SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange
Act of 1934
For Quarter Ended June 30, 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
- ------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
(602)389-8600
-------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, at the latest practical date.
CLASS OUTSTANDING AS OF June 30, 1996
- ----- -------------------------------
Common 7,775,129
Par value $.01 per share
<PAGE>
THREE-FIVE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
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<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets-
June 30, 1996 and December 31, 1995....................................................1
Consolidated Statements of Income-
Three Months and Six Months Ended June 30, 1996 and 1995...............................2
Consolidated Statements of Cash Flows-
Six Months Ended June 30, 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 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................................11
SIGNATURES.......................................................................................................12
</TABLE>
<PAGE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------------- --------------------
(Unaudited)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,461 $ 4,551
Accounts receivable, net 4,126 9,346
Inventories, net 15,243 13,703
Deferred tax asset 1,826 1,826
Other current assets 459 491
------------------ -------------------
Total current assets 30,115 29,917
PROPERTY, PLANT AND EQUIPMENT, net 32,158 33,493
COST IN EXCESS OF NET ASSETS ACQUIRED, net 150 170
OTHER ASSETS 199 200
------------------ -------------------
$ 62,622 $ 63,780
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,193 $ 3,199
Accrued liabilities 1,843 1,318
Current maturities of long-term debt - 3,000
Current taxes payable 420 -
------------------ -------------------
Total current liabilities 5,456 7,517
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LONG-TERM DEBT, net of current maturities - -
------------------ -------------------
DEFERRED TAX LIABILITY 1,040 1,039
------------------ -------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 78 77
Additional paid-in capital 32,295 32,286
Retained earnings 23,739 22,847
Cumulative translation adjustment 14 14
------------------ -------------------
Total stockholders' equity 56,126 55,224
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$ 62,622 $ 63,780
================== ===================
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
1
<PAGE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------------------- ----------------------------------------
1996 1995 1996 1995
--------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
NET SALES $ 14,457 $ 22,105 $ 32,539 $ 46,588
----------------- ---------------- ---------------- -----------------
COSTS AND EXPENSES:
Cost of sales 11,944 16,138 26,345 33,720
Selling, general and administrative 1,471 1,213 2,930 2,485
Research and development 820 401 1,830 806
----------------- ---------------- ---------------- -----------------
14,235 17,752 31,105 37,011
----------------- ---------------- ---------------- -----------------
Operating income 222 4,353 1,434 9,577
OTHER INCOME (EXPENSE):
Interest, net 133 279 152 621
Other, net (72) 27 (99) (15)
----------------- ---------------- ---------------- -----------------
INCOME BEFORE PROVISION FOR INCOME TAXES 283 4,659 1,487 10,183
Provision for income taxes 113 1,840 595 4,050
----------------- ---------------- ---------------- -----------------
NET INCOME $ 170 $ 2,819 $ 892 $ 6,133
================= ================ ================ =================
EARNINGS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ 0.02 $ 0.35 $ 0.11 $ 0.76
================= ================ ================ =================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE EQUIVALENTS
OUTSTANDING 8,032,263 8,094,207 8,036,766 8,088,704
================= ================ ================ =================
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
2
<PAGE>
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------------------------
1996 1995
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 892 $ 6,133
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,739 929
Provision (reduction) of accounts receivable valuation reserves 49 (224)
Provision of inventory valuation reserves 1,567 369
(Gain) loss on disposal of assets 11 (35)
Change in assets and liabilities:
(Increase) decrease in accounts receivable 5,171 (2,178)
Increase in inventories (3,106) (3,385)
Increase in other assets (147) (414)
Increase in accounts payable and accrued liabilities 519 248
Increase (decrease) in taxes payable, net 601 (699)
----------------- -----------------
Net cash provided by operating activities 7,296 744
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (396) (17,778)
Proceeds from sale of furniture and equipment 1 275
----------------- -----------------
Net cash used for investing activities (395) (17,503)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on notes payable to banks (3,000) -
Principal payments on and retirement of long-term debt - (182)
Stock options exercised 9 13
----------------- -----------------
Net cash used for financing activities (2,991) (169)
----------------- -----------------
Effect of exchange rate changes on cash and cash equivalents - (2)
----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,910 (16,930)
CASH AND CASH EQUIVALENTS, beginning of period 4,551 27,136
----------------- -----------------
CASH AND CASH EQUIVALENTS, end of period $ 8,461 $ 10,206
================= =================
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
3
<PAGE>
ITEM 1. (continued)
Three-Five Systems, Inc. and Subsidiaries Notes to Consolidated Financial
- -------------------------------------------------------------------------
Statements
- ----------
Note A The accompanying unaudited Consolidated Financial Statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and the
instructions to Form 10-Q. Accordingly, they do not include all
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial
position, results of operations, and cash flows for all periods
presented have been made. The results of operations for the three-
and six-month periods ended June 30, 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- and six-month
periods. Fully diluted earnings per share is considered equal to
primary earnings per share in all periods presented.
Note C Inventories consist of the following at:
June 30, 1996 December 31, 1995
------------- -----------------
(Unaudited)
(in thousands)
Raw Materials $ 8,623 $ 9,257
Work-In-Process 2,552 2,002
Finished Goods 4,068 2,444
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$15,243 $13,703
======= =======
Note D Property, plant, and equipment consist of the following at:
June 30, 1996 December 31, 1995
------------- -----------------
(Unaudited)
(in thousands)
Building and
improvements $10,418 $10,375
Furniture and
equipment 28,278 27,971
------ -------
38,696 38,346
Less-accumulated
depreciation (6,538) (4,853)
------- -------
$32,158 $33,493
======= =======
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Three Months Ended June 30, 1996 Compared with Three Months Ended June 30, 1995.
Net sales were $14,457,000 for the quarter ended June 30, 1996, a
decrease of 34.6 percent compared with net sales of $22,105,000 for the quarter
ended June 30, 1995. The Company's net sales have not been subject to any
significant seasonal fluctuations or variations. The sales decrease was
primarily a result of lower order rates from a major wireless communications
customer for existing product programs. That customer informed the Company
during the first quarter that it had decided to phase out the Company's highest
volume, longest running programs more quickly than originally planned. The
unexpected reduction of those programs was the greatest contributor to the
reduced revenue in the second quarter. The long product development time in the
custom business prevented the Company from quickly replacing the phased out
programs. In the second quarter, the Company's largest customer accounted for
net sales of $9,295,000 compared with net sales of $17,288,000 to that customer
for the quarter ended June 30, 1995, for an overall decrease in net sales to the
Company's largest customer of 46.2 percent. The Company's major customer
accounted for approximately 64.3 percent of the net sales in the second quarter
1996 compared with approximately 78.2 percent for the comparable quarter in
1995. All other customers accounted for net sales of $5,162,000 for the quarter
ended June 30, 1996 compared with the net sales of $4,817,000 for the quarter
ended June 30, 1995, for an overall increase of 7.2%.
Cost of sales, as a percentage of net sales, increased to 82.6 percent
for the quarter ended June 30, 1996 as compared with 73.0 percent for the
quarter ended June 30, 1995. The corresponding decline in the gross margin in
the second quarter was the result of a number of factors, including increased
provisions for excess and obsolete inventory, manufacturing variances occurring
as a result of decreased volume and material purchases, and sales of low margin
rework products.
Selling, general, and administrative expense increased to $1,471,000
for the quarter ended June 30, 1996 from $1,213,000 for the quarter ended June
30, 1995. The 21.3 percent increase resulted primarily from wages, accounting,
and consulting expenses. The increase in such expenses reflects the Company's
growing customer base and the increased costs associated with administering that
more diversified customer base. Selling, general, and administrative expense
increased as a percentage of net sales to 10.2 percent for the quarter ended
June 30, 1996 from 5.5 percent for the quarter ended June 30, 1995, primarily as
a result of decreased sales.
Research and development expense totaled $820,000, or 5.7 percent of
net sales, for the quarter ended June 30, 1996 as compared with $401,000, or 1.8
percent of net sales, for the quarter ended June 30, 1995. Research and
development expenses consist principally of salaries and benefits to scientists
and other personnel, related facilities costs, and various expenses for
projects. Research and development expense has increased as the Company has
invested in new technologies and manufacturing processes and has continued with
its in-house process development efforts related to the high-volume
manufacturing LCD line located in Tempe, Arizona. The Company believes that
continued investments in research and development relating to manufacturing
processes and new display technology are necessary to remain competitive in its
marketplace. Further, the development of the high-volume manufacturing LCD line
will help reduce its dependence on foreign suppliers. Accordingly, the Company
expects that research and development expenses will continue to increase in
absolute dollars and percentages for the remainder of 1996.
Interest income (net) for the quarter ended June 30, 1996 was $133,000,
down from $279,000 for the quarter ended June 30, 1995. The decrease in interest
income was the result of investing lower average cash balances during the
quarter. Other expenses (net) was $72,000 for the quarter ended June 30, 1996 as
compared with other income (net) of $27,000 for the quarter ended June 30, 1995.
The difference was due primarily to a net foreign exchange loss for the quarter
ended June 30, 1996 as compared with a net foreign exchange gain for the quarter
ended June 30, 1995, increased closed facilities expenses for the quarter ended
June 30, 1996, and a gain on sale of assets for the quarter ended June 30, 1995.
The provisions for income taxes decreased to $113,000 for the quarter
ended June 30, 1996 from $1,840,000 for the quarter ended June 30, 1995. This
resulted primarily from lower pre-tax income in the quarter ended June 30, 1996
as compared with the same period in 1995.
Net income decreased to $170,000, or $0.02 per share, for the quarter
ended June 30, 1996 from $2,819,000, or $0.35 per share, for the quarter ended
June 30, 1995.
5
<PAGE>
Six Months Ended June 30, 1996 Compared with Six Months Ended June 30, 1995.
Net sales were $32,539,000 for the six months ended June 30, 1996, a
decrease of 30.2 percent compared with net sales of $46,588,000 for the six
months ended June 30, 1995. The Company's net sales have not been subject to any
significant seasonal fluctuations or variations. The sales decrease was
primarily a result of lower order rates from a major wireless communications
customer for existing product programs. The long product development time in the
custom business prevented the Company from quickly replacing the phased out
programs. In the six-month period ended June 30, 1996, the Company's largest
customer accounted for net sales of $22,619,000 compared with net sales of
$37,735,000 to that customer for the six months ended June 30, 1995 for an
overall decrease of 40 percent. The Company's major customer accounted for
approximately 69.5 percent of the net sales for the six months ended June 30,
1996 compared with approximately 81 percent for the comparable period in 1995.
All other customers accounted for net sales of $9,920,000 for the six months
ended June 30, 1996 compared with the net sales of $8,853,000 for the six months
ended June 30, 1995, which is an overall increase of 12.1 percent.
Cost of sales, as a percentage of net sales, increased to 81.0 percent
for the six months ended June 30, 1996 as compared with 72.4 percent for the six
months ended June 30, 1995. The corresponding decline in the gross margin was
the result of a number of factors, including increased provisions for excess and
obsolete inventory, manufacturing variances occurring as a result of decreased
volume and material purchases, and sales of low margin rework products.
Selling, general, and administrative expense increased to $2,930,000
for the six months ended June 30, 1996 from $2,485,000 for the six months ended
June 30, 1995. The 17.9 percent increase resulted primarily from wages, legal,
accounting, recruiting\relocation, consulting, and bad debt expenses. Selling,
general, and administrative expense increased as a percentage of net sales to
9.0 percent for the six months ended June 30, 1996 from 5.3 percent for the six
months ended June 30, 1995, primarily as a result of decreased sales. Research
and development expense totaled $1,830,000, or 5.6 percent of net sales, for the
six months ended June 30, 1996 as compared with $806,000, or 1.7 percent of net
sales, for the six months ended June 30, 1995.
Interest income (net) for the six months ended June 30, 1996 was
$152,000, down from $621,000 for the six months ended June 30, 1995. The
decrease in interest income was the result of investing lower average cash
balances during the six months. Other expenses (net) increased to $99,000 for
the six months ended June 30, 1996 from $15,000 for the six months ended June
30, 1995. The increase was due primarily to increased closed facilities expenses
and a loss on sale of assets for the six months ended June 30, 1996 as compared
to a gain on sale of assets for the six months ended June 30, 1995.
The provisions for income taxes decreased to $595,000 for the six
months ended June 30, 1996 from $4,050,000 for the six months ended June 30,
1995. This resulted primarily from lower pre-tax income in the six months ended
June 30, 1996 as compared with the same period in 1995.
Net income decreased to $892,000, or $0.11 per share, for the six
months ended June 30, 1996 from $6,133,000, or $0.76 per share, for the six
months ended June 30, 1995.
Liquidity and Capital Resources
During the six months ended June 30, 1996, the Company generated
$7,296,000 in cash flow from operations as compared with $744,000 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 reduction of its accounts receivable. The Company's working
capital increased to $24,659,000 at June 30, 1996 from $22,400,000 at December
31, 1995, primarily as a result of the payoff of the Company's short-term debt.
The Company's current ratio at June 30, 1996 was 5.5-to-1 as compared with a
current ratio of 4.0-to-1 at December 31, 1995.
6
<PAGE>
During the six months ended June 30, 1996, the Company's primary
financing activity was to repay with cash flow from operations $3,000,000 of
debt that was outstanding under the revolving line of credit at December 31,
1995. 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,
Wells Fargo Bank (formerly, 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 June 30, 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 of Three-Five Systems Limited. Advances are based on
accounts receivable, 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 June 20, 1997. Three-Five
Systems Limited had no borrowings outstanding under this line of credit at June
30, 1996.
Capital expenditures during the six months ended June 30, 1996 were
approximately $396,000, as compared with $17,778,000 during the same period in
1995. Capital expenditures for the six months ended June 30, 1996 consisted
primarily of manufacturing equipment for its operations in Manila and Arizona.
Expenditures for the six months ended June 30, 1995 consisted primarily of
progress payments on its new manufacturing and headquarters facility in Tempe,
Arizona as well as equipment for its operations in Manila and Arizona. The
Company expects to expend nearly $2 million in the remainder of 1996 on capital
equipment and expenditures related to advanced manufacturing processes, the
high-volume LCD line and necessary manufacturing equipment.
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 cash flow from operations or
borrowings from the Company's primary lender.
Effects of Inflation and Foreign Currency Exchange Fluctuations
The results of operations of the Company for the periods discussed have
not been significantly affected by inflation or foreign currency fluctuations.
The Company generally sells its products and services and negotiates purchase
orders with its foreign suppliers in United States dollars. Such transactions
expose the Company to exchange rate fluctuations for the period of time from
inception of the transaction until it is settled. An exception is the Company's
sub-assembly agreement in the Philippines, which is based on a fixed conversion
rate, exposing the Company to exchange rate fluctuations with the Philippine
peso. 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 from time to time may enter into hedging transactions in
order to minimize its exposure to currency rate fluctuations.
Business Outlook and Risk Factors
The principal challenge facing the Company in the remainder of 1996 and
on into 1997 is the ongoing development of new programs to replace those older
programs of the Company's major customer that are being phased out more quickly
than expected. Due to the long product life cycle inherent in the custom
business, however, the third and possibly fourth quarter will be adversely
impacted by the unexpected phase out of those programs by the Company's major
customer. The adverse impact will occur through reduced revenue and margins,
with the margins expected to suffer principally from decreased absorption (as a
result of manufacturing inefficiencies from reduced sales). It is very possible
that the Company will have a loss for the third and/or fourth quarter. However,
it is the business plan of the Company to have record or near-record revenue in
1997. Further, the Company expects that increased production and inventory turns
in 1997 will allow the Company's margins to return to the low- or mid-twenties
as a percent of revenue.
In the past several years, a majority of the Company's business has
been in the communications industry and has been with one customer. The Company
continues, however, to establish new customer relationships with major OEMs in
an effort to diversify its customer and market base. Less than one-third of the
current programs in the design or pilot production phase are with its major
customer, and not all of those customer's design or pilot
8
<PAGE>
production programs are in the cellular market. The Company expects that nearly
two-thirds of the current programs in the design or pilot production phase will
ramp into production in the third and fourth quarters of this year. It is
expected that in the second half of 1996, the Company's major customer will
account for less than 60 percent of its revenue. In addition, the programs
scheduled to ramp into production early in 1997 for new customers are expected
to have large volume requirements and provide significant revenue. In 1997, the
business plan of the Company calls for its current major customer to account for
approximately 40 percent of its revenue.
The Company's future operating results may be affected by various
trends, developments and factors that the Company must successfully manage in
order to achieve favorable operating results. In addition, there are trends,
developments, and factors beyond the Company's control that may affect its
operations. In accordance with the provisions of the Private Securities
Litigation Reform Act of 1995, the cautionary statements and risk factors set
forth below and in the Company's other filings with the Securities and Exchange
Commission, including its Form 10-K, identify important trends, factors, and
currently known developments that could cause actual results to differ
materially from those in any forward-looking statements contained in this report
and in any written or oral statements of the Company. Forward-looking statements
in this report include revenue, margin, expense, and earnings analysis for the
remainder of 1996 and 1997 as well as the Company's expectations relating to
future design and production orders. Risk factors include the risk of having
just a few customers supplying the majority of its business, the ability of the
Company to complete satisfactory design services and secure future production
orders, the ability of the Company to penetrate new markets and diversify its
customer base, the impact of competitive products and pricing, product demand
and acceptance for the products of the Company's customers, manufacturing
inefficiencies, inventory risks, technological difficulties including the
ability of the Company to implement new manufacturing processes and ramp the LCD
line into full production, the availability of parts and supplies from
third-party suppliers on a timely basis and at reasonable prices, including the
availability of glass from its Asian suppliers and its own LCD line, and general
economic conditions.
As noted previously, one customer is currently responsible for a
majority of the Company's business. Although that customer is expected to
account for only 40 percent of the Company's revenue in 1997, the majority of
the Company's business in 1997 will still likely come from a core customer base.
Thus, any material delay, cancellation, or reduction of orders from those core
customers could have a material adverse effect on the Company's operations. The
Company has no firm long-term volume purchase commitments from its customers.
Thus, customer commitments can be canceled and expected volume levels can change
or be delayed. The timely replacement of canceled, delayed, or reduced
commitments cannot be assured and, among other things, could result in the
Company holding excess and obsolete inventory. These risks are exacerbated
because a majority of the Company's expected sales will be to customers in the
electronics industry, which is subject to rapid technological change and
obsolescence.
Another risk, which is inherent in custom manufacturing, is the
satisfactory completion of design services and securing production orders.
Completion of the design is dependent on the customer's changing needs and not
every design is successful in meeting those needs. In addition, some designs
test new theories or applications and may not meet the desired results. Failure
of a design order to achieve the customer's desired results could result in a
material effect on the Company's operations if the expected production order for
that product was significant. It is expected that as much as two-thirds of the
Company's anticipated revenue for 1997 will come from programs currently in the
design or pilot production stage.
The Company designs and manufactures products based on firm quotes.
Thus, the Company bears the risk of component price increases, which could
adversely affect the Company's gross margins. In addition, the Company depends
on certain suppliers and the unavailability or shortage of materials could cause
delays or lost orders, either of which could have a material adverse effect on
the Company.
Finally, the Company's success, especially in penetrating new markets
and increasing its OEM customer base, depends to a large extent upon the efforts
and abilities of key managerial and technical employees. The loss of services of
certain key personnel could have a material adverse effect on the Company. The
Company's business also depends upon its ability to continue to attract and
retain senior managers and skilled employees. Failure to do so could adversely
effect the Company's operations.
As a result of the noted factors, the Company's stock price may be
subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenues or earnings from levels expected by investors and
8
<PAGE>
brokers could have an immediate and significant adverse effect on the trading
price of the Company's common stock in any given period. Additionally, the
Company may not learn of such shortfalls until late in a fiscal quarter, which
could result in an even more immediate and adverse effect on the trading price
of the Company's common stock. Finally, other factors which generally affect the
market for stocks of high technology companies could cause the price of the
Company's stock to fluctuate substantially over short periods.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on April 24, 1996. All of
the nominees were elected to the Company's Board of Directors as set forth in
the Proxy Statement as follows:
Nominees Votes in Favor Against
-------- -------------- -------
David R. Buchanan 6,090,986 90,681
David C. Malmberg 6,095,749 85,918
Burton E. McGillivray 6,096,215 85,452
Jeffrey A. Wilson 6,092,355 89,312
Also voted upon by the stockholders was the appointment of Arthur Andersen LLP
as the independent auditors of the Company for the fiscal year ending December
31, 1996.
Votes in Favor Opposed Abstain
-------------- ------- -------
6,129,842 27,716 24,109
10
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ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) EXHIBIT 11: Statement Re: Computation of Per Share Earnings.
(b) EXHIBIT 27: Financial Data Schedule
(c) Reports on Form 8-K: None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THREE-FIVE SYSTEMS, INC.
------------------------
(Registrant)
Dated: July 25, 1996 By /s/ Jeffrey D. Buchanan
------------- --------------------------------
Jeffrey D. Buchanan
Its Vice President-Finance, Administration and
------------------------------------------
Legal; Chief Financial Officer
------------------------------
THREE-FIVE SYSTEMS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------- -------------------------------------
1996 1995 1996 1995
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Common shares outstanding beginning of period 7,737,095 7,703,024 7,735,745 7,691,524
Effect of Weighting Shares:
Employee stock options exercised 37,699 3,846 19,952 11,989
Employee stock options outstanding 257,469 387,337 281,069 385,191
------------------ ------------------ ---------------- ----------------
Primary 8,032,263 8,094,207 8,036,766 8,088,704
================== ================== ================ ================
Common shares outstanding beginning of period 7,737,095 7,703,024 7,735,745 7,691,524
Effect of Weighting Shares:
Employee stock options exercised 37,699 3,846 19,952 11,989
Employee stock options outstanding 257,469 400,853 281,070 397,858
------------------ ------------------ ---------------- ----------------
Fully diluted 8,032,263 8,107,723 8,036,767 8,101,371
================== ================== ================ ================
Net income $ 170,000 $ 2,819,000 $ 892,000 $ 6,133,000
================== ================== ================ ================
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARES:
Net income per share
Primary $ 0.02 $ 0.35 $ 0.11 $ 0.76
================== ================== ================ ================
Fully diluted $ 0.02 $ 0.35 $ 0.11 $ 0.76
================== ================== ================ ================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEET AT JUNE 30, 1996 AND THE RELATED
CONSOLIDATED STATEMENTS OF INCOME AND OF CASH
FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 8,461
<SECURITIES> 0
<RECEIVABLES> 4,126
<ALLOWANCES> 0
<INVENTORY> 15,243
<CURRENT-ASSETS> 459
<PP&E> 32,158
<DEPRECIATION> 0
<TOTAL-ASSETS> 62,622
<CURRENT-LIABILITIES> 5,456
<BONDS> 0
78
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 62,622
<SALES> 32,539
<TOTAL-REVENUES> 32,539
<CGS> 26,345
<TOTAL-COSTS> 31,105
<OTHER-EXPENSES> 99
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,487
<INCOME-TAX> 595
<INCOME-CONTINUING> 892
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 892
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
