SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange
Act of 1934
For Quarter Ended March 31, 1996
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Commission File Number 1-4373
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THREE-FIVE SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 86-0654102
- ------------------------------- ---------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
1600 North Desert Drive, Tempe, Arizona 85281
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(Address of principal executive offices) (Zip Code)
(602)389-8600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, at the latest practical date.
CLASS OUTSTANDING AS OF March 31, 1996
- ----- --------------------------------
Common 7,737,095
Par value $.01 per share
<PAGE>
THREE-FIVE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
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ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets-
March 31, 1996 and December 31, 1995........................1
Consolidated Statements of Income-
Three Months Ended March 31, 1996 and 1995..................2
Consolidated Statements of Cash Flows-
Three Months Ended March 31, 1996 and 1995..................3
Notes to Consolidated Financial Statements...........................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION................................5
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................7
SIGNATURES....................................................................8
<PAGE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
MARCH 31, DECEMBER 31,
1996 1995
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(Unaudited)
ASSETS
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CURRENT ASSETS:
Cash and cash equivalents $ 6,295 $ 4,551
Accounts receivable, net 5,686 9,346
Inventories, net 15,801 13,703
Deferred tax asset 1,826 1,826
Other current assets 71 491
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Total current assets 29,679 29,917
PROPERTY, PLANT AND EQUIPMENT, net 32,917 33,493
COST IN EXCESS OF NET ASSETS ACQUIRED, net 160 170
OTHER ASSETS 199 200
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$ 62,955 $ 63,780
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,749 $ 3,199
Accrued liabilities 1,958 1,318
Current maturities of long-term debt - 3,000
Current taxes payable 258 -
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Total current liabilities 5,965 7,517
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LONG-TERM DEBT, net of current maturities - -
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DEFERRED TAX LIABILITY 1,040 1,039
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 77 77
Additional paid-in capital 32,289 32,286
Retained earnings 23,569 22,847
Cumulative translation adjustment 15 14
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Total stockholders' equity 55,950 55,224
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$ 62,955 $ 63,780
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The accompanying notes are an integral part of these consolidated balance
sheets.
1
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THREE-FIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except share amounts)
THREE MONTHS
ENDED MARCH 31,
1996 1995
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NET SALES $ 18,082 $ 24,483
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COSTS AND EXPENSES:
Cost of sales 14,401 17,582
Selling, general and administrative 1,459 1,272
Research and development 1,010 405
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16,870 19,259
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Operating income 1,212 5,224
OTHER INCOME (EXPENSE):
Interest, net 19 342
Other, net (27) (42)
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INCOME BEFORE PROVISION FOR INCOME TAXES 1,204 5,524
Provision for income taxes 482 2,210
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NET INCOME $ 722 $ 3,314
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EARNINGS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ 0.09 $ 0.41
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WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE EQUIVALENTS
OUTSTANDING 8,039,794 8,086,138
============= =============
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 722 $ 3,314
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 861 418
Provision (reduction) of accounts receivable valuation reserves 36 (122)
Provision of inventory valuation reserves 1,317 389
Loss on disposal of assets 9 -
Change in assets and liabilities:
(Increase) decrease in accounts receivable 3,624 (4,235)
(Increase) decrease in inventories (3,415) 1,550
Decrease in other assets 240 47
Increase (decrease) in accounts payable and accrued liabilities 1,190 (45)
Increase in taxes payable, net 440 1,164
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Net cash provided by operating activities 5,024 2,480
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (284) (6,713)
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Net cash used for investing activities (284) (6,713)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) notes payable to banks (3,000) -
Principal payments on and retirement of long-term debt - (182)
Stock options exercised 3 7
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Net cash used for financing activities (2,997) (175)
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Effect of exchange rate changes on cash and cash equivalents 1 (2)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,744 (4,410)
CASH AND CASH EQUIVALENTS, beginning of period 4,551 27,136
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CASH AND CASH EQUIVALENTS, end of period $ 6,295 $ 22,726
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
ITEM 1. (continued)
Three-Five Systems, Inc. and Subsidiaries Notes to Consolidated
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Financial Statements
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Note A - The accompanying unaudited Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions
to Form 10-Q. Accordingly, they do not include all the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows for all periods
presented have been made. The results of operations for the
three-month period ended March 31, 1996 are not necessarily
indicative of the operating results that may be expected for the
entire year ending December 31, 1996. These financial statements
should be read in conjunction with the Company's December 31,
1995 financial statements and accompanying notes thereto.
Note B - Earnings per share is computed by dividing net earnings by the
weighted average number of common shares and common share
equivalents assumed outstanding during the three-month periods.
Fully diluted earnings per share is considered equal to primary
earnings per share in all periods presented.
Note C - Inventories consist of the following at:
March 31, 1996 December 31, 1995
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(Unaudited)
(in thousands)
Raw Materials $ 9,581 $ 9,257
Work-In-Process 1,721 2,002
Finished Goods 4,499 2,444
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$15,801 $13,703
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Note D - Property, plant and equipment consist of the following at:
March 31, 1996 December 31, 1995
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(Unaudited)
(in thousands)
Building and improvements $10,418 $10,375
Furniture and equipment 28,175 27,971
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38,593 38,346
Less-accumulated depreciation (5,676) (4,853)
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$32,917 $33,493
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4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three Months Ended March 31, 1996 Compared with Three Months Ended March 31,
1995.
Net sales were $18,082,000 for the quarter ended March 31, 1996, a decrease
of 26.1 percent compared with net sales of $24,483,000 for the quarter ended
March 31, 1995. The sales decrease was primarily a result of lower order rates
from a major wireless communications customer for existing product programs.
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 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 79.6 percent for
the quarter ended March 31, 1996 as compared with 71.8 percent for the quarter
ended March 31, 1995. This increase was primarily due to manufacturing
inefficiencies from new program introductions and volume reductions.
Selling, general and administrative expense increased to $1,459,000 for the
quarter ended March 31, 1996 from $1,272,000 for the quarter ended March 31,
1995. The 14.7 percent increase resulted primarily from wages, legal and
investor relations expenses. Selling, general and administrative expense
increased as a percentage of net sales to 8.1 percent for the quarter ended
March 31, 1996 from 5.2 percent for the quarter ended March 31, 1995, primarily
as a result of decreased sales.
Research and development expense totaled $1,010,000, or 5.6 percent of net
sales, for the quarter ended March 31, 1996 as compared with $405,000, or 1.7
percent of net sales, for the quarter ended March 31, 1995. The increase in
research and development expense represented in-house process development
efforts related to the high-volume manufacturing line located in Tempe, Arizona.
Interest income (net) for the quarter ended March 31, 1996 was $19,000,
down from $342,000 for the quarter ended March 31, 1995. The decrease in
interest income was the result of investing lower average cash balances during
the quarter. Other expenses (net) decreased to $27,000 for the quarter ended
March 31, 1996 from $42,000 for the quarter ended March 31, 1995. The decrease
was due primarily to a net foreign exchange gain for the quarter ended March 31,
1996 as compared to a net foreign exchange loss for the quarter ended March 31,
1995 offset by increased closed facilities expenses.
The provisions for income taxes decreased to $482,000 for the quarter ended
March 31, 1996 from $2,210,000 for the quarter ended March 31, 1995. This
resulted primarily from lower pre-tax income in the quarter ended March 31, 1996
as compared with the same period in 1995.
Net income decreased to $722,000, or $0.09 per share, for the quarter ended
March 31, 1996 from $3,314,000, or $0.41 per share, for the quarter ended March
31, 1995.
Seasonality
The Company's net sales have not been subject to any significant seasonal
fluctuations or variations.
Liquidity and Capital Resources
During the three months ended March 31, 1996, the Company generated
$5,024,000 in cash flow from operations as compared with $2,480,000 during the
same period in 1995. The increase in cash flow from operations with
substantially lower earnings was primarily due to the significant increase in
the Company's non-cash expenses of depreciation and inventory reserves as well
as the substantial collection of its accounts receivable and increase in
accounts payable. The Company's working capital increased to $23,714,000 at
March 31, 1996 from $22,400,000 at December 31, 1995,
5
<PAGE>
primarily as a result of the payoff of the Company's short-term debt. The
Company's current ratio at March 31, 1996 was 5.0-to-1 as compared with a
current ratio of 4.0-to-1 at December 31, 1995.
During the three months ended March 31, 1996, the Company's primary
financing activity was to repay $3,000,000 of debt that was outstanding under
the revolving line of credit at December 31, 1995 with cash flow from
operations. 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 March 31, 1996, no borrowings were 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. Management intends to renew the United Kingdom
credit facility and does not anticipate any material changes to the existing
terms. Three-Five Systems Limited had no borrowings outstanding under this line
of credit at March 31, 1996.
Capital expenditures during the three months ended March 31, 1996 were
approximately $284,000, as compared with $6,713,000 during the same period in
1995. Capital expenditures for both periods consisted primarily of manufacturing
equipment for its operations in Manila and Arizona.
The Company believes that its capital, together with the 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 the United States dollars. Such transactions
expose the Company to exchange rate fluctuations for the period of time from
inception of the transaction until it is settled. Although the Company has not
incurred any material exchange gains or losses to date, there can be no
assurance that fluctuations in the currency exchange rates in the future will
not have an adverse effect on the Company's operations. The Company has entered
and from time will enter into hedging transactions in order to minimize its
exposure to currency rate fluctuations.
6
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) EXHIBIT 11: Statement Re: Computation of Per Share Earnings.
(b) EXHIBIT 27: Financial Data Schedule
(c) Reports on Form 8-K: None
7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THREE-FIVE SYSTEMS, INC.
------------------------
(Registrant)
Dated: April 19, 1996 By /s/ Randal L. Buness
--------------------- --------------------
Its Vice President Finance & Administration
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(Chief Financial Officer)
8
THREE-FIVE SYSTEMS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
1996 1995
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Common shares outstanding beginning of period 7,735,745 7,691,524
Effect of Weighting Shares:
Employee stock options exercised 855 8,596
Employee stock options outstanding 303,194 386,018
------------- -------------
Primary 8,039,794 8,086,138
============= =============
Common shares outstanding beginning of period 7,735,745 7,691,524
Effect of Weighting Shares:
Employee stock options exercised 855 8,596
Employee stock options outstanding 303,195 386,018
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Fully diluted 8,039,795 8,086,138
============= =============
Net income $ 722,000 $ 3,314,000
============= =============
EARNINGS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT:
Earnings per share
Primary $ 0.09 $ 0.41
============= =============
Fully diluted $ 0.09 $ 0.41
============= =============
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1996 AND THE RELATED
CONSOLIDATED STATEMENTS OF INCOME AND OF CASH FLOWS FOR THE THREE MONTHS
ENDED MARCH 31, 1996 OF THREE-FIVE SYSTEMS, INC. AND ITS SUBSIDIARIES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 6,295
<SECURITIES> 0
<RECEIVABLES> 5,686
<ALLOWANCES> 0
<INVENTORY> 15,801
<CURRENT-ASSETS> 29,679
<PP&E> 32,917
<DEPRECIATION> 0
<TOTAL-ASSETS> 62,955
<CURRENT-LIABILITIES> 5,965
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 62,955
<SALES> 18,082
<TOTAL-REVENUES> 18,082
<CGS> 14,401
<TOTAL-COSTS> 16,870
<OTHER-EXPENSES> 27
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,204
<INCOME-TAX> 482
<INCOME-CONTINUING> 722
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 722
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
