<PAGE> 1
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 March 31, 2000
Commission File Number 1-4373
THREE-FIVE SYSTEMS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 86-0654102
------------------------------- ---------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
1600 North Desert Drive, Tempe, Arizona 85281
--------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(602) 389-8600
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, at the latest practical date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF MARCH 31, 2000
- ----- --------------------------------
<S> <C>
Common 12,661,549
Par value $.01 per share ------------------
</TABLE>
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THREE-FIVE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets -
December 31, 1999 and March 31, 2000 ...................... 1
Condensed Consolidated Statements of Income (Loss) -
Three Months Ended March 31, 1999 and 2000 ................ 2
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 2000................. 3
Notes to Condensed Consolidated Financial Statements............. 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................. 6
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 11
SIGNATURES.................................................................. 12
</TABLE>
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THREE-FIVE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
ASSETS (unaudited)
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 45,363 $ 45,413
Accounts receivable, net 20,886 18,509
Inventories 12,344 12,865
Deferred tax asset 3,231 4,202
Other current assets 1,047 1,839
---------- -----------
Total current assets 82,871 82,828
PROPERTY, PLANT AND EQUIPMENT, net 40,546 42,171
OTHER ASSETS 3,513 4,001
---------- -----------
$ 126,930 $ 129,000
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 13,450 $ 10,153
Accrued liabilities 7,526 6,279
Current taxes payable 1,042 3,096
---------- -----------
Total current liabilities 22,018 19,528
---------- -----------
DEFERRED TAX LIABILITY 3,692 3,711
---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 126 127
Additional paid-in capital 67,388 68,343
Retained earnings 33,702 37,289
Cumulative translation adjustment 7 5
Less - Treasury stock, at cost (3) (3)
---------- -----------
Total stockholders' equity 101,220 105,761
---------- -----------
$ 126,930 $ 129,000
========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
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THREE-FIVE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 2000
--------- ---------
<S> <C> <C>
NET SALES $ 23,044 $ 39,162
--------- ---------
COSTS AND EXPENSES:
Cost of sales 20,191 29,360
Selling, general, and administrative 2,449 2,262
Research, development, and engineering 1,821 2,763
--------- --------
24,461 34,385
--------- --------
Operating income (loss) (1,417) 4,777
OTHER INCOME (EXPENSE):
Interest, net (155) 604
Other, net (30) (24)
--------- --------
INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM)
INCOME TAXES: (1,602) 5,357
Provision for (benefit from) income taxes (960) 1,770
--------- ---------
NET INCOME (LOSS) $ (642) $ 3,587
========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (0.07) $ 0.28
========= =========
Diluted $ (0.07) $ 0.27
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic 9,345 12,617
========= =========
Diluted 9,345 13,365
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
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THREE-FIVE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 2000
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (642) $ 3,587
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,279 1,590
Provision for accounts receivable writedowns 45 57
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 898 2,319
(Increase) decrease in inventories (784) (520)
(Increase) decrease in other assets (328) (788)
Increase (decrease) in accounts payable and
accrued liabilities 1,544 (4,544)
Increase (decrease) in taxes payable and
deferred taxes, net 73 1,100
--------- ----------
Net cash provided by operating activities 2,085 2,801
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,727) (3,205)
Investment in Inviso, Inc. - (500)
--------- ----------
Net cash used in investing activities (2,727) (3,705)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to banks 3,000 -
Stock options exercised 65 956
--------- ----------
Net cash provided by financing activities 3,065 956
--------- ----------
Effect of exchange rate changes on cash - (2)
--------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,423 50
CASH AND CASH EQUIVALENTS, beginning of period 4,946 45,363
--------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 7,369 $ 45,413
========= ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 6
ITEM 1. (continued)
THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES (THE COMPANY) NOTES TO
----------------------------------------------------------------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
Note A The accompanying unaudited Condensed Consolidated Financial Statements
have been prepared in accordance with auditing standards generally
accepted in the United States for interim financial information and the
instructions to Form 10-Q. Accordingly, they do not include all the
information and footnotes required by auditing standards generally
accepted in the United States 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, 2000 are not necessarily indicative of the
operating results that may be expected for the entire year ending
December 31, 2000. These financial statements should be read in
conjunction with the Company's December 31, 1999 financial statements
and accompanying notes thereto.
Note B Basic earnings per common share are computed by dividing net income
(loss) by the weighted average number of shares of common stock
outstanding during the three-month period. No outstanding options were
assumed to be exercised for purposes of calculating diluted earnings
per share for the three months ended March 31, 1999, as their effect
was anti-dilutive. Diluted earnings per common share for the three
month period ended March 31, 2000 are determined assuming that
outstanding options and warrants were exercised at the beginning of the
period or at the time of issuance, if later. Set forth below are the
disclosures for the three months ended March 31, 1999 and March 31,
2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 2000
----------- -----------
(unaudited)
(in thousands, except per
share data)
<S> <C> <C>
Basic earnings per share:
Income (loss) available to
common stockholders................ $ (642) $3,587
------- ------
Weighted average common shares.... 9,345 12,617
------- ------
Basic per share amount........... $(0.07) $ 0.28
======= ======
Diluted earnings per share:
Income (loss) available to
common stockholders............... $ (642) $3,587
------- ------
Weighted average common shares.... 9,345 12,617
Options and warrants assumed
exercised....................... - 748
-------- ------
Total common shares plus
common stock equivalents........ 9,345 13,365
-------- ------
Diluted per share amount......... $ (0.07) $ 0.27
======== ======
</TABLE>
4
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Note C Inventories consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------- -------------
(unaudited)
(in thousands)
<S> <C> <C>
Raw materials $ 9,554 $ 9,033
Work-in-process 1,336 1,770
Finished goods 1,454 2,062
------- -------
$12,344 $12,865
======= =======
</TABLE>
Note D Property, plant, and equipment consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------- -------------
(unaudited)
(in thousands)
<S> <C> <C>
Building and improvements $16,411 $16,411
Furniture and equipment 47,036 50,242
------- -------
63,447 66,653
Less accumulated
depreciation (22,901) (24,482)
------- -------
$40,546 $42,171
======= =======
</TABLE>
Note E Segment information:
Management monitors and evaluates the financial performance of the
Company's operations by its four operating segments located in
various parts of the world. These segments consist of three
manufacturing operations, located in the United States, China, and
the Philippines, and a sales and distribution operation in the
United Kingdom.
The following operating segment information includes financial
information (in thousands) for all four of the Company's operating
segments.
<TABLE>
<CAPTION>
Three Months Ended United United
March 31, 1999 States Kingdom China Philippines Eliminations Total
- -------------- ------ ------- ----- ---------- ------------ -----
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 6,948 $10,351 $ 5,745 $ - $ - $23,044
Intersegment sales 15,091 - 1,145 791 (17,027) -
Income (loss) before
provision for
(benefit from)
income taxes (1,954) 137 57 15 143 (1,602)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended United United
March 31, 2000 States Kingdom China Philippines Elimination Total
- -------------- ------ ------- ----- ----------- ----------- -----
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net sales $15,597 $18,596 $4,969 $ - $ - $39,162
Intersegment sales 19,063 - 4,723 699 (24,485) -
Income before
provision for
income taxes 1,499 1,485 2,413 14 (54) 5,357
</TABLE>
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Note F Comprehensive income (loss) for the periods was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 2000
------------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Net income (loss) $(642) $ 3,587
Other comprehensive income
(loss):
Cumulative foreign currency
translation adjustment - (2)
------ -------
Comprehensive income (loss) $(642) $ 3,585
====== =======
</TABLE>
Note G Commitments and Contingencies:
In March 1995, the Company entered into a non-cancelable operating lease
for its primary manufacturing facility in Manila, the Philippines. The lease has
a current term extending through December 31, 2000, and from year-to-year
thereafter, but may be terminated by either party upon 180 days written notice.
In April 1995, the Company entered into a non-cancelable operating lease for an
additional manufacturing facility in Manila, the Philippines. This lease expired
on March 31, 2000 and has been renewed to March 31, 2001.
The Company is involved in certain administrative proceedings arising in
the normal course of business. In the opinion of management, the ultimate
settlement of these administrative proceedings will not materially impact its
financial position or results of operations.
Note H Benefit Plans
On January 27, 2000, the Board of Directors increased the number of shares
of the Company's common stock available for issuance under the 1997 Stock Option
Plan by 100,000 to 233,334 shares.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS
Except for the historical information contained herein, this Report
contains forward-looking statements, including those relating to revenue
concentration, margins, pricing pressures, quarterly fluctuations, the impact of
our China facility, material shortages, research, development, and engineering
expense, and liquidity and anticipated cash needs that involve risks and
uncertainties that could cause actual results to differ materially.
We caution that these statements are qualified by various factors that may
affect future results, including the following: changes in the market for our
products and the success of our customers' products, the failure of key
technologies to deliver commercially acceptable performance, our dependence on
one large customer, the absence of long-term purchase commitments, and our
lengthy development periods and product acceptance cycles. This Report should be
read in conjunction with our Report on Form 10-K for the fiscal year ended
December 31, 1999 and our Registration Statement on Form S-3 (Registration No.
333-84083) as declared effective by the Securities and Exchange Commission on
September 27, 1999.
OVERVIEW
We offer advanced design and manufacturing services to original equipment
manufacturers, commonly referred to as OEMs. We specialize in custom display
modules utilizing liquid crystal display, or LCD, components and technology. Our
LCD modules have varying levels of integration. At a minimum, each module
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includes an LCD, a custom LCD driver, and a flexible connector. We also provide
value-added services, which increase our competitiveness, by assembling
additional components onto the module based upon the specific needs of the
customer. These additional components include such items as keypads,
microphones, speakers, light guides, and optics.
We currently sell substantially all of our LCD modules to major OEMs. We
derived more than 80% of our net sales in 1999 and in the first quarter of 2000
from the mobile handset market. When we win a design program, our customer
typically pays all or a portion of our nonrecurring engineering expenses to
defray the costs of custom design, as well as the costs of nonrecurring tooling
for custom components. The typical program life cycle of a custom-designed LCD
module is three to twelve months and includes technical design, prototyping,
pilot manufacturing, and high-volume manufacturing. We typically seek large
volume programs from major OEMs. The minimum production quantity for an LCD
module typically approximates 100,000 units per year, although the production
rate for some programs has been as high as 100,000 units per week. The selling
price of our LCD modules usually ranges between $5 and $20 per unit. We
recognize revenue upon product shipment.
We experienced substantial growth from 1993 through 1995, primarily as a
result of sales to OEMs in the wireless communications industry, which grew
substantially during that period. During that period, our primary customer was
Motorola. In 1996, our net sales declined, primarily as a result of the
phase-out by Motorola of a significant family of programs. In 1997, our net
sales returned to pre-1996 levels primarily as a result of several new programs
and customers, including Hewlett-Packard. Motorola accounted for 65.1% of our
net sales in 1996, 34.6% in 1997, and 63.6% in 1998. In 1999, net sales to
Motorola increased at a rate faster than net sales to our other customers and
represented 86.1% of our net sales. In the first quarter of 2000, net sales to
Motorola represented 84.9% of our net sales. Hewlett-Packard accounted for 32.0%
of our net sales in 1997, and less than 10.0% in 1998 and 1999 and the first
quarter of 2000. This percentage decrease occurred as several older
Hewlett-Packard programs matured and ended. In addition, new programs launched
by Hewlett-Packard in 1998 either did not require our LCD modules or required
less complex, lower cost modules.
During the past several years, we have experienced seasonal quarterly
fluctuations in our net sales as our OEM customers developed retail products
with shorter product life cycles and phased out older programs early in the year
following holiday sales. As a result, sales usually peak in the fourth quarter
of a calendar year and are lower in the following quarter.
Several factors impact our gross margins, including manufacturing
efficiencies, product mix, product differentiation, product uniqueness,
inventory management, and volume pricing. Currently, significant pricing
pressure exists in the LCD module market, especially in higher volume programs
in the wireless communications industry. Accordingly, as the production levels
of some of our new higher volume programs have increased, the lower standard
gross margins on those programs have impacted our overall margins.
We vertically integrate our manufacturing facilities. In Arizona, we own
and operate the largest high-volume LCD production line in North America. We
generally use the Arizona facility for the manufacture of more technologically
complex and custom high-volume LCDs. We also purchase LCDs from Asian and
European sources to provide us an alternate source and to ensure available
capacity. In order to take advantage of lower labor costs, we ship our LCDs to
our facilities in Manila, the Philippines, or Beijing, China, for assembly into
modules.
Historically, we have conducted most of our manufacturing operations at
our facility in Manila. At that facility, we assemble LCDs into modules and
perform certain back-end LCD processing operations. We conduct our operations in
Manila under an agreement with a third-party subcontract manufacturer. Under
this agreement, the subcontractor supplies direct labor and incidental services
required to manufacture our products. We also lease our manufacturing facility
from the subcontractor. All indirect manufacturing employees, primarily
technicians, supervisors, and engineers, are our employees.
In early 1998, we decided to open a similar display module manufacturing
facility in Beijing. Within six months, we located a temporary manufacturing
facility, equipped the facility, trained our personnel, qualified the facility
for customers, and qualified products manufactured at the facility. We commenced
construction of our permanent Beijing facility in late 1998. This facility was
substantially completed in early July 1999, and we began
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<PAGE> 10
production in the new manufacturing facility late in the third quarter of 1999.
All production in Beijing beginning in the fourth quarter of 1999 was conducted
at our new permanent facility. We own our Beijing facility through a wholly
owned foreign subsidiary.
Selling, general, and administrative expense consists principally of
administrative and selling costs, salaries, commissions, and benefits to
personnel and related facility costs. We make substantially all of our sales
directly to OEMs, and our sales force consists of a small number of direct
technical sales persons. As a result, there is no material cost of distribution
in our selling, general, and administrative expense. Selling, general, and
administrative expense has increased as we have expanded our business and
increased our diversification efforts. In addition, we have recently incurred
substantial marketing and administrative expenses in connection with our LCoS
microdisplay business.
Research, development, and engineering expense consists principally of
salaries and benefits to scientists, design engineers, and other technical
personnel, related facility costs, process development costs, and various
expenses for projects, including new product development. Research, development,
and engineering expense continues to increase as we develop new display products
and technologies, especially LCoS microdisplays, while we continue with our
in-house process development efforts related to the high-volume LCD
manufacturing line located in Arizona.
Since 1997, we have been working on the development of LCoS microdisplays.
In 1997, we entered into a strategic alliance with National Semiconductor
Corporation for the development of LCoS microdisplay products. Under that
alliance, National focused on the silicon technologies needed for microdisplays,
and we focused on the liquid crystal technologies. In 1999, National decided to
close its microdisplay business unit. In connection with that closing, in July
1999, we purchased certain assets and licensed silicon technologies from
National relating to LCoS microdisplays. We paid approximately $3.0 million in
cash and issued warrants to purchase 93,333 shares of our common stock in the
transaction, which valued the transaction at approximately $3.6 million. No
additional payments are required under the licenses. We also hired several key
technical employees of National to assist in the implementation of the acquired
technologies.
In April 1998, we entered into a strategic relationship with Inviso, Inc.,
formerly Siliscape, Inc., a privately held company with numerous patents and
proprietary technology related to microdisplay development. We acquired a
minority equity interest in Inviso for approximately $3.3 million. In March
2000, we acquired an additional interest in Inviso for $500,000, raising our
total minority equity interest to $3.8 million. As part of this strategic
relationship, we provide proprietary manufacturing capabilities and liquid
crystal expertise, and Inviso provides patented and proprietary technologies and
components for the joint development of microdisplay products.
In August 1999, we licensed the microdisplay technology of S-Vision
Corporation, which had recently ceased operations. This license is an
irrevocable, royalty free, fully paid-up, worldwide license to manufacture and
package certain microdisplay products and patented optical engines.
In October 1999, we entered into an agreement with Tecdis S.p.A., a
European-based LCD company, to form an ASIC design center in Chatillon, Italy.
The ASIC design center will be known as Dora and will focus on the design of
ASICs necessary to drive the LCDs Tecdis and we design for our respective
customers. Recently, STMicroelectronics announced its participation in Dora and
its agreement to manufacture the ASICs designed by Dora.
These acquisitions, investments, and licenses will result in increased
research, development, and engineering expense as we expand our LCoS
microdisplay development efforts in preparation for the commercial introduction
of LCoS microdisplay products. We are also considering licensing other
technologies from other companies that could be optimized on our LCD
manufacturing line as well as entering into further alliances. We expect to
continue to devote substantial resources to research and development, especially
on our LCoS microdisplay technology and related products. As a result, the
actual dollar amount of our research, development, and engineering expense will
continue to increase.
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THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
NET SALES. Net sales increased 70.0% to $39.2 million in the three months
ended March 31, 2000 from $23.0 million in the three months ended March 31,
1999. The revenue increase was the result of the increased worldwide demand for
mobile handsets.
COST OF SALES. Cost of sales decreased significantly to 75.0% of net sales
in the three months ended March 31, 2000 from 87.6% in the three months ended
March 31, 1999. Our cost of sales in the three months ended March 31, 2000 was
favorably impacted by operating efficiencies and cost reduction efforts as a
result of the continued high levels of production for programs that have been
ongoing for several quarters. In addition, the quarter ended March 31, 1999 was
adversely impacted by delayed program start-ups, yield issues related to new
programs, and start-up expenses for our Beijing facility. In the second quarter,
we do not expect cost reduction efforts to offset new, lower pricing for our
older programs because production levels are expected to remain relatively
constant. In the second half of 2000, a substantial number of new programs for
new and existing customers are expected to begin. Many of these new programs are
for lower tier mobile handsets and are aggressively priced. Accordingly, we
expect our cost of sales as a percentage of net sales to increase during the
balance of 2000, although we currently believe that our annual cost of sales as
a percentage of net sales in 2000 will remain below that in 1999.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. Selling, general, and
administrative expense decreased 4.2% to $2.3 million in the three months ended
March 31, 2000 from $2.4 million in the three months ended March 31, 1999. The
decrease in SG&A expense was the result of a variety of factors, including
reduced recruiting fees. Our goal is to keep SG&A expense approximately the same
as 1999 levels. SG&A expense was 5.8% of net sales in the three months ended
March 31, 2000 compared to 10.6% in the three months ended March 31, 1999.
RESEARCH, DEVELOPMENT, AND ENGINEERING EXPENSE. Research, development, and
engineering expense increased 55.6% to $2.8 million in the three months ended
March 31, 2000 from $1.8 million in the three months ended March 31, 1999. RD&E
expense was 7.1% of net sales in the three months ended March 31, 2000 compared
to 7.9% in the three months ended March 31, 1999. RD&E expense overall increased
as the result of the development of new display products and technologies,
primarily LCoS microdisplays. LCoS microdisplays accounted for approximately
$1.5 million of RD&E expense in the three months ended March 31, 2000 compared
to approximately $866,000 in the three months ended March 31, 1999.
OTHER INCOME (EXPENSE), NET. Other income was $580,000 in the three months
ended March 31, 2000 compared to other expense of $185,000 in the three months
ended March 31, 1999. The difference was a result of increased interest income
and reduced interest expense. Increased interest income was a result of
significantly larger cash balances. The decrease in interest expense was
primarily a result of the elimination of all indebtedness.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. We had a provision for income
taxes of $1.8 million in the three months ended March 31, 2000 compared to a
benefit from income taxes of $960,000 for the quarter ended March 31, 1999. This
change resulted from having income in the three months ended March 31, 2000
compared to a net loss in the same period in 1999. Generally, the tax rate was
lower in the three months ended March 31, 2000 as a result of higher net income
in China, which is a low tax rate jurisdiction. We expect our worldwide tax rate
in 2000 to be approximately 33%.
NET INCOME (LOSS). Net income was $3.6 million, or $0.27 per diluted
share, in the three months ended March 31, 2000 compared to a net loss of
$642,000, or $0.07 per diluted share, in the three months ended March 31, 1999.
Excluding LCoS microdisplay related expenses, our net income for our core
passive display business for the three months ended March 31, 2000 was
approximately $4.9 million, or $0.37 per diluted share.
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited consolidated statement of
operations data for each of the five quarters in the period ended March 31,
2000. We believe 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.
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<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------
(unaudited)
(in thousands)
MAR 31, JUN 30, SEPT 30, DEC 31, MAR 31,
1999 2000
----------------------------------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $23,044 $31,600 $42,723 $50,041 $39,162
------- ------- ------- ------- -------
Cost and expenses:
Cost of sales 20,191 25,103 33,882 38,407 29,360
Selling, general, and
administrative 2,449 2,493 2,741 3,487 2,262
Research, development, and
engineering 1,821 2,008 2,427 2,489 2,763
------- ------ ------ ------- -------
24,461 29,604 39,050 44,383 34,385
------- ------- ------- ------- -------
Operating income (loss) (1,417) 1,996 3,673 5,658 4,777
Other income (expense), net (185) (214) (160) 541 580
------- ------ ------ ------- -------
Income (loss) before provision
for (benefit from) income
taxes (1,602) 1,782 3,513 6,199 5,357
Provision for (benefit from)
income taxes (960) 742 1,476 1,710 1,770
------- ------ ------ ------- -------
Net income (loss) $ (642) $1,040 $2,037 $4,489 $ 3,587
======= ====== ====== ====== =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had cash and cash equivalents of $45.4 million
compared to cash and cash equivalents of $45.4 million at December 31, 1999.
In the quarter ended March 31, 2000, we had $2.8 million in net cash flow
from operations compared to $2.1 million in net cash flow from operations in the
quarter ended March 31, 1999. Although we had net income in the first quarter of
2000 and a net loss in the first quarter of 1999, our cash flows in the two
quarters were comparable because accounts payable and accrued liabilities were
reduced by $4.5 million in the first quarter of 2000 compared to an increase in
accounts payable and accrued liabilities of $1.5 million in the first quarter of
1999.
Depreciation expense increased to $1.6 million for the first quarter of
2000 compared to $1.3 million for the first quarter of 1999. This increase
primarily relates to increased starts on our LCD line and increased building
depreciation as a result of our China operations. The high-volume LCD line is
depreciated on a units of production method based on units started. Inventory
turns increased from 6.3 in the first quarter of 1999 to 9.3 in the first
quarter of 2000. Accounts receivable DSOs (Day Sales Outstanding) decreased to
43 days in the first quarter of 2000 from 69 days in the first quarter of 1999.
Our working capital was $63.3 million at March 31, 2000 and $60.9 million
at December 31, 1999. Our current ratio increased to 4.2-to-1 at March 31, 2000
from 3.8-to-1 at December 31, 1999. The increase in our working capital and
current ratio during the first quarter of 2000 occurred primarily because of the
significant reduction in accounts payable while inventories remained relatively
unchanged. Including our cash, cash equivalents, and available credit
facilities, we had approximately $70.8 million in readily available funds at
March 31, 2000 compared to $70.7 million at December 31, 1999.
In January 2000, we entered into a new credit facility with Imperial Bank
to replace the then existing credit facility. The new credit facility is a $25.0
million unsecured revolving line of credit that matures in January 2001. Mellon
Bank is a participating lender on that new credit facility. No borrowings are
outstanding under the new credit facility. Advances under the new facility 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. Our Three-Five Systems Limited
subsidiary has established an annually renewable credit facility with a United
Kingdom bank in order to fund its working capital requirements. The credit
facility, which expires July 15, 2000, provides $350,000 of borrowing capacity
secured by accounts receivable of Three-Five Systems Limited. No borrowings are
outstanding under this facility.
10
<PAGE> 13
Capital expenditures during the quarter ended March 31, 2000 were
approximately $3.2 million. These capital expenditures primarily consisted of
equipment for our operations in Manila, Beijing, and Arizona, including
manufacturing equipment for LCoS microdisplays. We also made an additional
investment in Inviso, Inc. of $500,000, bringing our total minority investment
in Inviso to $3.8 million. Our total capital budget for 2000 remains at
approximately $14.0 million, although actual expenditures may be greater if
additional capacity is needed in the fourth quarter of 2000.
We believe that our existing balances of cash and cash equivalents,
anticipated cash flows from operations, and available credit lines will provide
adequate sources to fund our operations and planned expenditures through 2000.
We may have to expand our loan commitments or pursue alternate methods of
financing or raise capital, however, should we encounter additional cash
requirements, such as the need for increased manufacturing capacity. In
addition, we will continue to seek other alliances or acquisitions and
additional relationships with regard to the strategic development of various new
technologies, especially LCoS microdisplays, that may also require us to make
additional capital investments. We cannot provide assurance that adequate
additional loan commitments or alternative methods of financing will be
available or, if available, that they will be on terms acceptable to us.
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
The results of our operations for the periods discussed have not been
significantly affected by inflation or foreign currency fluctuations. We
generally sell our products and services and negotiate purchase orders with our
foreign suppliers in U.S. dollars. However, we have certain foreign currency
exchange exposure as a result of our manufacturing operations in the Philippines
and China. The sub-assembly agreement relating to our operations in Manila is
based on a fixed conversion rate, exposing us to exchange rate fluctuations with
the Philippine peso. We have not incurred any material exchange gains or losses
to date. There has been some minor benefit as a result of the peso devaluation,
although we are now required to pay approximately one-third of any peso
devaluation gain to our lessor and direct labor subcontractor in Manila.
In China, we have accounts receivable and cash deposits in the local
currency. Although the Chinese currency currently is stable, its value in
relation to the U.S. dollar is determined by the Chinese government. There has
been general speculation since late 1998 that China may devalue its currency.
Devaluation of the Chinese currency could result in translation adjustments to
our balance sheet as well as reportable losses depending on our monetary
balances and outstanding indebtedness at the time of devaluation. The government
of China historically has made it difficult to convert its local currency into
foreign currencies. Although from time to time we may enter into hedging
transactions in order to minimize our exposure to currency rate fluctuations,
the Chinese currency is not freely traded and thus is difficult to hedge. In
addition, the government of China has recently imposed restrictions on Chinese
currency loans to foreign-operated entities in China. Based on the foregoing, we
cannot provide assurance that fluctuations and currency exchange rates in the
future will not have an adverse effect on our financial condition or results of
operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There are no material changes in reported market risks since the Company's
most recent filing on Form 10-K for the fiscal year ended December 31, 1999.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT 27: Financial Data Schedule
(b) Reports on Form 8-K: None
11
<PAGE> 14
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 26, 2000 By: /s/ Jeffrey D. Buchanan
------------------------------------------
Jeffrey D. Buchanan
Its: Executive Vice President Finance,
Administration and Legal; Chief Financial
Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000 AND THE RELATED CONSOLIDATED
STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2000 OF THREE-FIVE
SYSTEMS, INC. AND ITS SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR
PURPOSES OF SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE
SECURITIES EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH
SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES
THIS REPORT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY INCORPORATES THIS
EXHIBIT BY REFERENCE.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 45,413
<SECURITIES> 0
<RECEIVABLES> 19,316
<ALLOWANCES> 807
<INVENTORY> 12,865
<CURRENT-ASSETS> 82,828
<PP&E> 66,653
<DEPRECIATION> 24,482
<TOTAL-ASSETS> 129,000
<CURRENT-LIABILITIES> 19,528
<BONDS> 0
127
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 129,000
<SALES> 39,162
<TOTAL-REVENUES> 39,162
<CGS> 29,360
<TOTAL-COSTS> 34,385
<OTHER-EXPENSES> 24
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (604)
<INCOME-PRETAX> 5,357
<INCOME-TAX> (1,770)
<INCOME-CONTINUING> 3,587
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,587
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.27
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