all utility bills when due.
<PAGE>
9. CANTEEN
LESSEE and its employees, agents and guests shall have access to the
canteen of the LESSOR and the LESSOR agrees to maintain services at least at the
present level.
10. SECURITY
LESSEE's personnel, officers, agents and guests, including the
personnel, officers, agents and guests of the company with a valid assembly or
sub-assembly contract with-Three-Five referred to in the last sentence of
Section 3 above, shall be listed and screened by LESSOR, however, they shall not
be denied access to the leased premises after such security check. The LESSOR
shall have a right to exclude or prevent the entry of any person who may in good
faith and for good reason be considered a security risk to the LESSOR or its
personnel or properties, provided that this right shall not be used to defeat
the purpose of this Contract of Lease.
11. TERMINATION
In the event that either party has committed a material breach of this
Contract of Lease, the other party shall have the right to terminate this
Contract of Lease; provided that neither party shall terminate this Contract of
Lease on the grounds of a material breach without giving a ninety (90) day
written notice of termination, specifying any alleged material breach or
breaches, such termination to become effective at the end of said period unless
during said period all material breaches specified have been remedied or waived.
Except for material breaches as provided in this paragraph, this Contract of
Lease shall not be terminated during the term of the assembly or sub-assembly
contract with Three-Five referred to in the last sentence of Section 3 above
provided that such assembly or sub-assembly contract is with the LESSOR. A
material breach shall have occurred if LESSEE fails to pay any rental, electric
bill and other reimbursable expenses when due.
12. VENUE
In case of court action due to any violation of this Contract of Lease,
the losing party shall pay all necessary expenses incurred for attorney's fees
and litigation expenses which in no case shall be less than TWENTY THOUSAND
PESOS (P20,000.00). It is hereby agreed that the venue of litigation shall be in
the proper courts of Pasig, Metro Manila.
13. NO WAIVER
The failure of a party to insist upon a strict performance of any of
the terms, conditions, covenants hereof shall not be deemed a relinquishment or
waiver of any right or remedy that said party may have, nor shall it be
construed as waiver of any subsequent breach or default of the terms, conditions
and covenants herein contained, which shall be deemed in full force and effect.
No waiver by a party shall be deemed to have been made unless expressed in
writing and signed by such party.
<PAGE>
14. REAL PROPERTY TAX
The LESSOR shall be responsible for payment of the real property tax on
the leased premises. The LESSEE shall be responsible for any taxes on the
equipment used in the leased premises.
15. GROUND LEASE
The LESSOR shall be responsible for payment of the land lease. By its
signature below, Food Terminal Inc., the landlord under the referenced land
lease (hereinafter, the "Master Landlord") agrees that notwithstanding any
breach or default by LESSOR under the land lease, and notwithstanding any
termination of the land lease as result of such breach or default, provided that
LESSEE is not in material breach of this Contract of Lease, Master Landlord
shall honor this Contract of Lease, shall not disturb LESSEE'S (and
Three-Five's) possession of the leased premises, and shall hold LESSEE in quiet
enjoyment of the leased premises. In addition, Master Landlord consents to the
option to prepay rent contained in Section 2 above and the option to purchase
contained in Section 19 below, and represents and warrants to LESSEE that Master
Landlord's interest in the land upon which the building is situated is free and
clear of all liens and encumbrances.
16. SUCCESSOR-IN-INTEREST
This Contract of Lease shall be valid and binding on the LESSOR and
LESSEE and all their assigns and successors-in-interest.
17. INSURANCE
LESSOR shall maintain a policy or policies of casualty insurance on the
building in which the leased premises are located in an amount of not less than
the full replacement cost thereof. Concurrently with the execution of this
Contract of Lease, LESSOR shall deliver to LESSEE certificates evidencing the
existence of such insurance. In the event of any damage to or destruction of the
leased premises or the building in which the leased premises is located by fire
or other casualty, LESSOR shall, with all reasonable dispatch, repair and
reconstruct the leased premises and/or the building, as the case may be, to the
condition existing immediately prior to the occurrence of such fire or other
casualty.
18. QUIET ENJOYMENT
LESSOR covenants with LESSEE that upon LESSEE performing and observing
the agreements and conditions on its part to be performed and observed under
this Contract of Lease, LESSEE shall and may peaceably and quietly have, hold,
and enjoy the leased premises and all rights of the LESSEE hereunder without any
manner of hindrance or molestation by LESSOR or any persons claiming by,
through, or LESSOR. Notwithstanding the foregoing, LESSOR and LESSEE
<PAGE>
acknowledge that until April 30, 1995, LESSOR may continue to occupy the
administrative offices identified as such on the floor plan attached as Exhibit
"A". LESSOR shall, however, vacate such administrative offices on or before
April 30, 1995, and shall deliver the same to LESSEE broom clean, and in good
condition and repair.
19. OPTION TO PURCHASE
LESSEE shall have and LESSOR hereby grants to LESSEE the option to
purchase the building within the leased premises is located, including the
interest of the tenant under the referenced land lease. If LESSEE wishes to
exercise this option, it shall do so by giving written notice to LESSOR on or
before October 31, 1999. The purchase price for the building in which the leased
premises is located and the tenant's interest under the land lease shall be
eighty-five percent (85%) of the fair market value of the building and the
tenant's interest under the land lease. Fair market value shall be determined by
the mutual agreement of LESSOR and LESSEE. The closing of the purchase pursuant
to this option shall take place on, or at, LESSEE's election, before December
31, 1999. At the closing, LESSEE shall pay to LESSOR the purchase price, and
LESSOR shall deliver to LESSEE a warranty deed and bill of sale to the building
in which the leased premises is located, a warranty assignment of the tenant's
interest under the land lease, together with the consent of the master landlord.
IN WITNESS WHEREOF, the parties hereto have executed this Contract of Lease this
22nd day of February, 1995, at Taguig, Metro Manila.
TECHNOLOGY ELECTRONICS THREE-FIVE SYSTEMS
ASSEMBLY MANAGEMENT PACIFIC, INC.
(T.E.A.M.) PACIFIC CORPORATION (LESSEE)
(LESSOR)
BY: /s/ Ceferino F. Bautista BY: /s/ Randal L. Buness
------------------------- ---------------------
Ceferino F. Bautista Randal L. Buness
ITS: Senior Vice President ITS: Chief Financial Officer
------------------------- ----------------------------
FOOD TERMINAL INC.
(Master Landlord)
BY:
----------------------------
ITS:
----------------------------
<PAGE>
We have read the above Contract of Lease and agree, for ourselves and for our
assigns and/or successors-in-interest in the Contract of Lease that
notwithstanding any breach or default by the LESSOR under any loans made by us
to LESSOR and notwithstanding any foreclosure by us of the liens and security
interests securing repayment of the loans made by us to LESSOR, we shall honor
this Contract of Lease, not disturb LESSEE'S (or Three-Five's) occupancy of the
leased premises, and shall hold LESSEE in peaceful and quiet enjoyment of the
leased premises. In addition, we consent to the to purchase described in Section
19 of the Contract of Lease, and, if necessary, will release our liens and
security interests encumbering the building in which the leased premises are
located and the tenant's interests under the land lease in exchange for payment
of the purchase price described in Section 19 of the Contract of Lease.
RIZAL COMMERCIAL BANKING CHINA BANKING
CORPORATION CORPORATION
BY: BY:
------------------------- ---------------------------
ITS: ITS:
------------------------- ---------------------------
CONTRACT OF LEASE
KNOW ALL MEN BY THESE PRESENTS:
This agreement made and entered into this 1st day of April, 1995 , in
Taguig Metro Manila by and between:
Regent Apparel Corporation, a corporation duly organized and existing under
and by virtue of laws of the Republic of the Philippines, with address at
Malungay Road, FTI Complex, Taguig, Metro Manila and in this stance represented
by its President and Gen. Manager, Dante Umali, herein after referred to as
LESSOR.
-and-
Three-Five Systems Pacific, Inc., a corporation duly organized and existing
under and by virtue of the laws of the Republic of the Philippines, with an
address at Electronics Avenue, FTI Complex, Taguig, Metro Manila and in this
stance represented by its Chief Financial Officer, Randal L. Buness, hereinafter
referred to as LESSEE.
WITNESSETH:
WHEREAS, the LESSOR has leased from the Food Terminal Inc. Lot No. 39 B
with an area of 1,970 sqm. more or less, said lot located at Malungay Road, FTI
Complex, Taguig, Metro Manila and where the leasehold is effective up to January
21, 2006.
WHEREAS, the LESSOR, is the owner of the warehouse type factory building
erected on lot 39 B located at Malungay Road, FTI Complex, Taguig, Metro Manila,
hereinafter referred to as the LEASED PREMISES.
WHEREAS, the LESSEE, desires to lease the above mentioned premises and the
LESSOR is willing to lease unto the LESSEE the said premises subject to the
terms and conditions hereinafter stipulated.
1. Object of Lease. LESSOR hereby sub-leases unto the LESSEE Lot No. 39 B
with an area of 1,970 sqm, more or less located at Malungay Road, FTI Complex
Taguig, Metro Manila and leases unto the LESSEE the warehouse type factory
building erected thereon. Included in the lease are the use of the following
improvements thereon and the amenities located therein:
1.1 Five telephone lines
1.2 One unit package type air-conditioning located at the ground
floor main office
1.3 Tables and chairs located at ground floor main office
1.4 One unit air-conditioning window type unit located at the
mezzanine floor office
1.5 Tables and chairs, conference table located at mezzanine floor
office
1.6 Wooden folding chairs located at the canteen area
1.7 Bundy clock and time card racks located at the main entrance
1.8 Electrical convenience outlets installed at the production area
and warehouses
1.9 Electrical lighting fixtures installed at production area and
warehouses
1.10 Smock racks
1.11 Water Tanks located within the lot area
1.12 Water Pump
A detailed listings of the fixtures is given in annex 1 hereof and is
considered part of the Contract.
2. Duration of the Lease. The Lease period shall be for Two Years and shall
commence on April 1, 1995 and unless otherwise agreed upon expire at the
mid-night of March 31, 1997 . LESSEE has option to renew this Lease Contract
under such terms and conditions as shall be mutually agreed upon by the parties,
provided however, that the LESSEE gives written notice to LESSOR of intention to
renew three months before the expiry date of this Contract of Lease and
completes the negotiation for the renewal within a month or at the latest two
months before the expiry date. Failure to notify or complete negotiations on the
above specified time will mean the LESSEE'S waiver of its right to first
refusal. Within the three month period prior to expiry date of this lease,
LEASED PREMISES will be open for possible lease to other prospective tenants and
LESSEE during that time grants LESSOR authority to show other prospective
tenants the LEASED PREMISES without begin held liable for trespassing.
3. Amount of Rent. In consideration of the sub-lease of Lot 39 B and the
lease of the lease premises, and the improvements and amenities located therein,
the LESSEE agrees to pay by way of rent a sum of Philippine Pesos One Hundred
Sixty - Seven Thousand Four Hundred Fifty (P 167, 450.00) per month during the
first year of the term of this Contract of Lease and Philippine Pesos One
Hundred Eighty Thousand (P 180,000.00) per month during the second year (and, if
applicable, Philippine Pesos One Hundred Ninety Four Thousand Five Hundred (P
194,500.00) per month during the third year and Philippine Pesos Two Hundred
Eight Thousand (P 208,000.00) per month during the fourth year) of the term of
this Contract of Lease. In case, the Value added Tax is imposed by the
government, the amount imposed shall be borne by the LESSEE. Payment shall be
due within the first Five (5) Days of each month without necessity of demand and
LESSEE shall without delay deliver to the LESSOR of his designated agents the
rent due. Payments made after the said five (5) day period shall be considered
delinquent and a surcharge at the rate of 2% per month or pro-rata fraction
thereof shall be imposed on the delinquent payments in addition to the rent due.
4. Security Deposit. The LESSEE shall deposit with the LESSOR an amount
equal to Three (3) months rental. Any difference between the amount of the
deposit and the amount of the monthly rental attributable to an increase in
rental pursuant to Paragraph 3 shall be paid by the LESSEE within five (5) days
after receipt of written notice from LESSOR.
5. Treatment of Security Deposit. The deposit shall be returned without
interest by the LESSOR to the LESSEE within forty-five (45) days after the
expiration of the term of this Contract of Lease or when there is a renewal
within the period indicated, less whatever sum or sums as may be owing the
LESSOR at the time including damage on the LEASED PREMISES and only after all
bills chargeable to the LESSEE are paid. Nothing herein contained shall be
understood as granting the LESSEE the right to require, before the termination
of the term of this Contract of Lease, that the deposit be applied against
overdue rentals and other outstanding accounts owing to the LESSOR so as to keep
the LESSEE'S account current.
6. Use of the Lease Premises. The LESSEE shall use the LEASED PREMISES for
the assembly, manufacture and testing of the products of LESSEE. The LESSEE
shall not devote the LEASED PREMISES for other uses without written consent of
the LESSOR (which consent shall not be unreasonably withheld), it being
expressly agreed that if at any time during the term of this Contract of Lease
and without previous consent of the LESSOR the LEASED PREMISES are used for
other purposes, which other use is not discontinued within 30 days after written
notice by LESSOR, LESSEE shall be in breach of this Contract of Lease.
7. Alterations, Additions, Improvements etc. The LESSEE shall not make any
alterations, additions or improvements without the prior written consent of the
LESSOR (which consent shall not be unreasonably withheld). Provided however,
that all such alterations, additions or improvements by either party within the
LEASED PREMISES, except the movable furniture and fixtures put in at the expense
of the LESSEE and removable without defacing or injuring the building or the
LEASED PREMISES shall become the property of the LESSOR.
8. Prohibitions. The LESSEE shall not bring into or store in the LEASED
PREMISES anything of a highly inflammable nature or explosive materials nor
install any apparatus machinery or equipment which may cause strenuous tremors
on the building, or unduly expose the LEASED PREMISES to fire or increase the
fire hazard of the building or change the insurance rate of the building, or any
other article which the LESSOR may reasonably prohibit, it being understood that
should the LESSEE do so, not only shall the latter be responsible for all
damages which such violation may cause the LESSOR and/or other tenants, and if
LESSEE does not discontinue such prohibited use within 30 days after written
notice by LESSOR, LESSEE shall be in breach of this Contract of Lease.
Furthermore, if the LESSEE uses the building in such manner as to result to an
increase in the rate of insurance payable by the LESSOR the increase shall be
for the account of the LESSEE.
9. Rules and Regulations etc. The LESSEE shall comply with any and all
uniformly imposed non-discriminatory reasonable rules and safety regulations
which may be promulgated by the LESSOR, FTI Administration or any
instrumentalities of the government regarding the use, occupancy and sanitation
of the LEASED PREMISES; provided however, no such rule or regulation promulgated
by the LESSOR shall abrogate any right granted to LESSEE in this Contract of
Lease. If any future law or regulation requires structural or extraordinary
modifications to the LEASED PREMISES solely as a result of the particular use of
the LEASED PREMISES by LESSEE, LESSEE shall perform such structural or
extraordinary repairs and modifications. If, however, such future law or
regulation is applicable to premises generally, LESSOR shall make such
extraordinary repair or structural modification.
10. Liabilities for Suit etc. The LESSEE shall indemnify and hold harmless
the said LESSOR against all actions, suits damages and claims by whomsoever they
maybe brought or made by reason of non-observance of said rules, regulations,
ordinances or laws or of the convenants of this Contract of Lease, except to the
extent cause by the gross negligence, recklessness or willful misconduct of
LESSOR, its agents, servants, contractors or employees. The LESSOR shall
indemnify and hold harmless the LESSEE against all actions, suits, damages and
claims by whomsoever they maybe brought or made by reason of non observance or
non performance of the covenants of the Contract of Lease or attributable to the
negligence, recklessness or willful misconduct of the LESSOR, its agents,
servants, contractors or employees.
11. Public Utilities. The LESSEE shall pay for its water, gas, telephone
services, electricity, garbage collection fees and other public services and
utilities.
12. Injury and Damage. The LESSEE agrees to assume full responsibility for
any damage which maybe caused to the person or property of third persons while
remaining either casually or on business on any part of the LEASED PREMISES and
further binds itself to hold the LESSOR free and harmless from any such claim
for injury or damage unless such injury or damage is due to the gross
negligence, recklessness or willful misconduct of the LESSOR, its agents,
contractors, servants or employees or due to the breach by LESSOR of this
Contract of Lease. The LESSOR shall not be liable nor responsible for (a)
presence of bugs, vermins, ants and insects in the LEASED PREMISES or (b) for
the failure of water and/or electrical supply or (c) damage arising from acts or
negligence of LESSEE or its agents, employees, representatives or any and all
other persons.
13. Damage to LEASED PREMISES. In case of damage to the LEASED PREMISES or
it appurtenances due to fire, earthquake, war or any unforeseen causes, the
LESSEE shall give notice thereof to the LESSOR and the LEASED PREMISES shall be
repaired at the expense of the LESSOR as speedily as possible after such notice,
but if the LEASED PREMISES are so destroyed as to not be capable of restoration
within 60 days, LESSEE may demand the rescession of this Contract of Lease, and
in such case the deposit shall be returned in accordance with Paragraph 5 of
this Contract of Lease. No compensation or claim shall be allowed against the
LESSOR, by reason of inconvenience, annoyance or injury to the LESSEE'S business
arising out of the necessity of repairing any portion of the building, no matter
how the necessity may arise, provided, however, LESSOR shall make its best
effort to minimize any disruptions of LESSEE'S business in the LEASED PREMISES.
14. Inspection of the LEASED PREMISES. The LESSOR or its authorized agents
shall, upon reasonable advance notice to LESSEE, have the right to enter the
LEASED PREMISES during regular business hours to examine the same or to make
alterations or repairs, or for any purpose it may deem necessary for the
operation or maintenance of the building, provided, however, LESSOR shall use
its best efforts to minimize any disruptions of LESSEE'S business in the LEASED
PREMISES.
15. Sub-Lease, Transfer of Rights. The LESSEE shall not assign or transfer
its rights of this Contract of Lease nor sub-lease or sub-let all or any part of
the LEASED PREMISES, without the prior consent of the LESSOR (which consent
shall not be unreasonably withheld) and no rights, title or interest thereto or
therein shall be conveyed on or vested in anyone other than the LESSEE without
such written consent.
16. Repairs. The LESSEE shall allow the LESSOR upon reasonable advance
notice to make repairs, or to undertake those who work, for the preservation,
maintenance, conservation of the building to the LEASED PREMISES during regular
business hours. The LESSEE for its part shall allow the maintenance or repairmen
of the LESSOR access to the LEASED PREMISEES whenever maintenance or repair is
necessary. In the event, that such maintenance or repair work should extend
beyond the working hours of the LESSEE, the LESSOR shall, at its expense,
provide the necessary guard within the LEASED PREMISES so that no damage,
pilferage or any untoward acts may happen within the LEASED PREMISES while the
repair or maintenance work is being undertaken. LESSEE hereby relieves and
releases the LESSOR, its officers and employees, from any and all liability that
maybe caused by such maintenance or repair work , except to the extent caused by
the gross negligence, recklessness, or willful misconduct of LESSOR, its agents,
servants, contractors or employees. Expenses for the repair of the alterations,
additions, improvements and other fixtures introduced by the LESSEE shall be for
its account, except to the extent caused by the gross negligence, recklessness,
or willful misconduct of LESSOR, its agents, servants, contractors or employees.
Only the repair and maintenance of the structure and appurtenances of the
building existing before the term of this Contract of Lease shall be for the
account of the LESSOR.
17. Bulbs and other Electrical Fixtures. Before the commencement of this
Contract of Lease, the LESSOR shall make operable all original electrical
fixtures and other such similar items. Replacement of all bulbs, fluorescent
tubes, starters as well as the repair and the replacement of extra fixtures and
connections within the LEASED PREMISES will be furnished, repaired or installed,
for account of the LESSEE.
18. LESSEE'S Installation. The LESSEE, at its expense, upon written approval
of the LESSOR (which approval shall not be unreasonably withheld) may install
the necessary installation required by its business provided the strength and
the general structure of the building of the LEASED PREMISES are not thereby
impaired or otherwise adversely affected and provided further that other
conditions of this Contract of Lease are not thereby violated.
19. Extra Electrical and Other Connections. The installation of additional
electric, water, telephone and/or gas connections and fixtures in the LEASED
PREMISES shall be for the account and expense of the LESSEE, who is authorized
to make the same only after obtaining the prior written consent and approval of
the LESSOR (which consent and approval shall not be unreasonably withheld) such
installation should be made in such a way as to cause no injury or damage to the
LEASED PREMISES, provided, however that in the installation of additional
electrical appliances where extra outlets are necessary the LESSEE shall first
furnish the LESSOR a plan of the additional electrical outlets for its approval
(which approval shall not be unreasonably withheld), and the LESSEE shall employ
only the services of licensed electricians reasonable acceptable to the LESSOR
so that additional load or current shall be within the capacity of the main
switch of the panel thereby minimizing fire hazards and shall further comply
with the requirements of Fire Department and/or Government authorities.
20. Termination of Lease. The LESSEE agrees to return and surrender the
LEASED PREMISES at the expiration or earlier termination of this Contract of
Lease in as good condition as reasonable wear and tear will permit and without
undue delay whatsoever devoid of all occupants, furniture, article or objects of
any kind except for items enumerated in Annex 1 hereof and for alterations,
additions or improvement which the LESSOR may elect to take in accordance with
provisions of Paragraph 7 hereof.
21. Failure to Surrender. If the LEASED PREMISES are not surrendered at the
expiration of the term or the earlier termination of this Contract of Lease, the
LESSEE shall be responsible to the LESSOR for all actual (but not consequential)
damages which the latter may suffer by reason thereof and will indemnify the
LESSOR against any and all claims made by any succeeding tenants against the
LESSOR, resulting from the delay by the LESSOR to deliver possession of the
LEASED PREMISES to such succeeding tenants so far as such delay is incurred by
the failure of the LESSEE to surrender the LEASED PREMISES on time.
22. Waiver of Subrogation. LESSOR and LESSEE each hereby waive any and all
rights of recovery against the other on account of loss or damage occassioned to
such waiving party or its property or property of other under its control to the
extent that such loss or damage is insured against under any policy of insurance
which either may have against either party by respective insurer of LESSOR and
LESSEE.
23. Non-waiver. The failure of the LESSOR to insist upon a strict
performance of any of the terms, conditions and covenants hereof shall not be
deemed a relinquishment or waiver of any rights or remedy that LESSOR may have,
not shall it be construed as a waiver of any subsequent breach of default of the
terms, conditions and covenants hereof, which terms and conditions and covenants
shall continue to be in full force and effect. No waiver by the LESSOR of any of
its rights under this Contract of Lease shall be deemed to have been made unless
expressed in writing and signed by LESSOR.
24. Breach of Default. The LESSEE agrees to observe strictly and faithfully
the covenants and conditions herein set forth and in case the LESSEE fails to
pay the agreed rental on time, which failure is not cured by LESSEE within ten
(10) days after written notice thereof by LESSOR, or materially violates any of
the herein covenants and conditions, which material violation is not cured
within thirty (30) days after written notice thereof by LESSOR or, in the event
such material violation cannot be cured within thirty (30) days, the LESSEE does
not promptly begin to cure such material violation and diligently pursue such
cure to completion, then the LESSOR shall have the right to terminate and cancel
this Contract of Lease even before the exploration of the term hereof without
further notice to the LESSEE and without absolving the latter from its
obligation to pay the rentals for the remaining portion of the term of this
Contract of Lease. The LESSEE shall be liable for any and all past due rental.
25. Waiver of Lien over Machineries, etc. LESSOR hereby disclaims and waives
any statutory, common law or other lien, claim or interest, including any so
called "Landlord's lien" it may have against the furnitures, fixtures,
machineries and or equipments of LESSEE or any permitted sub-leasee or
sub-tenant located with the LEASED PREMISES except for items listed in Annex 1
hereof and for alterations, additions, or improvements which LESSOR may elect to
take in accordance with provision of Paragraph 7 hereof.
26. Relief and Penalties. Should either the LESSOR or the LESSEE be
constrained to procure the services of an Attorney-at-Law to obtain relief
against the other, the non-prevailing party, in addition to the damages
mentioned herein, shall pay an amount equivalent to 25% of the amount claimed in
the complaint as attorney's fees (with a minimum of P 3,000.00), aside from the
costs of the litigation and other expenses which the law may entitle the
prevailing party to recover from the non-prevailing party. Provision of a penal
character in the other sections of this Contract of Lease shall be considered as
cumulative to this provision.
27. Ground Lease. The LESSOR shall be responsible for the payment of the
land lease. By its signature below, Food Terminal, Inc., the landlord under the
referenced land lease (herein after, the "Master Landlord") agrees that
notwithstanding any breach or default by LESSOR under the land lease, ant
notwithstanding any termination of the Land lease as a result of such breach or
default, provided that LESSEE is in not in material breach of this Contract of
Lease. Master Landlord shall honor this Contract of Lease, shall not disturb the
LESSEE'S possession of the LEASED PREMISES, and shall hold LESSEE in quiet
enjoyment of the LEASED PREMISES. Upon receipt by LESSEE of written notice from
Master Landlord that LESSOR is in default under the land lease, LESSEE shall
thereafter pay all rent under this Contract of Lease directly to Master Landlord
until such time as the default in the Land Lease by the LESSOR is cured and
LESSOR agrees such payment by LESSEE shall satisfy its obligation under this
Contract of Lease to pay rent.
28. Insurance. LESSOR shall maintain a policy or policies of casualty
insurance on the building in which the LEASED PREMISES are located. LESSOR shall
deliver to LESSEE certificates evidencing the existence of such insurance.
LESSEE shall maintain a policy of casuality insurance on its furniture,
fixtures, equipments and other personal property in the LEASED PREMISES. LESSEE
shall deliver to LESSOR certificate evidencing such insurance on the contents of
the building and a commercial general liability insurance coverage for third
party claims.
29. Quiet Enjoyment. LESSOR covenants LESSEE that upon LESSEE performing and
observing the agreements and conditions on its part to be performed and observed
under this Contract of Lease, LESSEE shall and may peaceably and quietly have,
hold, and enjoy the LEASED PREMISES and all rights of the LESSEE hereunder
without any manner of hindrance or molestation by LESSOR or any persons claiming
by, through, or LESSOR.
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto set their hands this 1st day
of April , 1995 in Taguig, M.M.
LESSOR
REGENT APPAREL CORPORATION
By: /s/ Dante Umali
---------------------------
Dante Umali
Its: President and GM
LESSEE
THREE-FIVE SYSTEMS PACIFIC, INC.
By: /s/ Randal L. Buness
----------------------------
Randal L. Buness
Its: Chief Financial Officer
MASTER LANDLORD
FOOD TERMINAL, INC.
By: /s/ Romeo David
---------------------------
Romeo David
Its: President
<PAGE>
ANNEX 1
LIST OF REGENT APPAREL CORPORATION FURNITURE AND EQUIPTMENT LOANED TO THREE-FIVE
SYSTEMS, INC. UNDER THIS CONTRACT OF LEASE
1. Located at the mezzanine office
1.1 Executive table - 2 units
1.2 Back working cabinet - 2 units
1.3 Carrier room air-conditioning
3/4 HP - 1 unit
1.4 Carrier room air-conditioning
1/2 HP - 1 unit
1.5 Conference table - 1 unit
1.6 Conference table chairs - 7 units
1.7 Filing cabinet, single drawer safe combination - 1 unit
1.8 Telephone units - 6 units
2. Located at the ground floor administrative office
2.1 Executive tables - 9 units
2.2 Clerical chairs - 8 units
2.3 Executive chairs - 1 unit
2.4 Koppel package type air-con - 1 unit
2.5 Filing cabinet - 3 units
2.6 Telephone units - 5 units
3. Located at production planning and control room
3.1 Executive table - 1 unit
3.2 Clerical table - 6 units
3.3 Filing cabinet - 2 units
3.4 Room air-con (for repair) - 2 units
3.5 Clerical chairs - 6 units
3.6 Cabinet free standing wooden - 2 units
4. Located at the canteen
4.1 Wooden folding chairs - 50 units
4.2 Exhaust fans - 34 inch blade - 1 unit
5. Production area
5.1 Installed double fluorescent lamp ballast - 265 units
5.2 Installed single ballast fluorescent lamp ballast - 16 units
5.3 Mercury lamp lighting - 17 units
5.4 Niagara exhaust fans - 34 inch blade - 7 units
5.5 Dust collector (mechanized) - 1 unit
5.6 Install overhead convenient outlet - 142 units
5.7 Installed fire hydrant hose - 5 units
5.8 Bundy clock - 1 unit
5.9 Water pump - 1 HP motor - 1 unit
5.10 Elevated water tank - 2 units
SECOND MODIFICATION AGREEMENT
BY THIS SECOND MODIFICATION AGREEMENT (the "Agreement"), made and
entered into as of the 22nd day of December, 1995, FIRST INTERSTATE BANK OF
ARIZONA, N.A., whose address is Post Office Box 29742, Phoenix, Arizona
85038-9742, Corporate Banking Division (hereinafter called "Lender"), and
THREE-FIVE SYSTEMS, INC., a Delaware corporation, whose address is 1600 North
Desert Drive, Tempe, Arizona 85281-1212 (hereinafter called "Borrower"), in
consideration of the mutual covenants herein contained and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, hereby confirm and agree as follows:
1. RECITALS.
1.1 Borrower and Lender entered into a Loan Agreement dated
July 11, 1994 (the "Loan Agreement"), which provided for a revolving line of
credit by Lender to Borrower in the amount of $5,000,000.00 (the "Revolving
Commitment Amount") upon the terms and conditions contained therein (the
"Revolving Credit Loan").
1.2 The Loan was evidenced by a Revolving Promissory Note
dated July 11, 1994, executed by Borrower, payable to the order of Lender, in
the principal amount of $5,000,000.00 (the "Revolving Note"). (Hereinafter the
Loan Agreement and the Revolving Note are referred to as the "Loan Documents.")
1.3 Lender and Borrower have executed and delivered previously
a Modification Agreement dated June 28, 1995 (the "Modification") modifying the
terms of the Loan Documents. Hereinafter, "Revolving Note," and "Loan Agreement"
shall mean such documents as modified in the Modification.
1.4 Borrower and Lender desire to modify the Loan Documents as
set forth herein.
1.5 All undefined capitalized terms used herein shall have the
meaning given them in the Loan Agreement.
2. REVOLVING NOTE.
As of the date hereof, prior to the effect of the modifications
contained herein, the outstanding principal balance of the Revolving Note is
$-0-.
3. LOAN AGREEMENT.
3.1 The Loan Agreement is hereby amended as follows:
(a) The following definitions is Section 2.1 of the
Loan Agreement are amended to read as follows:
"RLC Commitment Amount" means $15,000,000.00.
"RLC Note" means that Revolving Promissory Note
executed and delivered concurrently herewith in the face
amount equal to the RLC Commitment Amount made by Borrower
payable to the order of Lender, evidencing the RLC, and
extensions, modifications and renewals thereof.
(b) Section 7.12 of the Loan Agreement is to read as
follows:
Section 7.12 Permit the ratios of Borrower's Current
Liabilities at the end of any fiscal quarter of Borrower to be
less than 1.1 to 1. In the ratio, Current Assets is defined as
cash plus its accounts receivable. In the ratio, Current
Liabilities is defined as current liabilities.
3.2 The Revolving Note is to be executed and delivered
concurrently herewith.
4. OTHER MODIFICATIONS, RATIFICATIONS AND AGREEMENTS.
4.1 All references to the Loan Agreement in the Revolving Note
are hereby amended to refer to the Loan Agreement as hereby amended.
4.2 Borrower acknowledges that the indebtedness evidenced by
the Revolving Note is just and owing, that the balance thereof is correctly
shown in the records of Lender as of the date hereof, and Borrower agrees to pay
the indebtedness evidenced by the Revolving Note according to the terms thereof,
as herein modified.
4.3 Borrower hereby reaffirms to Lender each of the
representations, warranties, covenants and agreements of Borrower set forth in
the Revolving Note and the Loan Agreement, with the same force and effect as if
each were separately stated herein and made as of the date hereof.
4.4 Borrower hereby ratifies, reaffirms, acknowledges, and
agrees that the Revolving Note and the Loan Agreement, represent valid,
enforceable and collectible obligations of Borrower, and that there are no
existing claims, defenses, personal or otherwise, or rights of setoff whatsoever
with respect to any of these documents or instruments. In addition, Borrower
hereby expressly waives, releases and absolutely and forever discharges Lender
and its present and former shareholders, directors, officers, employees and
agents, and their separate and respective heirs, personal representatives,
successors and assigns, from any and all liabilities, claims, demands, damages,
action and causes of action, whether known or unknown and whether contingent or
matured, that Borrower may now have, or has had prior to the date hereof, or
that may hereafter arise with respect to acts, omissions or events occurring
prior to the date hereof and, without limiting the generality of the foregoing,
from any and all liabilities, claims, demands, damages, actions and causes of
action, known or unknown, contingent or matured, arising out of, or in any way
connected with, the RLC. Borrower further acknowledges and represents that no
event has occurred and no condition exists that, after notice or lapse of time,
or both, would constitute a default under this Agreement, the Revolving Note or
the Loan Agreement.
4.5 All terms, conditions and provisions of the Revolving Note
and the Loan Agreement are continued in full force and effect and shall remain
unaffected and unchanged except as specifically amended hereby. The Revolving
Note and the Loan Agreement, as amended hereby, are hereby ratified and
reaffirmed by Borrower, and Borrower specifically acknowledges the validity and
enforceability thereof.
5. GENERAL.
5.1 This Agreement in no way acts as a release or
relinquishment of those rights securing payment of the RLC. Such rights are
hereby ratified, confirmed, renewed and extended by Borrower in all respects.
5.2 The modifications contained herein shall not be binding
upon Lender until Lender shall have received all of the following:
(a) An original of this Agreement fully executed by
the Borrower.
(b) Such resolutions or authorizations and such other
documents as Lender may require relating to the existence and
good standing of the Borrower and the authority of any person
executing this Agreement or other documents on behalf of the
Borrower.
5.3 Borrower shall execute and deliver such additional
documents and do such other acts as Lender may reasonably require to fully
implement the intent of this Agreement.
5.4 Borrower shall pay all costs and expenses, including, but
not limited to, reasonable attorneys' fees incurred by Lender in connection
herewith, whether or not all of the conditions described in Paragraph 5.2 above
are satisfied. Lender, at its option, but without any obligation to do so, may
advance funds to pay any such costs and expenses that are the obligation of the
Borrower, and all such funds advanced shall bear interest at the highest rate
provided in the Revolving Note and shall be due and payable upon demand.
5.5 Notwithstanding anything to the contrary contained herein
or in any other instrument executed by Borrower or Lender, or in any other
action or conduct undertaken by Borrower or Lender on or before the date hereof,
the agreements, covenants and provisions contained herein shall constitute the
only evidence of Lender's consent to modify the terms and provisions of the
Revolving Note or the Loan Agreement. Accordingly, no express or implied consent
to any further modifications involving any of the matters set forth in this
Agreement or otherwise shall be inferred or implied by Lender's execution of
this Agreement. Further, Lender's execution of this Agreement shall not
constitute a waiver (either express or implied) of the requirement that any
further modification of the RLC or of the Revolving Note or the Loan Agreement,
shall require the express written approval of Lender; no such approval (either
express or implied) has been given as of the date hereof.
5.6 Time is hereby declared to be of the essence hereof of the
RLC, of the Revolving Note and of the Loan Agreement, and Lender requires, and
Borrower agrees to, strict performance of each and every covenant, condition,
provision and agreement hereof, of the Revolving Note and the Loan Agreement.
5.7 This Agreement shall be binding upon, and shall inure to
the benefit of, the parties hereto and their heirs, personal representatives,
successors and assigns.
5.8 This Agreement is made for the sole protection and benefit
of the parties hereto, and no other person or entity shall have any right of
action hereon.
5.9 This Agreement shall be governed by and construed
according to the laws of the State of Arizona.
IN WITNESS WHEREOF, these presents are executed as of the date
indicated above.
FIRST INTERSTATE BANK OF ARIZONA, N.A.
By: /s/ Kevin C. Halloran
-----------------------
Name: Kevin C. Halloran
-----------------------
Its: Vice President
----------------------
LENDER
THREE-FIVE SYSTEMS, INC., a Delaware
corporation
By: /s/ Randal L. Buness
--------------------------
Name: Randal L. Buness
-------------------------
Its: V.P. Finance & C.F.O.
------------------------------
BORROWER
<PAGE>
REVOLVING PROMISSORY NOTE
$15,000,000.00 Phoenix, Arizona
December 22 , 1995
FOR VALUE RECEIVED, the undersigned THREE-FIVE SYSTEMS, INC., a
Delaware corporation ("Maker"), promises to pay to the order of FIRST INTERSTATE
BANK OF ARIZONA, N.A. (the "Payee"; Payee and each subsequent transferee and/or
owner of this Note, whether taking by endorsement or otherwise, are herein
successively called "Holder"), at Post Office Box 29742, Phoenix, Arizona
85038-9742, or at such other place as Holder may from time to time designate in
writing, the principal sum of FIFTEEN MILLION AND NO/100 DOLLARS
($15,000,000.00) or so much thereof as Holder may advance to or for the benefit
of Maker plus interest calculated on a daily basis (based on a 360-day year)
from the date hereof on the principal balance from time to time outstanding as
hereinafter provided, principal, interest and all other sums payable hereunder
to be paid in lawful money of the United States of America as follows:
(a) Interest. Interest shall accrue on the unpaid principal of
each RLC Advance:
(i) At the Prime Rate if it is a Prime Rate RLC Advance.
(ii) At the applicable LIBOR Rate if it is a LIBOR Rate RLC
Advance.
(b) Interest Payment. All accrued interest shall be due and
payable on the RLC Payment Date.
(c) Principal Payment. The entire outstanding principal
balance, all accrued and unpaid interest and all other sums which may
have become payable thereunder shall be due and payable in full on the
RLC Maturity Date.
(d) Definitions. The capitalized terms used and not otherwise
defined herein shall have the same meanings as defined in the Loan
Agreement (defined below).
The principal balance of this Note represents a revolving credit all or
any part of which may be advanced to Maker, repaid by Maker, and readvanced to
Maker from time to time, subject to the other terms hereof and the conditions,
if any, contained in the Loan Agreement and provided that the principal balance
outstanding at any one time shall not exceed the face amount hereof.
Maker agrees to an effective rate of interest that is the rate stated
above plus any additional rate of interest resulting from any other charges in
the nature of interest paid or to be paid by or on behalf of Maker, or any
benefit received or to be received by Holder, in connection with this Note.
If any payment required under this Note is not paid within five (5)
Business Days when due, then, at the option of Holder, Maker shall pay a "late
charge" equal to three percent (3%) of the amount of that payment to compensate
Holder for administrative expenses and other costs of delinquent payments. This
late charge may be assessed without notice, shall be immediately due and payable
and shall be in addition to all other rights and remedies available to Holder.
All payments on this Note shall be applied first to the payment of any
costs, fees or other charges incurred in connection with the indebtedness
evidenced hereby, next to the payment of accrued interest and then to the
reduction of the principal balance.
This Note is issued pursuant to that Loan Agreement dated of even date
herewith between Maker and Payee (as amended from time to time, the "Loan
Agreement").
Time is of the essence of this Note. At the option of Holder, the
entire unpaid principal balance, all accrued and unpaid interest and all other
amounts payable hereunder shall become immediately due and payable without
notice upon the failure to pay any sum due and owing hereunder as provided
herein or upon the occurrence of any event of default under the Loan Agreement
or any Security Documents.
After maturity, including maturity upon acceleration, the unpaid
principal balance, all accrued and unpaid interest and all other amounts payable
hereunder shall bear interest at that rate that is five percent (5%) above the
rate that would otherwise be payable under the terms hereof. Maker shall pay all
costs and expenses, including reasonable attorneys' fees and court costs,
incurred in the collection or enforcement of all or any part of this Note. Such
court costs and attorneys' fees shall be set by the court and not by jury, shall
be included in any judgment obtained by Holder.
Maker shall have the option to prepay this Note, in full or in part, at
any time. Maker shall pay to Holder such amount or amounts as shall be
sufficient to compensate for any losses (including without limitations loss of
anticipated profit), costs or expenses which Holder may incur as a result of
payment or Conversion of any LIBOR Rate RLC Advance other than on the last
Business Day of the Interest Period for such RLC Advance.
Failure of Holder to exercise any option hereunder shall not constitute
a waiver of the right to exercise the same in the event of any subsequent
default or in the event of continuance of any existing default after demand for
strict performance hereof.
Maker and all sureties, guarantors and/or endorsers hereof (or of any
obligation hereunder) and accommodation parties hereon (severally each
hereinafter called a "Surety") each: (a) agree that the liability under this
Note of all parties hereto is joint and several; (b) severally waive any and all
formalities in connection with this Note to the maximum extent allowed by law,
including (but not limited to) demand, diligence, presentment for payment,
protest and demand, and notice of extension, dishonor, protest, demand and
nonpayment of this Note; and (c) consent that Holder may extend the time of
payment or otherwise modify the terms of payment of any part or the whole of the
debt evidenced by this Note, at the request of any other person liable hereon,
and such consent shall not alter nor diminish the liability of any person
hereon.
In addition, each Surety waives and agrees not to assert: (a) any right
to require Holder to proceed against Maker or any other Surety, to proceed
against or exhaust any security for the Note, to pursue any other remedy
available to Holder, or to pursue any remedy in any particular order or manner;
(b) the benefit of any statute of limitations affecting its liability hereunder
or the enforcement hereof; (c) the benefits of any legal or equitable doctrine
or principle of marshalling; (d) notice of the existence, creation or incurring
of new or additional indebtedness of Maker to Holder; (e) the benefits of any
statutory provision limiting the liability of a surety, including without
limitation the provisions of Sections 12-1641, et seq., of the Arizona Revised
Statutes; and (f) any defense arising by reason of any disability or other
defense of Maker or by reason of the cessation from any cause whatsoever (other
than payment in full) of the liability of Maker for payment of the Note. Until
payment in full of the Note, no Surety shall have any right of subrogation and
each hereby waives any right to enforce any remedy which Holder now has, or may
hereafter have, against Maker or any other Surety, and waives any benefit of,
and any right to participate in, any security now or hereafter held by Holder.
Maker agrees that to the extent Maker or any Surety makes any payment
to Holder in connection with the indebtedness evidenced by this Note, and all or
any part of such payment is subsequently invalidated, declared to be fraudulent
or preferential, set aside or required to be repaid by Holder or paid over to a
trustee, receiver or any other entity, whether under any bankruptcy act or
otherwise (any such payment is hereinafter referred to as a "Preferential
Payment"), then the indebtedness of Maker under this Note shall continue or
shall be reinstated, as the case may be, and, to the extent of such payment or
repayment by Holder, the indebtedness evidenced by this Note or part thereof
intended to be satisfied by such Preferential Payment shall be revived and
continued in full force and effect as if said Preferential Payment had not been
made.
Without limiting the right of Holder to bring any action or proceeding
against Maker or any Surety or against any property of Maker or any Surety (an
"Action") arising out of or relating to this Note or any indebtedness evidenced
hereby in the courts of other jurisdictions, Maker and each Surety hereby
irrevocably submit to the jurisdiction, process and venue of any Arizona State
or Federal court sitting in Phoenix, Arizona, and hereby irrevocably agree that
any Action may be heard and determined in such Arizona State court or in such
Federal court. Maker and all Sureties each hereby irrevocably waives, to the
fullest extent it may effectively do so, the defenses of lack of jurisdiction
over any person, inconvenient forum or improper venue, to the maintenance of any
Action in any jurisdiction.
This Note shall be binding upon Maker and its successors and assigns
and shall inure to the benefit of Payee, and any subsequent holders of this
Note, and their successors and assigns.
All notices required or permitted in connection with this Note shall be
given at the place and in the manner provided in the Loan Agreement for the
giving of notices.
This Note shall be construed according to the laws of the State of
Arizona.
IN WITNESS WHEREOF, this Revolving Promissory Note has been executed as
of the date first written above.
THREE-FIVE SYSTEMS, INC., a Delaware
corporation
By /s/ Randal L. Buness
---------------------
Randal L. Buness
---------------------
Its V.P. Finance & C.F.O.
--------------------------
MAKER
THREE-FIVE SYSTEMS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------------
1995 1994 1993
---------- ------------ -----------
<S> <C> <C> <C>
Common shares outstanding beginning of period 7,691,524 6,641,944 6,426,260
Effect of Weighting Shares:
Employee stock options exercised 24,472 23,824 151,966
Employee stock options outstanding 367,555 418,983 461,892
Issuance of common stock - 797,260 -
---------- ------------ -----------
Primary 8,083,551 7,882,011 7,040,118
========== ============ ===========
Common shares outstanding beginning of period 7,691,524 6,641,944 6,426,260
Effect of Weighting Shares:
Employee stock options exercised 24,472 23,824 151,966
Employee stock options outstanding 367,567 427,443 504,570
Issuance of common stock - 797,260 -
---------- ------------ -----------
Fully diluted 8,083,563 7,890,471 7,082,796
========== ============ ===========
Income before cumulative effect of accounting change $ 8,417,000 $ 12,546,000 $ 4,130,000
Cumulative effect of accounting change - - 924,000
---------- ------------ -----------
Net income $ 8,417,000 $ 12,546,000 $ 5,054,000
========== ============ ===========
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARES:
Net income per share
Primary:
Income before cumulative effect of accounting change $ 1.04 $ 1.59 $ 0.59
Cumulative effect of accounting change - - 0.13
---------- ------------ -----------
Net income $ 1.04 $ 1.59 $ 0.72
========== ============ ===========
Fully diluted:
Income before cumulative effect of accounting change $ 1.04 $ 1.59 $ 0.58
Cumulative effect of accounting change - - 0.13
---------- ------------ -----------
Net income $ 1.04 $ 1.59 $ 0.71
========== ============ ===========
</TABLE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Name Place of Incorporation
---- ----------------------
Three-Five Systems Limited United Kingdom
Three-Five Systems Pacific, Inc. Philippines
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File No's. 33-77600, 33-76090, 33-36968, and 33-88706.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 12, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1995 AND THE RELATED
CONSOLIDATED STATEMENT OF INCOME AND OF CASH FLOWS FOR THE YEAR ENDED
DECEMBER 31, 1995 OF THREE-FIVE SYSTEMS, INC. AND ITS SUBSIDIARIES AND
IS QUALIFED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 4,551
<SECURITIES> 0
<RECEIVABLES> 9,346
<ALLOWANCES> 0
<INVENTORY> 13,703
<CURRENT-ASSETS> 491
<PP&E> 33,493
<DEPRECIATION> 0
<TOTAL-ASSETS> 63,780
<CURRENT-LIABILITIES> 7,517
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 63,780
<SALES> 91,585
<TOTAL-REVENUES> 91,585
<CGS> 70,481
<TOTAL-COSTS> 78,263
<OTHER-EXPENSES> 122
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,965
<INCOME-TAX> 5,548
<INCOME-CONTINUING> 8,417
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,417
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
</TABLE>
