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<DIV align="right">
<FONT size="2"> </FONT>Filed Pursuant to Rule 424(B)(4)
</DIV>
<DIV align="right">
Registration No. 333-35788
</DIV>
<DIV align="left">
Prospectus
</DIV>
<P align="center">
<FONT size="4">2,150,000 Shares</FONT>
<P align="center">
<FONT size="4">[THREE-FIVE SYSTEMS LOGO]</FONT>
<P align="center">
<FONT size="4">Common Stock</FONT>
<P align="center">
<HR size="1" width="37%" align="center">
<P align="left">
Three-Five Systems, Inc. is offering 2,150,000 shares of common
stock in a firmly underwritten offering.
<P align="center">
<HR size="1" width="37%" align="center">
<P align="left">
Our common stock is traded on the New York Stock Exchange under
the symbol “TFS.” The last reported sale price of our
common stock on the New York Stock Exchange on May 25, 2000
was $62.56 per share.
<P align="center">
<HR size="1" width="37%" align="center">
<P align="left">
<B>Investing in our common stock involves risks. See “Risk
Factors” beginning on page 5.</B>
<P align="center">
<HR size="1" width="37%" align="center">
<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">
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<TD width="69%"> </TD>
<TD width="3%"> </TD>
<TD width="6%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="6%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
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<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Per Share</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Total</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Offering Price</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">55.00</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">118,250,000</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Discounts and Commissions to Underwriters</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2.75</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,912,500</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Offering Proceeds to Three-Five</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">52.25</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">112,337,500</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
<P align="left">
We have granted the underwriters the right to purchase up to an
additional 322,500 shares to cover any over-allotments. The
underwriters can exercise this right at any time within thirty
days after the offering. The underwriters expect to deliver the
shares of common stock to investors on June 1, 2000.
<P align="center">
<B><I>Joint Lead and Book-Running Managers</I></B>
<DIV> </DIV>
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<TD width="50%"></TD>
<TD width="50%"></TD>
</TR>
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<TD align="left"><B><FONT size="4">Banc of America Securities LLC</FONT></B></TD>
<TD align="right"><B><FONT size="4">Needham & Company, Inc.</FONT></B></TD>
</TR>
</TABLE>
<P align="center">
<HR size="1" width="37%" align="center">
<DIV> </DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="50%"></TD>
<TD width="50%"></TD>
</TR>
<TR valign="top">
<TD align="left"><B><FONT size="4">ING Barings</FONT></B></TD>
<TD align="right"><B><FONT size="4">J.C. Bradford & Co.</FONT></B></TD>
</TR>
</TABLE>
<P align="center">
<HR size="1" width="37%" align="center">
<P align="center">
The date of this prospectus is May 26, 2000
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<!-- TOC -->
<A name="toc"><DIV align="CENTER"><U><B>TABLE OF CONTENTS</B></U></DIV></A>
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<P><HR noshade><P>
<P>Inside Front Cover Page:
<P> <I>Upper-right:</I> Picture of a woman using a cellular telephone
<P> <I>Top:</I> (Heading) “Technology, Design and Flexible, High-Volume Manufacturing
To Serve Today’s Growing LCD Market”
<P> Text beneath top heading:
<P> “We have over ten years of LCD design and manufacturing experience. We provide
display design services and LCD manufacturing or the design, manufacturing, and
integration of complete, custom LCD display module systems. Three-Five partners
with each customer to add value at each step of the process, with fast,
flexible, worldwide capability to meet any OEM demand.”
<P> “Custom liquid crystal displays for the cellular communication and other
established markets.”
<P align="center">Diagram describing the mechanics of an LCD display
<P> Text in Middle:
<P align="center"> “Our advanced research and technology center in Arizona, supported by our core<BR>
LCD business, is the cornerstone of ongoing LCD enhancements and an incubator<BR>
for commercializing innovative display technologies of tomorrow.”
<P> <I>Middle:</I> (Heading)
<P align="center"> “Innovation To Meet The Demands of Tomorrow’s Dynamic Markets: Microdisplays”
<P> Text in Middle:
<P> “Market-driven proprietary technologies, including
LCoS(TM) microdisplays and LCiD
displays, are based on Three-Five’s core competencies in design and
manufacturing. Microdisplays are tiny LCDs with high resolution that are
magnified for individual or group viewing. Our LCoS microdisplays are being
assessed by major OEM customers for various applications, including AV
projectors, HDTV screens, computer monitors, and virtual, full-page displays
for use in cell phones and other communications products.”
<P> <I>Bottom:</I> Diagram describing the mechanics of Liquid Crystal on Silicon
(LCoS) microdisplays
<P> Bottom text:
<P> “Liquid Crystal on Silicon (LCoS) is a technology that merges the high-density
resolution of silicon integrated circuits with liquid crystal displays. LCoS
combines the benefits of high performance, low cost, and low power consumption.”
<P>Bottom left: Picture of an LCoS handheld device
<P>Text beneath picture of LCoS picture: “Example of a
potential mobile Internet appliance with a full SVGA resolution
microdisplay and a mousepad.”
<P>Gatefold Page
<P>Upper-left: (Heading) “Evolutionary Display Technologies”
<P><I>Middle:</I> Arranged under the heading, “LCD Modules Customized For Today’s Growing
Markets” are pictures of a printer, cellular phone and MP3 player in which our display technology has
been incorporated. The pictures have captions superimposed on them with text
above the captions and pictures.
<P><I>Left margin:</I> (Caption) “LCD Display with LED Lamp”; above the caption is text
that reads, “Since our beginning in the mid-1980s, Three-Five has offered
customers a variety of information display solutions. These solutions include
LCDs integrated with LED devices and other components. Soon after our
inception, we began to drive the evolution of our display capabilities away
from standard LED products and into custom LCDs.”
<P><I>Left-middle:</I> (Caption) “LCD — Liquid Crystal Display”; above the caption is
text that reads, “LCDs are today’s predominant flat panel display technology.
We produce TN, STN, FSTN and DSTN, as well as color and monochrome LCDs at our
automated, high-volume manufacturing facility in Arizona, the largest of its
kind in North America.”
<P><I>Middle:</I> (Caption) “LCiD(TM) — Liquid Crystal intense Display”; above the
caption is text that reads, “Our LCiD(TM) display was one of the first products
developed by our highly experienced research and technology team in Arizona in
1997. This display resembles a brightly-colored LED, but offers customers the
low power requirements of an LCD combined with sunlight readability and
customized colors.”
<P><I>Right:</I> Under the heading, “Microdisplays For Newly Emerging Markets” is text
that reads, “The most exciting technology yet to emerge from our research
laboratories is the LCoS microdisplay. Our LCoS technology has the
ability to deliver millions of pixels of information with clear resolution on a
space about the size of a thumbnail. The applications for this low-cost
technology are many and range from business projector systems to a variety of
portable communications devices. The potential for LCoS rests in future
products both in existing and emerging markets. Potential
applications include rear
projection computer monitors, rear and front projection digital TV, and
head-mounted displays for computers, games, and movies. Data viewers for
wireless portable information devices such as cell phones are believed to have
the highest market potential. Other applications include head-mounted displays
for flight, flight simulation, equipment maintenance, and medicine.” Under the
text are pictures of a monitor, a rear projection display and a hand
held internet access device incorporating LCoS microdisplays bearing the caption
“LCoS(TM) — Liquid Crystal on Silicon” superimposed on them.
<P><I>Bottom-left:</I> (Heading) “Expanding Markets”. Beneath the heading are
sub-headings with text. The sub-headings and text read,
“Communications/Computing: mobile radios, pagers, global positioning systems,
cellular phones, cordless phones, feature phones, remote controls, personal
digital assistants; Office Automation: mail processing equipment, data storage
devices, printers, multifunction peripherals, facsimile machines, photo
copiers, scanners, computer peripherals; Industrial: temperature controllers,
industrial ovens, portable controllers, vehicle instrumentation, gas pumps,
scales, chart recorders; Medical: patient monitors and controls, digital
assistants, diagnostic equipment, digital thermometers and
glucometers, oximeters,
infusion systems; Point of Sale: test & measurement, point-of-sale terminals,
barcode scanners, transaction terminals, electronic shelf labeling; Consumer:
white goods, brown goods, audio systems, video systems, home theater,
radios.”
<P><I>Bottom-left:</I>“Rear-Projection: large format monitors, digital television, high-definition
television, projection television, and display cubes. Front-Projection:
portable audio-visual projectors, and home theater. Portable: mobile Internet appliances,
wireless convergence products, commercial/industrial wearable computers, and
personal DVD viewers.”
<P align="center">
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<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="left">
<B> You should rely only on the
information contained in this prospectus. We have not, and the
underwriters have not, authorized any other person to provide you
with different information. If anyone provides you with
different or inconsistent information, you should not rely on it.
We are not, and the underwriters are not, making an offer to
sell these securities in any jurisdiction where the offer or sale
is not permitted. The information in this document may only be
accurate on the date of this document.</B>
</DIV>
<P align="center"><B>TABLE OF CONTENTS</B>
<CENTER>
<TABLE width="60%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="90%"> </TD>
<TD width="3%"> </TD>
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<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Page</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Prospectus Summary</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Risk Factors</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Cautionary Statement Regarding Forward-Looking Statements</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Use of Proceeds</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Price Range of Common Stock</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">17</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Dividend Policy</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">17</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Capitalization</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Selected Consolidated Financial Data</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">19</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Management’s Discussion and Analysis of Financial Condition
and Results of Operations</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">20</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Business</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">28</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Management</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">41</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Security Ownership of Directors and Executive Officers</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">44</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Underwriting</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">46</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Legal Matters</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">47</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Experts</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">47</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Where You Can Find More Information</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">47</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Incorporation of Certain Documents by Reference</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">48</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Index to Consolidated Financial Statements</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">F-1</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
All references to “we,” “us,”
“our,” “Three-Five,” or “the
Company” in this prospectus mean Three-Five Systems, Inc.
and all entities owned or controlled by Three-Five Systems, Inc.,
except where it is clear that the term means only the parent
company.
<P align="left">
Except as otherwise indicated, all information in this prospectus
reflects a four-for-three stock split effected in the form of a
stock dividend in December 1999, reflects a three-for-two stock
split effected in the form of a stock dividend on May 12,
2000 to stockholders of record on May 1, 2000, and assumes
no exercise by the underwriters of their over-allotment option to
purchase up to 322,500 additional shares of common stock.
<P align="left">
The triangle logo, Three-Five together with the triangle logo,
and <I>LCiD®</I> are registered trademarks of Three-Five,
and <I>LCoS™</I> and <I>LCoS™</I> stylized are
trademarks of Three-Five. This prospectus also includes
trademarks, service marks, and trade names of other companies.
<P align="center">1
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<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>PROSPECTUS SUMMARY</B>
<P align="left">
<I>This summary highlights information contained elsewhere in
this prospectus. You should read this entire prospectus
carefully. This prospectus contains forward-looking statements,
which involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set
forth under “Risk Factors” and elsewhere in this
prospectus.</I>
<P align="center"><B>Introduction</B>
<P align="left">
We are a leading worldwide supplier of custom designed and
manufactured display modules for use in the end products of
original equipment manufacturers, or OEMs. We currently
specialize in custom liquid crystal display, or LCD, components
and technology. We collaborate closely with our customers in
providing our design and manufacturing services. Our LCD modules
are used in mobile handsets and other wireless communication
devices as well as in the data collection, medical electronics,
and other commercial and consumer marketplaces. In addition to
our traditional LCD module business, we are pursuing the
commercialization of our liquid crystal on silicon, or <I>LCoS
</I>, microdisplays following substantial research and
development over the past three years. We market our services in
North America, Europe, and Asia through a direct technical sales
force. Motorola is our largest customer.
<P align="left">
We believe we are well positioned to expand our custom LCD module
business through securing new customers and increasing our
business with existing customers. Our facilities, technology, and
personnel enable us to design, develop, and manufacture, on a
timely and cost-effective basis, a wide range of innovative,
distinctive, and high-quality display modules that our customers
require in their end products. Our Arizona headquarters includes
the largest high-volume LCD manufacturing line in North America
and a research and technology center dedicated to custom design
engineering and development of advanced display technology. Our
new manufacturing facility in Beijing, China substantially
increases our capacity and complements our long-standing
manufacturing facility in Manila, the Philippines. We operate our
highly automated, high-volume LCD manufacturing line in Arizona
to produce the majority of our LCDs. We utilize advanced,
flexible manufacturing systems for high-volume module assembly in
Manila and Beijing. We believe our three manufacturing
facilities provide us with a competitive advantage in meeting the
custom LCD needs of our customers.
<P align="left">
Our technological capabilities closely coupled with our LCD
manufacturing expertise have been essential to our ability to
develop and commercialize new types of displays. We are engaged
in research and development efforts on several types of new
display technologies, including reflective color LCDs,
color-filter LCDs, plastic LCDs, monochrome LCDs with a
paper-white background, bi-stable LCDs, and organic and polymer
light emitting displays. We will continue to undertake some of
these initiatives with partners and in strategic alliances.
<P align="left">
We are pursuing the commercialization of our <I>LCoS</I>
microdisplay technology. This technology addresses market demands
for high-information content, power-efficient displays with
increased functionality and smaller sizes at relatively low
costs. <I>LCoS</I> microdisplays are no larger than a thumbnail,
but contain all of the information appearing on a high-resolution
personal computer screen. The tiny image on an <I>LCoS</I>
microdisplay can be projected onto a screen or other surface for
individual or group viewing or used in a portable application and
viewed through a magnifying device similar to a viewfinder. We
are working with various international OEMs on <I>LCoS</I>
microdisplay product offerings for a broad range of applications
for anticipated introduction during the next six to
12 months. Initial applications are expected to include use
in business projection equipment and computer monitors. Other
potential applications include the use of <I>LCoS</I>
microdisplays in digital and high-definition televisions and in a
wide variety of portable devices, such as wireless Internet
access devices, mobile handsets, pagers, and personal digital
assistants, or PDAs, as well as in wearable computing equipment.
<P align="center">2
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<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="left">
Our strategy is to enhance our position as a leading worldwide
supplier of custom designed and manufactured displays for
application in various high-growth segments of the electronics
industry. Key elements of our strategy include the following:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
targeting leading companies in high-growth industries;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
intensifying our efforts to expand our customer base;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
emphasizing strong and long-lasting customer relationships that
enable us to become seamless extensions of our customers’
design and manufacturing functions;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
combining domestic design and prototyping with low-cost,
high-volume production capacity through the use of advanced
computer-aided design software and advanced, efficient, and
highly automated production processes;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
emphasizing innovative design and manufacturing techniques to
improve the speed, efficiency, and performance of our design and
manufacturing services; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
emphasizing the development of new display technologies to meet
customers’ continual requirements for higher information
content and lower costs.</TD>
</TR>
</TABLE>
<P align="left">
We believe our strategy has enabled us to provide our customers
with displays that have competitive advantages in terms of size,
cost, and product differentiation.
<P align="left">
We maintain our principal executive offices at 1600 North
Desert Drive, Tempe, Arizona 85281. Our telephone number is
(602) 389-8600.
<P align="center"><B>The Offering</B>
<DIV> </DIV>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="28%"></TD>
<TD width="1%"></TD>
<TD width="71%"></TD>
</TR>
<TR>
<TD valign="top">
Common stock offered</TD>
<TD></TD>
<TD valign="top">
2,150,000 shares</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR>
<TD valign="top">
Common stock to be outstanding after this offering</TD>
<TD></TD>
<TD valign="top">
<BR>
21,142,324 shares</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR>
<TD valign="top">
Use of proceeds</TD>
<TD></TD>
<TD valign="top">
To increase our manufacturing capacity through the expansion of
facilities and the acquisition of equipment; to fund the
continued development of our <I>LCoS</I> microdisplay technology
and develop new display or display-related technologies; and to
provide additional working capital to finance the expansion of
our business. We may expand our manufacturing capacity and
technology development in part through strategic acquisitions,
investments, and alliances, but have no current plans to do so.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR>
<TD valign="top">
New York Stock Exchange symbol</TD>
<TD></TD>
<TD valign="top">
<BR>
TFS</TD>
</TR>
</TABLE>
<P align="left">
The total number of shares that we assume will be outstanding
after the offering is based on the number of shares outstanding
at March 31, 2000 and excludes (a) 1,797,108 shares of
common stock issuable upon exercise of stock options with a
weighted average exercise price of $10.09 per share,
(b) 539,052 shares of common stock reserved for future
issuance under our stock option plans, and (c) 140,000
shares issuable upon exercise of outstanding warrants, with an
exercise price of $8.47 per share.
<P align="center">3
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>Summary Consolidated Financial Data</B>
<DIV align="center">
<B>(in thousands, except per share amounts)</B>
</DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="41%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="19"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Three Months</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><FONT size="2"><B>Years Ended December 31,</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Ended March 31,</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1995</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1996</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>2000</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
<B>Consolidated Statement of Operations Data:</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net sales</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">91,585</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">60,713</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">84,642</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">95,047</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">147,408</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">23,044</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">39,162</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Costs and expenses:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Cost of sales</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">70,481</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">58,321</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">64,760</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">76,149</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">117,583</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">20,191</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">29,360</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Selling, general, and administrative</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,386</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,351</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,557</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,334</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11,170</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,449</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,262</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Research, development, and engineering</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,396</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,065</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,106</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,159</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,745</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,821</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,763</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">78,263</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">67,737</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">76,423</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">90,642</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">137,498</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">24,461</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">34,385</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Operating income (loss)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">13,322</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(7,024</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,219</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,405</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9,910</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1,417</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,777</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Other income (expense), net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">643</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">273</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">358</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(42</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(18</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(185</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">580</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Income (loss) before provision for (benefit from) income
taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">13,965</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(6,751</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,577</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,363</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9,892</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1,602</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,357</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Provision for (benefit from) income taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,548</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(2,920</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,334</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,773</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,968</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(960</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,770</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net income (loss)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,417</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3,831</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,243</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,590</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,924</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(642</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,587</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Earnings (loss) per common share<SUP>(1)</SUP>:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Basic</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.55</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.25</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.33</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.17</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.44</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.05</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.19</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Diluted</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.52</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.25</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.32</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.17</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.43</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.05</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.18</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Weighted average number of common shares<SUP>(1)</SUP>:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Basic</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,432</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,536</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,708</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,277</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,563</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">14,018</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18,926</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Diluted</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,169</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,536</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,180</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,604</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,005</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">14,018</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">20,047</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="79%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>March 31, 2000</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>As</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Actual</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Adjusted<SUP>(2)</SUP></B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>Consolidated Balance Sheet Data:</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Cash and cash equivalents</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45,413</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">157,201</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Working capital</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">63,300</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">175,088</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total assets</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">129,000</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">240,788</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total stockholders’ equity</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">105,761</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">217,549</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left">
<HR size="1" width="18%" align="left">
</DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="97%"></TD>
</TR>
<TR valign="top">
<TD>(1) </TD>
<TD align="left">
Adjusted for the four-for-three stock split effected in December
1999 and the three-for-two stock split effected on May 12,
2000.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD>(2) </TD>
<TD align="left">
Adjusted to reflect the sale of the 2,150,000 shares of common
stock offered by us in this offering at the public offering price
of $55.00 per share and after deducting the estimated
underwriting discounts and offering expenses and giving effect to
the application of the estimated net proceeds. See “Use of
Proceeds” and “Capitalization.”</TD>
</TR>
</TABLE>
<P align="center">4
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>RISK FACTORS</B>
<P align="left">
<I>Before you invest in our common stock, you should be aware
that there are risks, including those set forth below. You should
carefully consider these risk factors, together with all the
other information included in this prospectus, before you decide
to purchase shares of our common stock.</I>
<P align="left"><B>Motorola accounts for a significant portion of our sales.</B>
<P align="left">
Our business depends to a significant extent on Motorola’s
success in the mobile handset business, particularly in the
various major mobile handset programs in which we participate.
Any material delay, cancellation, or reduction of orders from
Motorola could have a material adverse effect on our business.
<P align="left">
Motorola has been our largest customer during each of the last
five years. Sales to Motorola accounted for approximately 84.9%
of our net sales in the first three months of 2000, 86.1% in
1999, 63.6% in 1998, 34.6% in 1997, 65.1% in 1996, and 80.5% in
1995. Substantially all of our sales to Motorola were for mobile
handset applications.
<P align="left">
We anticipate that sales to Motorola in 2000 will exceed 1999
levels and that the percentage of our net sales attributable to
Motorola will stay in the current range for the remainder of 2000
as a result of increased worldwide demand for mobile handsets.
Sales to Motorola currently are made under multiple product
programs administered by eight buyers operating in eight separate
plants. During the first three months of 2000, the five largest
of these product programs accounted for a total of 79.5% of our
net sales, with the largest program accounting for 27.0% of our
net sales. During 1999, the five largest of these product
programs accounted for a total of 79.1% of our net sales, with
the largest program accounting for 33.0% of our net sales.
<P align="left">
A decline in sales to Motorola could occur at any time. For
example, an unexpected reduction in Motorola mobile handset
programs reduced our net sales to Motorola from $73.7 million in
1995 to $39.5 million in 1996 and $29.2 million in 1997. Since
Motorola has no long-term contractual commitments to purchase any
of our products, we could experience similar declines in our net
sales in the future.
<P align="left"><B>We are subject to lengthy development periods and product
acceptance cycles.</B>
<P align="left">
We sell our display modules to OEMs, which then incorporate them
into the products they sell. OEMs make the determination during
their product development programs whether to incorporate our
display modules or pursue other alternatives. This requires us to
make significant investments of time and capital in the custom
design of display modules well before our customers introduce
their products incorporating these displays and before we can be
sure that we will generate any significant sales to our customers
or even recover our investment. During a customer’s entire
product development process, we face the risk that our display
will fail to meet our customer’s technical, performance, or
cost requirements or will be replaced by a competing product or
alternative technological solution. Even if we complete our
design process in a manner satisfactory to our customer, the
customer may delay or terminate its product development efforts.
The occurrence of any of these events would adversely affect our
operating results.
<P align="left"><B>We do not have long-term purchase commitments from our
customers.</B>
<P align="left">
Our customers, including Motorola, generally do not provide us
with firm, long-term volume purchase commitments. Although we
have begun to enter into more manufacturing contracts with our
customers, these contracts clarify order lead times, inventory
risk allocation, and similar matters rather than provide firm,
long-term volume purchase commitments. As a result, customers can
cancel purchase commitments or reduce or delay orders at any
time. The cancellation, delay, or reduction of customer
commitments could result in our holding excess and obsolete
inventory or having unabsorbed manufacturing overhead. The large
percentage of our sales to customers in the electronics industry,
which is subject to severe competitive pressures, rapid
technological change, and product obsolescence, increases our
inventory and overhead risks.
<P align="left">
Our operating results have been materially and adversely affected
in the past as a result of the failure to obtain anticipated
orders and deferrals or cancellations of purchase commitments
because of changes in
<P align="center">5
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="left">
customer requirements. For example, we made two announcements in
1998 that sales would not meet our expectations because of delays
in customer programs.
</DIV>
<P align="left"><B>We depend on the market acceptance of the products of our
customers.</B>
<P align="left">
We do not sell any products to end users. Instead, we design and
manufacture various product solutions that our customers
incorporate into their products. As a result, our success depends
almost entirely upon the widespread market acceptance of our
customers’ products. Any significant slowdown in the demand
for our customers’ products would adversely affect our
business.
<P align="left">
Because our success depends on the widespread market acceptance
of our customers’ products, we must identify industries that
have significant growth potential and establish relationships
with OEMs in those industries. Our failure to identify potential
growth opportunities or establish relationships with OEMs in
those industries would adversely affect our business.
<P align="left">
Our dependence on the success of the products of our customers
exposes us to a variety of risks, including the following:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
our ability to provide significant design and manufacturing
services for customers on a timely and cost-effective basis;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
our success in maintaining customer satisfaction with our design
and manufacturing services;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
our ability to match our design and manufacturing capacity with
customer demand and to maintain satisfactory delivery schedules;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
customer order patterns, changes in order mix, and the level and
timing of orders placed by customers that we can complete in a
quarter; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the cyclical nature of the industries and markets we serve.</TD>
</TR>
</TABLE>
<P align="left">
Our failure to address these risks may cause our sales to
decline.
<P align="left"><B>Our emerging microdisplay business may not be successful.</B>
<P align="left">
A key element of our current business plan involves the
commercialization of our microdisplay technology. The success of
this effort depends on numerous factors. As a result, we could be
unable to expand our business as we currently anticipate and may
make substantial investments in product development,
manufacturing, and marketing efforts that may not result in
microdisplay sales.
<P align="left">
Manufacturing an <I>LCoS </I>microdisplay involves a
significantly different procedure than manufacturing a typical
liquid crystal display. Although we added additional equipment to
our Arizona manufacturing facility in the last two years for
manufacturing <I>LCoS </I>microdisplays, the manufacture of
microdisplays will require us to overcome numerous challenges,
including the following:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the use of new materials, including silicon;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the modification of equipment and processes to accommodate the
miniature size of the product;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the implementation of new manufacturing techniques;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the incorporation of new handling procedures;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the maintenance of cleaner manufacturing environments; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the ability to master tighter tolerances in the manufacturing
process.</TD>
</TR>
</TABLE>
<P align="left">
We could experience significant problems in commencing volume
production of <I>LCoS </I>microdisplays. These problems could
result in the delay of the full implementation of high-volume <I>
LCoS </I>microdisplay production. In addition, lower than
expected manufacturing yields could significantly and adversely
affect us because of the relatively high cost of the silicon
backplanes used in <I>LCoS </I>microdisplays.
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<P align="left">
Various target markets for our microdisplays, including
projectors, monitors, digital and high-definition televisions,
and portable microdisplays, are uncertain, may be slow to
develop, or could utilize competing technologies. Many
manufacturers have well-established positions in the projector
and monitor markets. As a result, we must provide these
manufacturers with lower cost, comparable performance
microdisplays for their products. Digital and high-definition
television has only recently become available to consumers, and
widespread market acceptance is uncertain. Penetrating this
market will require us to offer lower cost alternatives to
existing technology. In addition, the commercial success of the
portable microdisplay market is uncertain. Gaining acceptance in
this market may prove difficult because of the radically
different approach of microdisplays to the presentation of
information. The failure of any of these target markets to
develop as we expect, or our failure to penetrate these markets,
will impede our anticipated sales growth. Even if our technology
successfully meets our price and performance goals, our customers
may not achieve commercial success in selling their products
that incorporate our microdisplay technology.
<P align="left"><B>We face intense competition.</B>
<P align="left">
We serve intensely competitive industries that are characterized
by price erosion, rapid technological change, and competition
from major domestic and international companies. This intense
competition could result in pricing pressures, lower sales,
reduced margins, and lower market share. Many of our competitors
have greater market recognition, larger customer bases, and
substantially greater financial, technical, marketing,
distribution, and other resources than we possess. As a result,
they may be able to introduce new products and respond to
customer requirements more quickly than we can.
<P align="left">
Our competitive position could suffer if one or more of our
customers decide to design and manufacture their own display
modules, to use standard devices, to contract with our
competitors, or to use alternative technologies. In addition, our
customers typically develop a second source, even for displays
we design for them. These second source suppliers may win an
increasing share of a program, particularly as it grows and
matures, by competing primarily on price rather than on design
capability.
<P align="left">
Our ability to compete successfully depends on a number of
factors, both within and outside our control. These factors
include the following:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
our success in designing and manufacturing new product solutions,
including those implementing new technologies;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
our ability to address the needs of our customers;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the quality, performance, reliability, features, ease of use,
pricing, and diversity of our product solutions;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
foreign currency fluctuations, which may cause a foreign
competitor’s products to be priced significantly lower than
our product solutions;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the quality of our customer services;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
our efficiency of production;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the rate at which customers incorporate our product solutions
into their own products; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
product or technology introductions by our competitors.</TD>
</TR>
</TABLE>
<P align="left"><B>Shortages of components and materials may delay or reduce our
sales and increase our costs.</B>
<P align="left">
Our inability to obtain sufficient quantities of components and
other materials necessary to produce our displays could result in
reduced or delayed sales or lost orders. Any delay in or loss of
sales could adversely impact our operating results. We obtain
many of the materials we use in the manufacture of our displays
from a limited number of foreign suppliers, particularly
suppliers located in Asia, and we do not have long-term supply
contracts with any of them. As a result, we are subject to
economic instability and currency fluctuations in these Asian
countries as well as to increased costs, supply interruptions,
and difficulties in
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<DIV align="left">
obtaining materials. Our customers also may encounter
difficulties or increased costs in obtaining from others the
materials necessary to produce their products into which our
product solutions are incorporated.
</DIV>
<P align="left">
Materials and components for some of our major programs from time
to time have been subject to allocation because of shortages of
these materials and components. During 1998, we occasionally
delayed sales of our LCD modules as a result of the
unavailability of LCD polarizers and IC drivers, or ASICs. During
1999 and the first quarter of 2000, we experienced difficulties
obtaining our requirements for ASICs as a result of a worldwide
shortage. These shortages resulted in lost sales opportunities.
Similar shortages in the future could have a material adverse
effect on our business.
<P align="left"><B>We must maintain satisfactory manufacturing yields and
capacity.</B>
<P align="left">
Our inability to maintain high levels of productivity or
satisfactory delivery schedules at our manufacturing facilities
in Manila, Beijing, or Arizona would adversely affect our
operating results. The design and manufacture of LCDs and display
modules are highly complex processes that are sensitive to a
wide variety of factors, including the level of contaminants in
the manufacturing environment, impurities in the materials used,
and the performance of personnel and equipment. As is typical in
the industry, at times we have experienced lower than anticipated
manufacturing yields and lengthening of delivery schedules. We
may encounter lower manufacturing yields and longer delivery
schedules as we continue to ramp up our high-volume LCD line to
greater production levels and begin to manufacture <I>LCoS </I>
microdisplays. In addition, the complexity of manufacturing
processes will increase along with increases in the
sophistication of display modules.
<P align="left">
We anticipate that we will expand our capacity by establishing
one or more additional production facilities. We will face all of
the risks inherent in constructing, equipping, and commencing
operations in any new facilities that we establish. These risks
include the following:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the ability to identify and acquire or lease suitable property;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
construction delays and cost overruns;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the ability to procure and install necessary equipment;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the ability to hire, train, and manage manufacturing personnel;
and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
production delays, unfavorable manufacturing yields, and
lengthening delivery schedules.</TD>
</TR>
</TABLE>
<P align="left">
These risks could be more pronounced with respect to any
facilities that we establish in foreign countries. Any problems
with our LCD manufacturing operations could result in the
lengthening of our delivery schedules, reductions in the quality
or performance of our design and manufacturing services, and
reduced customer satisfaction.
<P align="left"><B>Our business depends on new products and technologies.</B>
<P align="left">
We operate in rapidly changing industries. Technological
advances, the introduction of new products, and new design and
manufacturing techniques could adversely affect our business
unless we are able to adapt to the changing conditions. As a
result, we will be required to expend substantial funds for and
commit significant resources to
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
continue research and development activities on existing and
potential product solutions;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
engage additional engineering and other technical personnel;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
purchase advanced design, production, and test equipment; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
expand our manufacturing capacity.</TD>
</TR>
</TABLE>
<P align="left">
Our future operating results will depend to a significant extent
on our ability to continue to provide new product solutions that
compare favorably on the basis of time to introduction, cost, and
performance with the
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<DIV align="left">
design and manufacturing capabilities of OEMs and competitive
third-party suppliers. Our success in attracting new customers
and developing new business depends on various factors, including
the following:
</DIV>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
utilization of advances in technology;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
innovative development of new solutions for customer products;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
efficient and cost-effective services; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
timely completion of the design and manufacture of new product
solutions.</TD>
</TR>
</TABLE>
<P align="left"><B>Our efforts to develop new technologies may not result in
commercial success.</B>
<P align="left">
Our research and development efforts with respect to new
technologies may not result in customer or widespread market
acceptance. Some or all of those technologies may not
successfully make the transition from the research and
development lab to cost-effective production as a result of
technology problems, competitive cost issues, yield problems, and
other factors. Even when we successfully complete a research and
development effort with respect to a particular technology, our
customers may determine not to introduce or may terminate
products utilizing the technology for a variety of reasons,
including the following:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
difficulties with other suppliers of components for the products;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
superior technologies developed by our competitors;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
price considerations;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
lack of anticipated or actual market demand for the products; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
unfavorable comparisons with products introduced by others.</TD>
</TR>
</TABLE>
<P align="left">
For example, in 1999 we deferred the commercialization of our <I>
Liquid Crystal active Drive</I>, or <I>LCaD®</I>, display
product line. We have decided to concentrate our resources
elsewhere and have not yet determined whether or to what extent
we will pursue commercialization of the <I>LCaD</I> product line.
<P align="left">
The nature of our business requires us to make capital
expenditures and investments for new technologies. For example,
our capital expenditures, including tooling and licenses, for <I>
LCoS </I>microdisplays, currently our largest research and
development effort, have been over $8.0 million through
March 31, 2000. To facilitate the development of our <I>LCoS
</I>microdisplay products, we also made an equity investment of
$3.8 million in Inviso, Inc., formerly Siliscape, Inc., during
1998 and 2000 and purchased assets and technology of the former
Light Valve business unit of National Semiconductor Corporation
for approximately $3.6 million during 1999. We may be required to
make similar investments and acquisitions in the future to
maintain or enhance our ability to offer technological solutions.
<P align="left">
Significant expenditures relating to one or more new
technologies, especially <I>LCoS </I>microdisplays, that
ultimately prove to be unsuccessful for any reason could have a
material adverse effect on us. In addition, any investments or
acquisitions, such as Inviso and the assets and technology of the
former Light Valve business unit, made to enhance our
technologies may prove to be unsuccessful.
<P align="left"><B>We face risks associated with international operations.</B>
<P align="left">
Our manufacturing operations in Manila, Beijing, and Arizona and
our sales and distribution operations in Europe and Asia create a
number of logistical and communications challenges. Our
international operations also expose us to various economic,
political, and other risks, including the following:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
management of a multi-national organization;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
compliance with local laws and regulatory requirements as well as
changes in those laws and requirements;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
employment and severance issues;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
overlap of tax issues;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
tariffs and duties;</TD>
</TR>
</TABLE>
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<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
possible employee turnover or labor unrest;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
lack of developed infrastructure;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the burdens and costs of compliance with a variety of foreign
laws; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
political or economic instability in certain parts of the world.</TD>
</TR>
</TABLE>
<P align="left">
Changes in policies by the United States or foreign governments
resulting in, among other things, increased duties, higher
taxation, currency conversion limitations, restrictions on the
transfer or repatriation of funds, limitations on imports or
exports, or the expropriation of private enterprises also could
have a material adverse effect on us. Any actions by our host
countries to reverse policies that encourage foreign investment
or foreign trade also could adversely affect our operating
results. In addition, U.S. trade policies, such as
“most favored nation” status and trade preferences for
certain Asian nations, could affect the attractiveness of our
services to our U.S. customers.
<P align="left"><B>We depend on our operations in Arizona.</B>
<P align="left">
Our Arizona facility and its high-volume LCD manufacturing line
are critical to our success. We utilize this high-volume line to
produce a majority of our own requirements for LCDs. We also have
installed a dedicated high-volume microdisplay manufacturing
line in this facility. We intend, at least initially, to produce
all of our <I>LCoS</I> microdisplays on this dedicated line. This
facility also houses our principal research, development,
engineering, design, and managerial operations. Any event that
causes a disruption of the operation of this facility for even a
relatively short period of time would adversely affect our
ability to provide both technical and manufacturing support for
our customers.
<P align="left"><B>We depend on our manufacturing operations in the Philippines.
</B>
<P align="left">
Any disruption or termination of our manufacturing operations in
Manila or air transportation with the Philippines, even for a
relatively short period of time, would adversely affect our
operations. The Philippines have been subject to volcanic
eruptions, typhoons, and substantial civil disturbances,
including attempted military coups against the government, since
we commenced operations at the facility in 1986. We have made
cumulative capital investments in the Philippines amounting to
approximately $15.2 million through March 31, 2000. We
believe that our manufacturing operations in Manila constitute
one of our most important resources and that it would be
difficult to replace the low-cost, high-performance facility or
the highly trained production staff in the event of the
disruption or termination of our manufacturing operations in
Manila.
<P align="left">
Our operations in Manila also depend on the business and
financial condition of the third-party subcontractor that owns
the manufacturing facility, which is located on land the
subcontractor leases from the Philippine government. The
subcontractor operates the facility utilizing equipment,
processes, and documentation that we own and supervisory
personnel that we employ. The subcontractor provides us with
direct production personnel and leases space to us. The
subcontractor also utilizes additional space in the facility to
produce products for other entities unrelated to us. The failure
of the subcontractor to fulfill its obligations to us would
adversely affect our operating results. Our agreements with the
subcontractor extend through December 31, 2000 and are
renewable from year to year thereafter, but may be terminated by
the subcontractor or us upon 180 days written notice.
<P align="left">
We are considering establishing our own production facility in
Manila during the last half of 2000. In such event, we would
likely retain our existing facility because of expected capacity
requirements in 2001.
<P align="left"><B>We depend on our manufacturing operations in China.</B>
<P align="left">
We commenced manufacturing operations in Beijing, China, during
1998 in a leased temporary facility. During 1999, we completed
the construction of a permanent, high-volume LCD module
manufacturing facility in Beijing, which is similar to our Manila
facility. We have made cumulative capital investments in
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<DIV align="left">
China amounting to approximately $11.0 million through
March 31, 2000. We are considering expansion of our Beijing
manufacturing facility.
</DIV>
<P align="left">
Our operations and assets are subject to significant political,
economic, legal, and other uncertainties in China. The Chinese
government recently has been pursuing economic reform policies,
including the encouragement of foreign trade and investment and
greater economic decentralization. The Chinese government,
however, may not continue to pursue these policies, may not
successfully pursue these policies, or may significantly alter
these policies from time to time. China currently does not have a
comprehensive and highly developed system of laws, particularly
with respect to foreign investment activities and foreign trade.
Enforcement of existing and future laws and contracts is
uncertain, and implementation and interpretation of laws may be
inconsistent. As the Chinese legal system develops, the passage
of new laws, changes in existing laws, and the preemption of
local regulations by national laws may adversely affect us. We
also could be adversely affected by a number of other factors,
including the following:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the imposition of austerity measures intended to reduce
inflation;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
inadequate development or maintenance of infrastructure,
including the unavailability of adequate power and water
supplies, transportation, raw materials, and parts; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
a deterioration of the general political, economic, or social
environment in China.</TD>
</TR>
</TABLE>
<P align="left">
In November 1999, the United States and China signed an agreement
that will lift trade barriers between the two countries and that
advances China’s efforts to join the World Trade
Organization. Special interest groups have raised objections to
these efforts, and we cannot be certain whether or to what extent
trade relations with China will continue to improve. Any
developments that adversely affect trade relations between the
United States and China in the future could adversely affect us
by increasing the cost to U.S. customers of products
manufactured by us in China.
<P align="left"><B>We face risks associated with international trade and currency
exchange.</B>
<P align="left">
Political and economic conditions abroad may adversely affect the
foreign manufacture and sale of our displays. Protectionist
trade legislation in either the United States or foreign
countries, such as a change in the current tariff structures,
export or import compliance laws, or other trade policies, could
adversely affect our ability to manufacture or sell displays in
foreign markets and to purchase materials or equipment from
foreign suppliers.
<P align="left">
While we transact business predominantly in U.S. dollars and
bill and collect most of our sales in U.S. dollars, we
collect a portion of our revenue in non-U.S. currencies,
such as the Chinese renminbi. In the future, customers
increasingly may make payments in non-U.S. currencies, such
as the Euro. In addition, we account for a portion of our costs,
such as payroll, rent, and indirect operating costs, in
non-U.S. currencies, including Philippine pesos, British
pounds sterling, and Chinese renminbi.
<P align="left">
Fluctuations in foreign currency exchange rates could affect our
cost of goods and operating margins and could result in exchange
losses. In addition, currency devaluation can result in a loss to
us if we hold deposits of that currency. The Philippine peso
suffered a major devaluation in late 1997, and the Chinese
renminbi has experienced significant devaluation against most
major currencies over the last five years. Hedging foreign
currencies can be difficult, especially if the currency is not
freely traded. We cannot predict the impact of future exchange
rate fluctuations on our operating results.
<P align="left">
The risks described above are particularly important since
international sales represented 81.2% of our net sales in the
first three months of 2000 and 82.0% of our net sales in 1999.
Sales in foreign markets, primarily Europe and China, to OEMs
based in the United States accounted for almost all of our
international sales in both of these periods. In the future, we
expect sales to OEMs based in Europe and China to increase.
<P align="left"><B>Variability of customer requirements may adversely affect our
operating results.</B>
<P align="left">
Custom manufacturers for OEMs must provide increasingly rapid
product turnaround and respond to ever-shorter lead times. A
variety of conditions, both specific to individual customers and
generally affecting
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<DIV align="left">
the demand for their products, may cause customers to cancel,
reduce, or delay orders. Cancellations, reductions, or delays by
a significant customer or by a group of customers could adversely
affect our business. On occasion, customers require rapid
increases in production, which can strain our resources and
reduce our margins. Although we have increased our manufacturing
capacity, we may lack sufficient capacity at any given time to
meet our customers’ demands if their demands exceed
anticipated levels.
</DIV>
<P align="left"><B>Our operating results have significant fluctuations.</B>
<P align="left">
In addition to the variability resulting from the short-term
nature of our customers’ commitments, other factors
contribute to significant periodic and seasonal quarterly
fluctuations in our results of operations. These factors include
the following:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the timing of orders;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the volume of orders relative to our capacity;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
product introductions and market acceptance of new products or
new generations of products;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
evolution in the life cycles of customers’ products;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
timing of expenditures in anticipation of future orders;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
effectiveness in managing manufacturing processes;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
changes in cost and availability of labor and components;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
product mix;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
pricing and availability of competitive products and services;
and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
changes or anticipated changes in economic conditions.</TD>
</TR>
</TABLE>
<P align="left">
Accordingly, you should not rely on the results of any past
periods as an indication of our future performance. It is likely
that in some future period, our operating results may be below
expectations of public market analysts or investors. If this
occurs, our stock price may drop.
<P align="left"><B>We must effectively manage our growth.</B>
<P align="left">
The failure to manage our growth effectively could adversely
affect our operations. We have increased the number of our
manufacturing and design programs and plan to expand further the
number and diversity of our programs in the future. Our ability
to manage our planned growth effectively will require us to
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
enhance our operational, financial, and management systems;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
expand our facilities and equipment; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
successfully hire, train, and motivate additional employees,
including the technical personnel necessary to operate our new
production facility in Beijing.</TD>
</TR>
</TABLE>
<P align="left">
The expansion and diversification of our product and customer
base may result in increases in our overhead and selling
expenses. We also may be required to increase staffing and other
expenses as well as our expenditures on capital equipment and
leasehold improvements in order to meet the anticipated demand of
our customers. For example, prior to the receipt of orders, we
substantially increased our manufacturing capacity in 1998 by
starting up manufacturing operations in Beijing. We plan further
expansion of our manufacturing capacity. Customers, however,
generally do not commit to firm production schedules for more
than a short time in advance. Any increase in expenditures in
anticipation of future orders that do not materialize would
adversely affect our profitability. Customers also may require
rapid increases in design and production services that place an
excessive short-term burden on our resources.
<P align="center">12
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<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="left"><B>We depend on key personnel.</B>
<P align="left">
Our development and operations depend substantially on the
efforts and abilities of our senior management and technical
personnel. The competition for qualified management and technical
personnel is intense. The loss of services of one or more of our
key employees or the inability to add key personnel, including
those required for our LCD manufacturing facility, could have a
material adverse effect on us. Although we maintain
non-competition and nondisclosure covenants with certain key
personnel, we do not have any fixed-term agreements with, or key
person life insurance covering, any officer or employee.
<P align="left"><B>We must protect our intellectual property, and others could
infringe on or misappropriate our rights.</B>
<P align="left">
We believe that our continued success depends in part on
protecting our proprietary technology. Third parties could claim
that we are infringing their patents or other intellectual
property rights. In the event that a third party alleges that we
are infringing its rights, we may not be able to obtain licenses
on commercially reasonable terms from the third party, if at all,
or the third party may commence litigation against us. The
failure to obtain necessary licenses or other rights or the
institution of litigation arising out of such claims could
materially and adversely affect us.
<P align="left">
We rely on a combination of patent, trade secret, and trademark
laws, confidentiality procedures, and contractual provisions to
protect our intellectual property. We seek to protect certain of
our technology under trade secret laws, which afford only limited
protection. We face risks associated with our intellectual
property, including the following:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
pending patent applications may not be issued;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
intellectual property laws may not protect our intellectual
property rights;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
third parties may challenge, invalidate, or circumvent any patent
issued to us;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
rights granted under patents issued to us may not provide
competitive advantages to us;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
unauthorized parties may attempt to obtain and use information
that we regard as proprietary despite our efforts to protect our
proprietary rights;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
others may independently develop similar technology or design
around any patents issued to us; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
effective protection of intellectual property rights may be
limited or unavailable in some foreign countries, such as China,
in which we operate.</TD>
</TR>
</TABLE>
<P align="left">
We may not be able to obtain effective trademark, service mark,
copyright, and trade secret protection in every country in which
we sell our products. We may find it necessary to take legal
action in the future to enforce or protect our intellectual
property rights or to defend against claims of infringement.
Litigation can be very expensive and can distract our
management’s time and attention, which could adversely
affect our business. In addition, we may not be able to obtain a
favorable outcome in any intellectual property litigation.
<P align="left"><B>The market price of our common stock may be volatile.</B>
<P align="left">
The market price of our common stock has been extremely volatile.
Our stock price increased dramatically during the three-year
period ended December 31, 1994, but declined significantly
during 1995 and 1996. The stock price increased again during
1997, but declined significantly in 1998. Our stock price again
increased significantly during 1999 and the first three months of
2000. The trading price of our common stock in the future could
continue to be subject to wide fluctuations in response to
various factors, including the following:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
variations in our quarterly operating results;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
actual or anticipated announcements of technical innovations or
new product developments by us or our competitors;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
changes in analysts’ estimates of our financial performance;</TD>
</TR>
</TABLE>
<P align="center">13
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<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
general conditions in the electronics industry; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
worldwide economic and financial conditions.</TD>
</TR>
</TABLE>
<P align="left">
In addition, the stock market has experienced extreme price and
volume fluctuations that have particularly affected the market
prices for many high-technology companies and that often have
been unrelated to the operating performance of these companies.
These broad market fluctuations and other factors may adversely
affect the market price of our common stock.
<P align="left"><B>The electronics industry is cyclical.</B>
<P align="left">
The electronics industry has experienced significant economic
downturns at various times, characterized by diminished product
demand, accelerated erosion of average selling prices, and
production over-capacity. In addition, the electronics industry
is cyclical in nature. We have sought to reduce our exposure to
industry downturns and cyclicality by providing design and
production services for leading companies in rapidly expanding
segments of the electronics industry. We may, however, experience
substantial period-to-period fluctuations in future operating
results because of general industry conditions or events
occurring in the general economy.
<P align="left"><B>We must finance the growth of our business and the development
of new products.</B>
<P align="left">
To remain competitive, we must continue to make significant
investments in research and development, equipment, and
facilities. As a result of the increase in fixed costs and
operating expenses related to these capital expenditures, our
failure to increase sufficiently our net sales to offset these
increased costs would adversely affect our operating results.
<P align="left">
From time to time, we may seek additional equity or debt
financing to provide for the capital expenditures required to
maintain or expand our design and production facilities and
equipment. We cannot predict the timing or amount of any such
capital requirements at this time. If such financing is not
available on satisfactory terms, we may be unable to expand our
business or to develop new business at the rate desired and our
operating results may suffer. Debt financing increases expenses
and must be repaid regardless of operating results. Equity
financing could result in additional dilution to existing
stockholders.
<P align="left"><B>Potential strategic alliances may not achieve their
objectives.</B>
<P align="left">
We anticipate that we will enter into various strategic
alliances. Among other matters, we will explore strategic
alliances designed to enhance or complement our technology or to
work in conjunction with our technology; to increase our
manufacturing capacity; to provide necessary know-how,
components, or supplies; and to develop, introduce, and
distribute products utilizing our technology. Any strategic
alliances may not achieve their strategic objectives, and parties
to our strategic alliances may not perform as contemplated.
<P align="left"><B>Any acquisitions that we undertake could be difficult to
integrate, disrupt our business, dilute stockholder value, and
harm our operating results.</B>
<P align="left">
We expect to review opportunities to buy other businesses or
technologies that would complement our current products, expand
the breadth of our markets, enhance our technical capabilities,
or otherwise offer growth opportunities. While we have no current
agreements or negotiations underway, we may buy businesses,
products, or technologies in the future. If we make any future
acquisitions, we could issue stock that would dilute existing
stockholders’ percentage ownership, incur substantial debt,
or assume contingent liabilities. Our experience in acquiring
other businesses and technologies is limited. Potential
acquisitions also involve numerous risks, including the
following:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
problems assimilating the purchased operations, technologies, or
products;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
unanticipated costs associated with the acquisition;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
diversion of management’s attention from our core
businesses;</TD>
</TR>
</TABLE>
<P align="center">14
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<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
adverse effects on existing business relationships with suppliers
and customers;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
risks associated with entering markets in which we have no or
limited prior experience; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
potential loss of key employees of purchased organizations.</TD>
</TR>
</TABLE>
<P align="left">
We cannot assure you that we would be successful in overcoming
problems encountered in connection with such acquisitions, and
our inability to do so could adversely affect our business.
<P align="left"><B>We are subject to environmental regulations.</B>
<P align="left">
Our operations result in the creation of small amounts of
hazardous waste, including various epoxies, gases, inks,
solvents, and other wastes. Any failure by us to control the use,
or adequately restrict the discharge, of hazardous substances
could subject us to future liabilities. We are subject to
federal, state, and local governmental regulations related to the
use, storage, discharge, and disposal of toxic, volatile, or
otherwise hazardous chemicals used in our design and
manufacturing processes. The amount of hazardous waste produced
by us may increase in the future depending on changes in our
operations. Our failure to comply with present or future
environmental regulations could result in the imposition of
fines, suspension of production, or a cessation of operations.
Compliance with these regulations could require us to acquire
costly equipment or to incur other significant expenses.
<P align="left"><B>The application of the net proceeds of this offering is
uncertain.</B>
<P align="left">
We plan to use the net proceeds of this offering to increase our
manufacturing capacity through the expansion of facilities and
the acquisition of equipment; to fund the continued development
of our <I>LCoS</I> microdisplay technology and to develop new
display or display-related technologies; and to provide
additional working capital to finance the expansion of our
business. We may expand our manufacturing capacity and technology
development in part through strategic acquisitions, investments,
and alliances. We do not, however, have any commitments
respecting capital expenditures, acquisitions, investments, or
alliances. As a result, management will have wide discretion in
the application of the net proceeds of this offering and
investors will not have the opportunity to assess the use of
proceeds of this offering. Our management may not utilize the
proceeds in an effective manner, and the use of the proceeds may
not increase our profitability or market value.
<P align="left"><B>Change in control provisions may adversely affect existing
stockholders.</B>
<P align="left">
Our restated certificate of incorporation and the Delaware
General Corporation Law contain provisions that may have the
effect of making more difficult or delaying attempts by others to
obtain control of our company, even when these attempts may be
in the best interests of stockholders. Our restated certificate
also authorizes the board of directors, without stockholder
approval, to issue one or more series of preferred stock, which
could have voting and conversion rights that adversely affect or
dilute the voting power of the holders of common stock. Delaware
law also imposes conditions on certain business combination
transactions with “interested stockholders.”
<P align="left"><B>Sales of large numbers of shares could adversely affect the
price of our common stock.</B>
<P align="left">
All of our outstanding shares are freely tradeable without
restriction or further registration. Affiliates must sell all
shares they own in compliance with the volume and other
requirements of Rule 144, except for the holding period
requirements. Our directors and executive officers have agreed
that for a period of 90 days after the date of this
prospectus, they will not directly or indirectly sell any shares
of common stock without the joint consent of Banc of America
Securities LLC and Needham & Company, Inc. Sales of
substantial amounts of common stock by our stockholders, or even
the potential for such sales, may have a depressive effect on the
market price of our common stock and could impair our ability to
raise capital through the sale of our equity securities.
<P align="center">15
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<P align="left"><B>We do not pay cash dividends.</B>
<P align="left">
We have never paid any cash dividends on our common stock and do
not anticipate that we will pay cash dividends in the foreseeable
future. Instead, we intend to apply earnings to the expansion
and development of our business.
<P align="center"><B>CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS</B>
<P align="left">
Certain statements and information contained in this prospectus
regarding revenue, margins, expenses, and earnings analysis for
fiscal 2000 and thereafter; technological innovations; future
products or product development; our product development
strategies; potential acquisitions or strategic alliances; the
success of particular product or marketing programs; the amounts
of revenue generated as a result of sales to significant
customers; liquidity and anticipated cash needs; and other
statements contained in this prospectus regarding matters that
are not historical facts are forward-looking statements, as such
term is defined under applicable securities laws. Forward-looking
statements, by their very nature, include risks and
uncertainties, many of which are beyond our control. Accordingly,
actual results may differ, perhaps materially, from those
expressed in or implied by such forward-looking statements.
Factors that could cause actual results to differ materially
include those discussed under “Risk Factors.”
<P align="center"><B>USE OF PROCEEDS</B>
<P align="left">
The net proceeds to us from the sale of our common stock are
estimated to be approximately $111.8 million, after
deducting the estimated underwriting discounts and offering
expenses. We plan to use the net proceeds to increase our
manufacturing capacity through the expansion of facilities and
the acquisition of equipment; to fund the continued development
of our <I>LCoS</I> microdisplay technology and to develop new
display or display-related technologies; and to provide
additional working capital to finance the expansion of our
business. We may expand our manufacturing capacity and technology
development in part through strategic acquisitions, investments,
and alliances. We do not have any commitments respecting capital
expenditures, acquisitions, investments, or alliances. Prior to
using the net proceeds, we plan to invest the net proceeds in
short-term, interest bearing, investment grade securities.
<P align="center">16
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<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>PRICE RANGE OF COMMON STOCK</B>
<P align="left">
Our common stock has been listed on the New York Stock Exchange
under the symbol “TFS” since December 29, 1994.
The following table sets forth the quarterly high and low closing
prices of our common stock as reported on the New York Stock
Exchange for the periods indicated, as adjusted for the
four-for-three stock split effected in December 1999 and the
three-for-two stock split effected in May 2000.
<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="69%"> </TD>
<TD width="3%"> </TD>
<TD width="6%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>High</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Low</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
<B>1998:</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
First Quarter</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.53</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.88</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Second Quarter</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.19</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.44</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Third Quarter</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.09</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.53</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Fourth Quarter</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.94</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.25</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
<B>1999:</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
First Quarter</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.31</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Second Quarter</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.91</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.03</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Third Quarter</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.06</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.84</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Fourth Quarter</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">27.33</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.13</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
<B>2000:</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
First Quarter</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">43.83</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">25.46</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Second Quarter (through May 25, 2000)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">80.69</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">36.75</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
As of May 25, 2000, there were approximately 780 holders of
record and approximately 7,200 beneficial owners of our common
stock. The closing sale price of our common stock on the New York
Stock Exchange on May 25, 2000 was $62.56 per share.
<P align="center"><B>DIVIDEND POLICY</B>
<P align="left">
Our policy is to retain earnings to provide funds for the
operation and expansion of our business. We have not paid cash
dividends on our common stock and do not anticipate that we will
do so in the foreseeable future. Furthermore, our credit facility
with Imperial Bank does not permit us to pay dividends without
the consent of Imperial Bank. The payment of cash dividends in
the future will depend on our growth, profitability, financial
condition, and other factors that our board of directors may deem
relevant.
<P align="center">17
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>CAPITALIZATION</B>
<P align="left">
The following table sets forth our capitalization at
March 31, 2000 and as adjusted to reflect the sale of the
2,150,000 shares of common stock offered by us in this offering
at the public offering price of $55.00 per share, after deducting
estimated underwriting discounts and offering expenses and
giving effect to our receipt and application of the estimated net
proceeds:
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="70%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>March 31, 2000</B></FONT></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Actual</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>As Adjusted</B></FONT></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>(in thousands)</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="4" align="left" valign="top"><FONT size="2">
Stockholders’ equity:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Preferred stock, $.01 par value; 1,000,000 shares authorized; no
shares issued and outstanding</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Common stock, $.01 par value; 60,000,000 shares authorized;
18,992,913 issued and 18,992,324 outstanding, actual; 21,142,913
issued and 21,142,324 outstanding, as adjusted<SUP>(1)(2)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">190</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">212</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Additional paid-in capital</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">68,343</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">180,109</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Retained earnings</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">37,226</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">37,226</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Cumulative translation adjustment</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Treasury stock, at cost (589 shares)<SUP>(2)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Total stockholders’ equity</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">105,761</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">217,549</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Total capitalization</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">105,761</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">217,549</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left">
<HR size="1" width="18%" align="left">
</DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="97%"></TD>
</TR>
<TR valign="top">
<TD>(1) </TD>
<TD align="left">
Excludes the following at March 31, 2000:</TD>
</TR>
</TABLE>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
1,797,108 shares issuable upon exercise of options outstanding
under our stock option plans, with a weighted average exercise
price of $10.09 per share;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
539,052 shares available for future issuance under our stock
plans; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
140,000 shares issuable upon exercise of outstanding warrants
with an exercise price of $8.47 per share.</TD>
</TR>
</TABLE>
<P align="left">
For a discussion of our benefit plans,
see Note 5 to the Consolidated Financial Statements.
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="97%"></TD>
</TR>
<TR valign="top">
<TD>(2) </TD>
<TD align="left">
Adjusted for the three-for-two stock split effected on
May 12, 2000.</TD>
</TR>
</TABLE>
<P align="center">18
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>SELECTED CONSOLIDATED FINANCIAL INFORMATION</B>
<P align="left">
The following table contains selected consolidated financial data
and is qualified by the more detailed Consolidated Financial
Statements and Notes thereto included elsewhere in this
prospectus. The consolidated statement of operations data for the
fiscal years ended December 31, 1997, December 31,
1998, and December 31, 1999 have been derived from our
Consolidated Financial Statements, which statements have been
audited by Arthur Andersen LLP, independent public accountants,
and are included elsewhere in this prospectus. The consolidated
statement of operations data for the fiscal years ended
December 31, 1995 and December 31, 1996 have been
derived from our consolidated financial statements, which have
been audited by Arthur Andersen LLP but which are not included in
this prospectus. Data as of March 31, 2000 and for the
three months ended March 31, 1999 and 2000 have been derived
from our unaudited Consolidated Financial Statements included
elsewhere in this prospectus and, in our opinion, include all
adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of operations
for the periods presented. Results for the three months ended
March 31, 2000 are not necessarily indicative of the results
to be expected for the full year. This data should be read in
conjunction with the Consolidated Financial Statements and Notes
thereto and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” appearing
elsewhere in this prospectus.
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="33%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="19"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Three Months Ended</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><FONT size="2"><B>Years Ended December 31,</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>March 31,</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1995</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1996</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>2000</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="27"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="27"><FONT size="2"><B>(in thousands, except per share amounts)</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
<B>Consolidated Statement of Operations Data:</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net sales</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">91,585</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">60,713</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">84,642</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">95,047</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">147,408</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">23,044</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">39,162</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Costs and expenses:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Cost of sales</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">70,481</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">58,321</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">64,760</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">76,149</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">117,583</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">20,191</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">29,360</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Selling, general, and administrative</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,386</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,351</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,557</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,334</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11,170</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,449</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,262</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Research, development, and engineering</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,396</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,065</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,106</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,159</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,745</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,821</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,763</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">78,263</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">67,737</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">76,423</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">90,642</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">137,498</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">24,461</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">34,385</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Operating income (loss)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">13,322</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(7,024</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,219</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,405</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9,910</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1,417</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,777</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Other income (expense), net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">643</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">273</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">358</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(42</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(18</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(185</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">580</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Income (loss) before provision for (benefit from) income
taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">13,965</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(6,751</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,577</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,363</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9,892</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1,602</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,357</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Provision for (benefit from) income taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,548</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(2,920</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,334</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,773</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,968</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(960</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,770</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net income (loss)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,417</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3,831</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,243</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,590</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,924</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(642</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,587</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Earnings (loss) per common share <SUP>(1)</SUP>:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Basic</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.55</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.25</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.33</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.17</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.44</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.05</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.19</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Diluted</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.52</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.25</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.32</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.17</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.43</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.05</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.18</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Weighted average number of common shares<SUP>(1)</SUP>:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Basic</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,432</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,536</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,708</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,277</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,563</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">14,018</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18,926</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Diluted</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,169</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,536</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,180</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,604</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,005</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">14,018</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">20,047</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="75%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="6%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>March 31, 2000</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Actual</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>As Adjusted<SUP>(2)</SUP></B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>Consolidated Balance Sheet Data:</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Cash and cash equivalents</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45,413</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">157,201</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Working capital</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">63,300</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">175,088</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total assets</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">129,000</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">240,788</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total stockholders’ equity</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">105,761</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">217,549</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left">
<HR size="1" width="18%" align="left">
</DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="97%"></TD>
</TR>
<TR valign="top">
<TD>(1) </TD>
<TD align="left">
Adjusted for the four-for-three stock split effected in December
1999 and the three-for-two stock split effected on May 12,
2000.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD>(2) </TD>
<TD align="left">
Adjusted to reflect the sale of the 2,150,000 shares of common
stock offered by us in this offering at the public offering price
of $55.00 per share, after deducting the estimated underwriting
discounts and offering expenses and giving effect to the
application of the estimated net proceeds. See “Use of
Proceeds” and “Capitalization.”</TD>
</TR>
</TABLE>
<P align="center">19
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>MANAGEMENT’S DISCUSSION AND ANALYSIS OF</B>
<DIV align="center">
<B>FINANCIAL CONDITION AND RESULTS OF OPERATIONS</B>
</DIV>
<P align="left"><B>Overview</B>
<P align="left">
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 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.
<P align="left">
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.
<P align="left">
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, 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 and 1999 either did
not require our LCD modules or required less complex, lower cost
modules.
<P align="left">
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.
<P align="left">
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.
<P align="left">
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.
<P align="center">20
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="left">
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.
<P align="left">
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 production in the new manufacturing facility late in
the third quarter of 1999. All production in Bejing 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.
<P align="left">
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 <I>LCoS </I>
microdisplay business.
<P align="left">
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 <I>LCoS </I>
microdisplays, while we continue with our in-house process
development efforts related to the high-volume LCD manufacturing
line located in Arizona.
<P align="left">
Since 1997, we have been working on the development of <I>LCoS
</I>microdisplays. In 1997, we entered into a strategic alliance
with National Semiconductor Corporation for the development of
<I>LCoS </I>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 <I>
LCoS </I>microdisplays. We paid approximately $3.0 million in
cash and issued warrants to purchase 140,000 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.
<P align="left">
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.
<P align="left">
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.
<P align="left">
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 we and Tecdis design for our respective
<P align="center">21
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="left">
customers. Recently, STMicroelectronics announced its
participation in Dora and its agreement to manufacture the ASICs
designed by Dora.
</DIV>
<P align="left">
These acquisitions, investments, and licenses will result in
increased research, development, and engineering expense as we
expand our <I>LCoS </I>microdisplay development efforts in
preparation for the commercial introduction of <I>LCoS </I>
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 <I>LCoS </I>
microdisplay technology and related products. As a result, the
actual dollar amount of our research, development, and
engineering expense will continue to increase.
<P align="left"><B>Results of Operations</B>
<P align="left">
The following table sets forth, for the periods indicated, the
percentage of net sales of certain items in our Consolidated
Financial Statements.
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="54%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Three Months</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="11"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Ended</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="11"><FONT size="2"><B>Years Ended December 31,</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>March 31,</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="11"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>2000</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net sales</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Costs and expenses:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Cost of sales</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">76.5</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">80.1</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">79.8</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">87.6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">75.0</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Selling, general, and administrative</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.8</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.7</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.7</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Research, development, and engineering</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.0</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.9</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.9</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.1</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">90.3</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">95.4</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">93.3</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">106.1</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">87.8</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Operating income (loss)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.7</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.7</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(6.1</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12.2</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Other income (expense), net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.4</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.9</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.5</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Income (loss) before provision for (benefit from) income
taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.1</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.7</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(7.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">13.7</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Provision for (benefit from) income taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.9</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.9</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2.0</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(4.2</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.5</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net income (loss)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.2</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2.7</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.7</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(2.8</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.2</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left"><I>Three months ended March 31, 2000 compared to three
months ended March 31, 1999</I>
<P align="left">
<B><I>Net Sales. </I></B>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.
<P align="left">
<B><I>Cost of Sales. </I></B>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.
<P align="left">
<B><I>Selling, General, and Administrative Expense. </I></B>
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
<P align="center">22
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<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="left">
was 5.7% of net sales in the three months ended March 31,
2000 compared to 10.6% in the three months ended March 31,
1999.
</DIV>
<P align="left">
<B><I>Research, Development, and Engineering Expense. </I></B>
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 <I>LCoS </I>microdisplays. <I>LCoS </I>
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.
<P align="left">
<B><I>Other Income (Expense), Net. </I></B>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.
<P align="left">
<B><I>Provision for (Benefit From) Income Taxes. </I></B>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%.
<P align="left">
<B><I>Net Income (Loss). </I></B>Net income was $3.6 million, or
$0.18 per diluted share, in the three months ended March 31,
2000 compared to a net loss of $642,000, or $0.05 per diluted
share, in the three months ended March 31, 1999. Excluding
<I>LCoS </I>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 $0.24 per
diluted share.
<P align="left"><I>Year ended December 31, 1999 compared to year ended
December 31, 1998</I>
<P align="left">
<B><I>Net Sales. </I></B>Net sales increased 55.2% to $147.4
million in 1999 from $95.0 million in 1998. This increase
resulted from several new programs, primarily for Motorola. Net
sales in the fourth quarter of 1999 were 117.2% greater than net
sales in the first quarter of 1999.
<P align="left">
<B><I>Cost of Sales. </I></B>Cost of sales decreased to 79.8% of
net sales in 1999 from 80.1% in 1998. This percentage decrease
resulted primarily from increased operating efficiencies as a
result of a significant increase in production volume. Most of
those operating efficiencies occurred in the fourth quarter of
1999. In addition, our permanent China manufacturing facility was
operational during the entire fourth quarter, and in that new
facility we experienced better yields and absorption than when we
operated in our temporary China facility.
<P align="left">
<B><I>Selling, General, and Administrative Expense. </I></B>
Selling, general, and administrative expense increased 53.4% to
$11.2 million in 1999 from $7.3 million in 1998. Selling,
general, and administrative expense was 7.6% of net sales in 1999
compared to 7.7% in 1998. The increase in selling, general, and
administrative expense reflected the continued expansion of our
business. In particular, we incurred approximately $2.2 million
of marketing and administrative expenditures relating to our <I>
LCoS </I>microdisplay business in 1999 compared to approximately
$300,000 in 1998.
<P align="left">
<B><I>Research, Development, and Engineering Expense. </I></B>
Research, development, and engineering expense increased 20.8% to
$8.7 million in 1999 from $7.2 million in 1998. Research,
development, and engineering expense was 5.9% of net sales in
1999 compared to 7.6% in 1998. Although research, development,
and engineering expense associated with in-process developments
on the LCD line decreased in 1999, research, development, and
engineering expense overall increased as the result of the
development of new display products and technologies. For
example, <I>LCoS </I>microdisplays accounted for approximately
$4.4 million of research, development, and engineering expense in
1999 compared to approximately $2.4 million in 1998.
<P align="center">23
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<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="left">
<B><I>Other Income (Expense), Net. </I></B>Other expense was
$18,000 in 1999 compared to other expense of $42,000 in 1998. We
had sharply higher interest income in the fourth quarter of 1999
as a result of increased cash balances and a tax refund. That
interest income offset interest expense we had in the first three
quarters of 1999 as a result of additional borrowing incurred in
connection with our stock repurchase program and increased
borrowings on our working capital line of credit. All credit
lines were paid off and cash balances increased as a result of
our equity offering in the third quarter of 1999.
<P align="left">
<B><I>Provision for Income Taxes. </I></B>We recorded a provision
for income taxes of $3.0 million in 1999 compared to $1.8
million in 1998. This change resulted primarily from higher
pre-tax income in 1999 compared to the same period in 1998. In
addition, we recorded tax benefits in the first and fourth
quarters of 1999 relating to a state income tax refund.
Generally, the tax rate was also lower in 1999 as a result of
higher net income in China (which is a low tax rate jurisdiction)
compared to a net loss in China in 1998.
<P align="left">
<B><I>Net Income. </I></B>Net income increased 165% to $6.9
million, or $0.43 per diluted share, in 1999 from $2.6 million,
or $0.17 per diluted share, in 1998. Excluding <I>LCoS</I>
microdisplay related expenses, our net income for 1999 was
approximately $11.4 million, or $0.71 per diluted share.
<P align="left"><I>Year ended December 31, 1998 compared to year ended
December 31, 1997</I>
<P align="left">
<B><I>Net Sales. </I></B>Net sales increased 12.3% to $95.0
million in 1998 from $84.6 million in 1997. The increase resulted
from several new programs in 1998 for a variety of customers,
including Motorola. In 1998, we recorded 56.7% of our net sales
in the third and fourth quarters. Net sales in the fourth quarter
of 1998 were almost 58.6% greater than in the first quarter of
1998.
<P align="left">
<B><I>Cost of Sales. </I></B>Cost of sales increased to 80.1% of
net sales in 1998 from 76.5% in 1997. The corresponding decrease
in our gross margin was primarily the result of manufacturing
variances occurring as a result of the start-up of our new
manufacturing facility in Beijing, unfavorable manufacturing
yields experienced in connection with the start of several new
programs, and increased pricing pressure from customers and
competitors, partially as a result of the Asian economic crisis.
<P align="left">
<B><I>Selling, General, and Administrative Expense. </I></B>
Selling, general, and administrative expense increased 10.6% to
$7.3 million in 1998 from $6.6 million in 1997. Selling, general,
and administrative expense was 7.7% of net sales in 1998
compared to 7.8% in 1997. Selling, general, and administrative
expense increased in absolute terms as a result of increased
selling expenses and the addition of administrative personnel. As
a result of increased net sales in 1998, however, selling,
general, and administrative expense declined slightly as a
percent of net sales.
<P align="left">
<B><I>Research, Development, and Engineering Expense. </I></B>
Research, development, and engineering expense increased 41.2% to
$7.2 million in 1998 from $5.1 million in 1997. Research,
development, and engineering expense was 7.6% of net sales in
1998 compared to 6.0% in 1997. In 1998, we continued to expand
and intensify our research and development efforts on proprietary
display products as well as ongoing LCD manufacturing process
improvements, including increased use of the LCD manufacturing
line in our Arizona facility as a resource for development of
these new products.
<P align="left">
<B><I>Other Income (Expense), Net. </I></B>Other expense was
$42,000 in 1998 compared to other income of $358,000 in 1997. Net
interest income in 1998 was $75,000, down from $548,000 in 1997.
The decrease in net interest income was the result of investing
lower average cash balances during the year as well as increased
interest expense as a result of increased debt. This decline in
net interest income was partially offset by reduced foreign
exchange losses.
<P align="left">
<B><I>Provision for Income Taxes. </I></B>We recorded a provision
for income taxes of $1.8 million in 1998 compared to $3.3
million in 1997. Our overall tax rate was 40.6% in 1998 compared
to 38.9% in 1997. The increased tax rate resulted primarily from
losses in Beijing for which we did not receive a tax benefit
proportionate to our tax rate elsewhere in the world.
<P align="left">
<B><I>Net Income. </I></B>Net income decreased 50.0% to $2.6
million, or $0.17 per diluted share, in 1998 compared to $5.2
million, or $0.32 per diluted share, in 1997.
<P align="center">24
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<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="left"><I>Quarterly Results of Operations</I>
<P align="left">
The following table presents unaudited consolidated statement of
operations data for each of the nine quarters in the period ended
March 31, 2000, as well as such data expressed as a
percentage of net sales. 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.
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="22%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="35"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="35"><FONT size="2"><B>Quarters Ended</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="35"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="35"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="35"><FONT size="2"><B>(in thousands)</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="15"></TD>
<TD></TD>
<TD colspan="15"></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>2000</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Mar. 31</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>June 30</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Sept. 30</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Dec. 31</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Mar. 31</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>June 30</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Sept. 30</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Dec. 31</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Mar. 31</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net sales</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18,479</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">22,682</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">24,572</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">29,314</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">23,044</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">31,600</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">42,723</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">50,041</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">39,162</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Cost and expenses:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Cost of sales</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">13,687</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">17,095</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">22,243</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">23,124</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">20,191</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">25,103</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">33,882</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">38,407</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">29,360</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Selling, general, and Administrative</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,619</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,815</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,721</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,179</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,449</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,493</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,741</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,487</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,262</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Research, development, and engineering</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,689</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,904</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,250</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,316</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,821</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,008</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,427</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,489</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,763</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,995</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">20,814</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">25,214</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">27,619</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">24,461</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">29,604</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">39,050</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">44,383</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">34,385</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Operating income (loss)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,484</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,868</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(642</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,695</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1,417</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,996</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,673</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,658</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,777</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Other income (expense), net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">175</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">124</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(52</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(289</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(185</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(214</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(160</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">541</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">580</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Income (loss) before provision for (benefit from) income
taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,659</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,992</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(694</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,406</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1,602</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,782</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,513</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,199</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,357</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Provision for (benefit from) income taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">664</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">869</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(291</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">531</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(960</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">742</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,476</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,710</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,770</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net income (loss)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">995</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,123</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(403</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">875</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(642</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,040</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,037</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,489</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,587</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="22%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="35"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="35"><FONT size="2"><B>Percentage of Net Sales</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="35"><FONT size="2"><B>Quarters Ended</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="35"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="15"></TD>
<TD></TD>
<TD colspan="15"></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>2000</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Mar. 31</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>June 30</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Sept. 30</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Dec. 31</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Mar. 31</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>June 30</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Sept. 30</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Dec. 31</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Mar. 31</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net sales</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Cost and expenses:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Cost of sales</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">74.1</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">75.4</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">90.5</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">78.9</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">87.6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">79.4</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">79.3</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">76.8</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">75.0</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Selling, general, and Administrative</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.8</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.0</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.0</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.4</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.9</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.4</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.9</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.7</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Research, development, and engineering</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.1</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.4</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.1</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.9</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.9</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.4</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.7</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.0</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.1</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">92.0</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">91.8</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">102.6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">94.2</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">106.1</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">93.7</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">91.4</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">88.7</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">87.8</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Operating income (loss)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.0</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.2</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(2.6</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.8</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(6.1</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.3</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.3</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12.2</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Other income (expense), net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.0</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.2</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.9</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.7</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.4</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.1</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.5</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Income (loss) before provision for (benefit from) income
taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.0</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.8</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(2.8</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.8</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(7.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.2</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12.4</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">13.7</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Provision for (benefit from) income taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.8</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1.2</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.8</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(4.2</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2.3</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.4</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.4</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.5</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net income (loss)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.4</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1.6</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(2.8</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.3</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.8</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.0</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.2</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
Historically, we have experienced seasonal fluctuations in our
net sales. OEM customers that purchase our products for
incorporation into retail products, such as mobile handsets,
typically increase their purchases during the year-end holiday
period and phase out old programs early in the year following
holiday sales. As a result, net sales typically peak in the
fourth quarter and reach a seasonal low point in the first
quarter.
<P align="left">
There is significant pricing pressure in higher volume programs
in the wireless communications and office automation industries.
In addition, high-volume programs that generally have lower gross
margins began to represent a larger percentage of net sales in
the second half of 1998, thereby reducing gross margins. In the
third quarter of 1998, we also started several new programs and
incurred substantial start-up costs on those new programs. In
addition, excess inventory purchases occurred in the second
quarter of 1998, slowing purchases in the third quarter of 1998
and greatly reducing material overhead absorption in that
quarter. In the first quarter of 1999, we had an unfavorable
product mix, shipping principally lower margin products. In
addition, reduced manufacturing yields and under-absorption of
fixed overhead contributed to lower margins. In the second half
of 1999, higher volumes in our manufacturing facilities produced
increased operating efficiencies, resulting in better margins.
<P align="center">25
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="left">
We started new manufacturing operations in Beijing in 1998 in a
temporary manufacturing facility. Our gross margins in the second
and third quarters of 1998 were adversely affected by start-up
costs associated with these operations, which were incurred in
advance of the receipt of significant sales. We moved into our
permanent facility in the third quarter of 1999 and, as a result,
operating efficiencies increased in China in the fourth quarter
of 1999.
<P align="left">
In 1999, we continued to expand and intensify our research and
development efforts on proprietary display products, such as <I>
LCoS </I>microdisplays. Other expense increased in the last half
of 1998 and the first half of 1999 as our cash balances declined
and we increased our borrowings. All borrowings were paid off and
cash balances increased as a result of our equity offering in
the third quarter of 1999. As a result, we had sharply higher
interest income in the fourth quarter of 1999.
<P align="left"><B>Liquidity and Capital Resources</B>
<P align="left">
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.
<P align="left">
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.
<P align="left">
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.
<P align="left">
In 1999, we had $18.4 million in net cash flow from operations
compared to nearly flat net cash flow from operations during
1998. Cash flow from operations improved during 1999 primarily as
a result of increased net income and depreciation expense. Our
depreciation expense was $5.9 million for 1999 as compared with
$4.7 million for 1998. This increase relates to increased starts
on our LCD line and increased capital equipment as a result of
our China operations. The high-volume LCD line is depreciated on
a units of production method based on units started. The
increased operational cash flow in 1999 was also the result of
inventory turns increasing from 7.3 to 9.5 in 1999 and account
receivable DSOs (Day Sales Outstanding) decreasing throughout the
year, ending at 52 days on December 31, 1999.
<P align="left">
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.
<P align="left">
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.
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<P align="left">
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 <I>LCoS</I>
microdisplays. We also made an additional investment in Inviso,
Inc. of $500,000, bringing our total minority investments 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.
<P align="left">
Capital expenditures during 1999 were approximately $12.5
million. These capital expenditures consisted of $5.6 million for
equipment and construction costs relating to our manufacturing
facility in Beijing; $1.8 million for manufacturing and office
equipment for our operations in Manila and Arizona; and $5.1
million for <I>LCoS </I>microdisplays, including our purchase of
assets and licenses from National Semiconductor and S-Vision. The
assets and licensed silicon technologies from National
Semiconductor relating to <I>LCoS </I>microdisplays were acquired
for approximately $3.0 million in cash and warrants to purchase
140,000 shares of our common stock. Substantially all of the
purchase price was allocated to depreciable assets, tooling and
mask rights, and amortizable licenses.
<P align="left">
Capital expenditures during 1998 were approximately $8.1 million.
These capital expenditures consisted primarily of manufacturing
and office equipment for our operations in Manila and Arizona and
laboratory equipment for research and development. In addition,
we spent $5.3 million for equipment and construction in 1998
related to our Beijing operations. In 1998 and 1999, we
cumulatively expended approximately $10.9 million in Beijing for
manufacturing, equipment, building construction, and land costs.
<P align="left">
We believe that our existing balances of cash and cash
equivalents, the proceeds of this offering, 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 <I>LCoS </I>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.
<P align="left"><B>Effects of Inflation and Foreign Currency Exchange
Fluctuations</B>
<P align="left">
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.
<P align="left">
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.
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<P align="center"><B>BUSINESS</B>
<P align="left"><B>Introduction</B>
<P align="left">
We design and manufacture display modules for use in the end
products of original equipment manufacturers, or OEMs. We
currently specialize in custom liquid crystal display, or LCD,
components and technology. We collaborate closely with our
customers in providing our design and manufacturing services. Our
LCD modules are used in mobile handsets and other wireless
communication devices as well as in the data collection, medical
electronics, and other commercial and consumer marketplaces. In
addition to our traditional LCD module business, we are pursuing
the commercialization of our liquid crystal on silicon, or <I>
LCoS</I>, microdisplays following substantial research and
development over the past three years. We market our services in
North America, Europe, and Asia primarily through a direct
technical sales force. Motorola is our largest customer.
<P align="left"><B>Industry Overview</B>
<P align="left"><I>Liquid Crystal Displays</I>
<P align="left">
Prior to the introduction of LCDs in the 1970s, most commonly
used displays and indicators had substantial limitations as to
their use, especially in terms of size, life, and power
consumption. LCDs were developed in response to these
limitations, especially the demand for greater information
content and less power consumption than was possible using light
emitting diode, or LED, technology. LCDs, sometimes called flat
panel displays, provide high-information content displays at
competitive prices. LCDs now appear in products throughout the
communications, office automation, industrial, medical, and
commercial electronics industries. LCDs are one of the fastest
growing of the established display industry segments, primarily
because of their widespread application in mobile communications
devices, a fast-growing segment of the electronics industry.
<P align="left">
An LCD modifies light that passes through or is reflected by it,
rather than emitting light like an LED. An LCD generally consists
of a layer of liquid crystalline material suspended between two
glass plates. The liquid crystals align themselves in a
predictable manner when stimulated electrically. The alignment
produces a visual representation of the desired information. LCDs
can display information in black and white or in a wide range of
color combinations. LCD displays consist of a matrix of dots,
called pixels, which are arranged in rows and columns that can be
selectively energized to form letters or pictures. A principal
advantage of LCDs over other display technologies, such as LEDs,
is the ability to include thousands or even millions of pixels in
a single display, which allows for greater information content.
<P align="left">
There are two types of LCDs, active matrix and passive matrix.
Active matrix LCD displays are relatively complex devices that
require manufacturing operations involving very large capital
investments. Active matrix LCD displays are used in larger,
high-information content applications, such as laptop computers.
Passive matrix LCD displays are less complex and less expensive
to manufacture. Passive matrix LCD displays are used in such
applications as mobile handsets, pagers, office equipment, data
collection terminals, point-of-sale equipment, medical devices,
transportation instrumentation, and industrial instruments and
controls.
<P align="left"><I>The Custom Passive LCD Market</I>
<P align="left">
Stanford Resources, Inc. estimated that the worldwide market for
passive matrix LCDs was $4.2 billion in 1998. This market
includes displays used in mobile handsets and other
communications equipment, business, industrial and transportation
equipment, and computer and consumer products. Of the $4.2
billion market, $1.5 billion represented LCDs used in mobile
handset applications. Mobile handsets represent the third largest
market for LCDs. According to Stanford Resources, the worldwide
market for LCDs in mobile handsets has grown from an estimated
165 million units in 1998 to 281 million units in 1999. Stanford
Resources estimates that the demand for LCDs used in mobile
handsets will be 388 million units in 2000. Additional fast
growing markets for LCD display modules include pagers, personal
digital assistants, or PDAs, and palm top computers.
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<P align="left">
The increasing complexity and functionality of handheld products,
such as wireless computing devices, require OEMs to increase the
visual performance and information content of the displays
incorporated into their products. At the same time, the market
continues to demand that OEMs incorporate displays with reduced
power requirements and lower costs. Custom passive LCDs address
these requirements for high performance, increased information
content, low power, and low cost.
<P align="left">
OEMs also seek ways to differentiate their products from the
products of their competitors. Custom-designed display modules
provide OEMs a cost-effective means to achieve this
differentiation. In designing its product, an OEM must determine
whether to use standard “off-the-shelf” display
modules, to design its own custom display modules for production
by a custom display manufacturer, or to enter into arrangements
with a third party for custom display design and production. In
making a decision to engage third parties for custom design and
production, OEMs recognize that standard
“off-the-shelf” displays make it more difficult to
differentiate their products from those of their competitors. In
considering whether to design their own display modules, OEMs
often recognize that their greatest strengths consist of consumer
brand name recognition, market research and product development
expertise, and highly developed sales and distribution channels.
Advanced design and manufacturing processes require increasing
investments for research and development, personnel, and
equipment. Competitive market conditions require a shorter period
of time from product conception to delivery, product
differentiation, improved product user friendliness, and
continually enhanced product performance and reduced product cost
during the life cycle of the product. As a result of these
factors and increasingly sophisticated and complex technology, it
has become more difficult for even the leading OEMs to maintain
the necessary technology, expertise, personnel, and equipment to
design and produce internally all of the various components
necessary for their products. As a result, there has been a trend
toward outsourcing the design and production of components such
as display modules.
<P align="left">
In addition to design and production, OEMs have increased their
use of third-party suppliers to add additional components to
their products. This permits the integration of more of the
manufacturing steps into fewer locations. This trend toward
integration and outsourcing decreases the number of suppliers
necessary to produce a final product and results in lower costs.
<P align="left"><I>The Emerging Microdisplay Market</I>
<P align="left">
Market trends demand high-information, power-efficient displays
with increasing functionality and smaller sizes at relatively low
costs. Microdisplays based on liquid crystal on silicon
technology provide a response to those demands.
<P align="left">
Liquid crystal on silicon microdisplays are a form of LCD in
which liquid crystalline material is suspended between a glass
plate and a silicon backplane rather than between two glass
plates. The silicon backplane, essentially an integrated circuit,
provides drive signals for each pixel element of the display as
well as logic functions, such as serial to parallel conversion
and data storage. Because silicon integrated circuits, a highly
developed technology, form the basis of these displays, liquid
crystal on silicon technology permits a very high-information,
high-performance display in a small size and at a relatively low
cost.
<P align="left">
Microdisplays are no larger than a thumbnail, but contain all of
the information appearing on a high-resolution personal computer
screen. The tiny image on a microdisplay can be projected onto a
screen or other surface for individual or group viewing or used
in a portable application that is viewed through a magnifying
device similar to a viewfinder. Various types of projector
applications represent the most common current use of
microdisplays. Projectors can cast the information on a distant
large screen, as in audio-visual front projectors, or shine the
image through a translucent screen, as in rear projectors.
Potential initial microdisplay applications include use in
business projection equipment and computer monitors. Other
potential applications include digital and high-definition
televisions and a wide variety of portable devices, such as
wireless Internet access devices, mobile handsets, pagers, and
PDAs as well as in wearable computing equipment using
head-mounted displays, which allow hands-free access to large
amounts of information.
<P align="left">
A well-developed front projector market currently exists. These
products are typically referred to as audio-visual projectors and
are generally fixed or portable products used in business
applications. Most front
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<DIV align="left">
projectors currently use transmissive polysilicon and reflective
DMD microdisplay technologies. Reflective liquid crystal on
silicon technology, however, is expected to provide more
information at a lower cost.
</DIV>
<P align="left">
Emerging market segments are beginning to develop for large,
cost-effective, higher-resolution computer monitors and
television screens. Current display technologies for computer
monitors and digital and high-definition televisions encounter
serious barriers related to cost, resolution, and dimensions when
used for high-resolution large screens. Many companies are
considering the incorporation of microdisplays into large,
high-resolution screens to enable affordable display solutions.
<P align="left">
Significant development efforts are currently being directed to
portable microdisplays as a potential method for delivering
high-information content at low cost and with low power
consumption in mobile, hand-held communication devices. It is
widely assumed that converged voice and data communication
devices have the potential to become a new class of products in
mobile communications, probably integrated with PDA functions,
such as phonebooks and calendars. In concept, the functions of
the telephone, e-mail, pagers, PDAs, and the Internet are
expected to become integrated. Delivery of high-information
content over the Internet on a small, direct-view display,
however, presents difficult technological challenges. Portable
microdisplays used with a viewfinder offer a potential solution
because they can deliver as much information as a computer
monitor in a very small, lightweight, and power-efficient
package.
<P align="left">
The portable microdisplay market is just beginning to develop.
Market potential currently is uncertain and is limited by such
factors as the availability of sufficient wireless communication
bandwidth, the uncertainty of customer acceptance, and the
possibility of alternative technologies. Nevertheless, many major
vendors of mobile handsets, pagers, and PDAs have prototype
programs underway to develop new converged mobile communication
products with large information content at low cost, and many of
these vendors are beginning to assess portable microdisplays for
use in these products.
<P align="left"><B>The Three-Five Approach</B>
<P align="left">
We seek to provide our customers with high-performance,
information-rich, low-power consumption displays that have
competitive advantages in terms of size, cost, and product
differentiation. To accomplish this goal, our research and
development activities focus on technological developments
intended to meet the current and future requirements of our
customers. We add value for our customers through our ability to
integrate the design and production process, which reduces the
time between product conception and market introduction. Our
emphasis on customization and technological leadership has
positioned us to develop new custom product solutions for our
customers as they seek displays with more information content at
lower cost.
<P align="left">
Our custom product solutions provide OEMs with the following
benefits:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
access to specialized design and manufacturing technology and
expertise;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
accelerated design process and reduced design and manufacturing
costs through the use of our specialized personnel, equipment,
and facilities;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
reduced reliance on multiple suppliers for components and
integration of their production processes; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the ability to concentrate their own resources on the design,
production, and distribution of their core products.</TD>
</TR>
</TABLE>
<P align="left">
By eliminating the duplication and overlap of investment and
resources, we and our OEM customers are able to work together and
grow at a faster rate than would otherwise be possible. We
concentrate on the development of our display technologies and
their applications to products, while our customers devote time
and resources on market development for these products.
<P align="left">
Our historical target market consists of high-end monochrome
passive matrix LCD display modules of 1/4 VGA (320 x 240
pixels) or less resolution, primarily those having smaller than
three-inch diagonal screen sizes. We do not address low-end LCD
display markets, such as watches and calculators. Our target
market for <I>LCoS </I>microdisplays consists of displays of SVGA
(800 x 600 pixels) or higher resolution.
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<P align="left"><B>Strategy</B>
<P align="left">
Our strategy is to enhance our position as a leading worldwide
supplier of custom-designed and manufactured displays for
application in various high-growth segments of the electronics
industry. Key elements of our strategy include the following:
<P align="left"><I>Target Leading Customers in High-Growth Industries</I>
<P align="left">
We identify industries that we believe have the greatest
long-term potential for growth. We recognize that our growth and
development is closely aligned with the growth and development of
the industries we serve. Current targeted industries include
mobile handsets and other wireless communication, data
collection, office automation, medical equipment, and other
commercial and consumer marketplace products.
<P align="left">
Within an industry, we target leading companies that we believe
would benefit from our design and manufacturing services.
Targeted customers typically are Fortune 1000 manufacturing
companies whose products require display devices. Our sales and
engineering staffs then attempt to demonstrate the benefits that
the potential customer would derive by outsourcing to us the
design and production of display devices required in their
products.
<P align="left">
Once we establish a relationship with a new customer, we endeavor
to develop new programs for other product groups within the
customer’s business. For this reason, we specifically target
customers with multiple divisions or product lines.
<P align="left"><I>Expand Customer Base</I>
<P align="left">
We intend to intensify our efforts to expand our customer base.
We also plan to target specialized markets that have substantial
volume requirements. We will continue to seek opportunities in
growing and emerging markets, both in the United States and
internationally.
<P align="left"><I>Establish Close Relationships with Customers</I>
<P align="left">
We seek to establish strong and long-lasting customer
relationships through our fundamental business practice, which we
refer to as “customer partnering.” Customer partnering
involves aligning our prospects with those of our customers and
seeking to make our engineering and production staffs seamless
extensions of the product design and production departments of
our customers. This includes our engineers spending a significant
portion of their time assisting customers with their own
research and development efforts at their facilities. In
addition, our customers’ engineers spend a significant
amount of time conducting research and development in our
facilities.
<P align="left">
We stress product solutions for our customers’ products. We
view each customer’s new product as our own and take pride
in creating and implementing innovative engineering solutions
that differentiate the customer’s product from competitive
products. In connection with this philosophy, we have positioned
ourselves to provide a rapid response to our customers and their
worldwide operations.
<P align="left">
To achieve our customer partnering goal, we emphasize corporate
cultures, customs, and communications that complement those of
our customers. A thorough understanding of our customers’
products and business goals enables us to anticipate customer
needs and to develop new design and production solutions for
their products.
<P align="left">
We continually attempt to enhance the competitive position of our
customers by providing them with innovative, distinctive, and
high-quality display devices on a timely and cost-effective
basis. To do so, we work continually to improve our productivity,
lower our costs, and speed the delivery of our product
solutions. We endeavor to streamline the entire design through
delivery process by maintaining an ongoing engineering and
manufacturing improvement effort.
<P align="left">
We continue to provide customer support after product design has
been completed and production has been commenced. Through such
follow-on activity, we conduct quality enhancement and
cost-reduction efforts to maintain the competitiveness of our
customers’ products.
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<P align="left"><I>Provide Advanced Custom Design and Manufacturing Services</I>
<P align="left">
We seek to design, prototype, and manufacture, on a timely and
cost-effective basis, a wide range of innovative, distinctive,
and high-quality display devices for operational control and
information display functions required in the end products of
OEMs. Our design processes utilize advanced computer-aided design
software to provide custom solutions for customers’
products in time frames and on cost bases that we believe are
substantially shorter and lower-priced than industry norms.
<P align="left">
We operate our highly automated, high-volume LCD manufacturing
line in Arizona to produce the majority of our LCDs. We utilize
advanced, flexible manufacturing systems for high-volume module
assembly in Manila and Beijing. We believe our three
manufacturing facilities provide us with a competitive advantage
in meeting the custom LCD needs of our customers. We anticipate
that our ability to design, prototype, and manufacture product
solutions will be enhanced by the expansion of our engineering
personnel, our increased design capacity, and our ability to meet
our LCD requirements. We continue to increase our production
personnel and add sophisticated manufacturing equipment to meet
expanding capacity requirements. We will continue to explore the
most advanced and cost-efficient production methods for each
product solution.
<P align="left"><I>Exceed Customer Requirements Through Speed and Efficiency</I>
<P align="left">
We emphasize innovative design and manufacturing techniques to
improve the speed, efficiency, and performance of our design and
manufacturing services. This enables our customers to address the
pressure to reduce the lead times for market introduction of
their products. As part of our development process, we
continually improve and modify our design and manufacturing
processes, controls, and methodology in an effort to support our
customers’ requirements.
<P align="left"><I>Leverage Research, Development, and Engineering</I>
<P align="left">
We continually strive to develop and acquire new technologies and
utilize technological developments in order to provide practical
solutions for our customers. We conduct an active research and
development program designed to
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
continually improve our products and create new products;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
increase our efficiency;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
reduce our costs;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
improve the speed, efficiency, and performance of our design and
manufacturing services;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
develop new design and manufacturing processes and techniques;
and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
enhance the quality, cost-effectiveness, and value of our
services.</TD>
</TR>
</TABLE>
<P align="left">
We plan to expand our research and development efforts through
increased expenditures and the hiring of additional personnel to
meet the expectations of our customers and to satisfy our goal to
design and produce the most advanced product solutions on a
timely and cost-effective basis. New technologies include our <I>
LCoS </I>microdisplays, which address the increased demands for
high-information displays in a small size and at a relatively low
cost. In addition, we currently are exploring the development
and expansion of existing LCD technologies as well as new
technologies, such as sunlight readable LCDs, color LCDs, plastic
LCDs, bi-stable LCDs, graphics and color graphics, organic and
polymer light emitting displays, and pixel-related display
technologies.
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<P align="left"><B>Products and Services</B>
<P align="left">
We currently engage in the design and manufacture of LCD display
modules and the development and commercialization of
manufacturing technologies for use in various products of OEMs.
<P align="left"><I>LCD Display Modules and Services</I>
<P align="left">
We currently emphasize custom designed LCD display modules. A
manufacturer of a complete system or product requiring a specific
type of visual display, such as a mobile handset, medical
instrument, business machine, or hand-held data collection
device, represents a typical buyer for a custom LCD display
module. For each custom display module, we work directly with our
customer to develop and produce the original design and to
manufacture the display module in accordance with the
customer’s specifications. At a minimum, each module
includes an LCD, a custom LCD driver, and a flexible connector.
We also provide value-added services by assembling additional
components onto the module, such as keypads, microphones,
speakers, light guides, and optics. In 1999, LCD custom display
modules accounted for approximately 95.0% of our net sales.
<P align="left">
We have developed a sophisticated design process to meet the
specific needs of our customers’ applications. Each design
project normally involves a cross-functional team of our
engineers who are assigned to a customer program. The team
consults with the customer’s engineers throughout the
design, prototype development, and manufacturing process. We
continue to supply value-added engineering support after the
design solution has been developed and integrated into the
manufacturing process in an ongoing effort to provide customers
with product performance enhancements and cost-reduction
opportunities.
<P align="left">
The difficulties in developing a custom LCD module include
unclear customer expectations, evolving customer requirements,
and changing customer end-product specifications. These factors
result in lengthy lead times for market introduction of
customers’ products. To overcome the traditional obstacles
involved in custom design and development, we have developed the
four phase program development process described below. We
combine our program development process with our philosophy of
being a “seamless extension of our customer.” This
results in a very flexible, responsive, accurate, and fast
development cycle that enables our customers to introduce their
products into the market rapidly. Our program development process
consists of the following phases:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
<I>Feasibility and concept phase. </I>We work closely with our
customer to understand its requirements. Customer input varies
from rough sketches to detailed specifications. Experienced LCD
module design engineers work to develop conceptual solutions to
customer requirements that include both design and cost
parameters.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
<I>Prototype phase. </I>We conduct a design review with the
customer; complete at our Arizona facility a proposed design,
including the electrical, mechanical, and optical features of the
LCD display module; and deliver a prototype to the customer.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
<I>Pilot phase. </I>We perform a thorough design review with our
customer, involving an analysis of performance, cost, and volume
production considerations. A successful pilot phase results in
the completion of any design changes, the ordering of the tooling
required for production, and the delivery of manufacturing
samples. We generally conduct the pilot phase primarily in
Manila.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
<I>High-volume production phase. </I>We complete any required
changes in the manufacturing process, receive necessary tooling,
and commence high-volume production. The production takes place
either in Manila or Beijing.</TD>
</TR>
</TABLE>
<P align="left">
We also design and produce standard or “off-the-shelf”
devices, which involve designs that are adaptable to various uses
with little or no modification. Standard devices encompass a
wide variety of display devices having varied applications.
Standard display devices include solid state lamps, multi-digit
numerical displays, integrated displays, and bar graph displays.
In 1999, our standard devices accounted for less than 3.0% of our
net sales and consisted of non-LCD devices.
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<P align="left"><I>New Display Technologies</I>
<P align="left">
We are pursuing several new technology initiatives for our
display module business. We have patented a new type of sunlight
readable LCD display that we call <I>Liquid Crystal intense
Display</I>, or <I>LCiD</I>. This lower information content
device provides a multi-colored, emissive-looking display at
passive LCD prices.
<P align="left">
<I>LCiD </I>display devices include a display from as little as
one line by five character dot matrix to as large as four line by
20 character dot matrix, all available in a variety of
colors. We began production shipments of <I>LCiD </I>in the
fourth quarter of 1999. We expect that <I>LCiD </I>displays will
be used primarily in lower information content applications
requiring high contrast, desired color, and ease of readability
from full sunlight to complete darkness. We have recently
received orders for <I>LCiD</I> displays for applications in
several markets. These applications include radar detectors and
various types of digital audio devices, including MP3 players.
Other potential applications for our <I>LCiD </I>display devices
include automotive instrumentation, appliances, hand-held
instrumentation devices, vending equipment, stereo equipment,
embedded computing equipment, remote sensing equipment, outdoor
monitor equipment, and industrial controls.
<P align="left">
We also have begun research and development efforts on several
types of new display technologies, including reflective color
LCDs, color-filter LCDs, plastic LCDs, monochrome LCDs with a
paper-white background, bi-stable LCDs, and organic and polymer
light emitting displays. Some of these initiatives have been or
will be undertaken with partners and in strategic alliances. For
example, we recently established a strategic relationship with
Kyocera Industrial Ceramics Corporation to develop reflective
color LCD displays. We expect that manufacturers of mobile
handsets, Internet appliances, and smart phones will soon begin
to use color LCD displays. Reflective color displays utilize
ambient light to illuminate the display. As a result, reflective
color displays use less power than other types of color displays,
which is important for portable products where battery life is a
critical factor.
<P align="left"><I>LCoS Microdisplays</I>
<P align="left">
The display market demands continually greater information
content at reduced prices. In response to these demands, we are
pursuing the commercialization of our liquid crystal on silicon,
or <I>LCoS,</I> microdisplays following three years of extensive
research and development activities. Our <I>LCoS</I> technology
provides very high-information content in a small size and at an
expected relatively low cost. The information presented by these
displays is magnified for view, generally either in a projector
or in a viewfinder. We believe that the inherent capability of
our <I>LCoS </I>technology provides a cost-effective solution to
increased information demands.
<P align="left">
Our current plan for the development of our <I>LCoS </I>
microdisplay business is to respond in an efficient manner to
industry developments and changes, to develop a dedicated
organization infrastructure, and to develop or lead the market to
a common <I>LCoS </I>module platform. To meet our business
objective of becoming the leading supplier of microdisplay visual
systems, we must rapidly commercialize <I>LCoS </I>microdisplay
technology on a cost-effective basis. This requires us to focus
on common <I>LCoS </I>module platforms that provide economies of
scale, rapid time to market, and broad market penetration.
Specifically, our strategy calls for a business preparation phase
and a business growth phase. We are currently transitioning from
the business preparation phase to the business growth phase. In
the preparation phase, we emphasized research, development, and
licensing opportunities to expand our technology portfolio,
design engineering of <I>LCoS </I>products for a significant
number of OEMs, and management to establish an organization
infrastructure. The business growth phase calls for resources to
be deployed primarily in high-volume manufacturing, marketing,
sales, and business development.
<P align="left">
We are developing a broad range of <I>LCoS </I>microdisplay
products to offer customers. The table below sets forth various
resolutions with pixel count, or the number of color dots on a
screen, and potential uses for our
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<DIV align="left">
<I>LCoS</I> microdisplays. We currently have multiple <I>LCoS
</I>solutions, which we have prototyped for customer evaluation.
We are focussing on products with the capability to produce all
of the following resolutions:
</DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="7%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
<TD width="3%"> </TD>
<TD width="65%"> </TD>
</TR>
<TR>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Resolution</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Pixel Count</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Applications</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">SVGA</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">480,000</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Hand-held devices, such as PDAs or mobile handsets, and head
mounted displays or wearable computers</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">XGA</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">780,000</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Portable audio-visual projectors</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">SXGA</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">1,300,000</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Portable audio-visual projectors, rear-projection monitors, and
digital television</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">HDTV</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">2,000,000</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
High-definition digital television</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
We believe that the initial markets for our <I>LCoS </I>
microdisplay products will be in front projectors, monitors, and
digital and high-definition television sets. Currently, the front
projector, rear projection, and digital and high-definition
television markets are being served by active matrix polysilicon
microdisplays and DMD microdisplays. Polysilicon microdisplays
are manufactured by several large Japanese companies. These
products are incapable of producing cost-effective resolutions
above XGA without the further expense of adding special optics
and are generally more expensive than anticipated costs for <I>
LCoS </I>microdisplays. DMD microdisplays are a proprietary
product of Texas Instruments. Although DMDs have no inherent
resolution limitations, they are relatively expensive to
manufacture, especially at higher resolutions. The expected
relatively low cost for <I>LCoS </I>microdisplays makes them more
suitable for competitive consumer marketplaces, such as portable
business projectors, monitors, and digital and high-definition
televisions.
<P align="left">
We believe another market for <I>LCoS </I>microdisplay products
will be converged wireless products requiring high-information
content displays for e-mail and access to the Internet. Use of an
<I>LCoS </I>microdisplay in a viewfinder application would
enable a person to carry a portable device capable of delivering
the same SVGA resolution as on the person’s desktop or
laptop computer. This has the potential to allow portable access
to the Internet and critical information, such as calendars,
maps, e-mail, and documentation, in a handheld product. The high
resolution of the device would avoid scrolling or time-consuming
text conversions in accessing the World Wide Web for needed
information.
<P align="left">
We plan to offer a range of <I>LCoS</I> product solutions with
different levels of integration from individual light valves to
fully integrated displays. By adopting a modular approach to
configuring and selling our <I>LCoS</I> microdisplays, we will
have the opportunity to price our products on a value-added basis
and to rapidly introduce new <I>LCoS</I> products. In addition,
we have been working with optical companies that are interested
in developing optical light engines for sale to OEMs that
manufacture monitors and televisions. A light engine consists of
a lens, color management system, lamp, and microdisplay. <I>LCoS
</I> microdisplays require different optics than those employed
when using transmissive polysilicon microdisplays.
<P align="left">
We have recently entered into an agreement with Nikon Corporation
and Mitsui & Co. Ltd. for the development of a
high-performance light engine employing Nikon’s proprietary
polarizing beam splitter optical technology and our <I>LCoS</I>
microdisplays. The light engines will be targeted to the
rear-projection computer monitor and television markets as a
replacement for conventional CRT computer monitors and
televisions. Nikon recently completed a fully functional
pre-production light engine built around one of our <I>LCoS</I>
microdisplays. As part of its pre-production design work, Nikon
will optimize the performance of its proprietary technology to
best match the characteristics of our microdisplay. In addition,
Advanced Optical Engineering and Samsung Electro-Mechanics
Company recently announced the development of a new optical light
engine, which utilizes our <I>LCoS</I> microdisplay, targeted to
the projection market and designed to be a platform for the
development of other light engine products to be used in
rear-projection computer monitors, PCTVs, television sets, and
Internet ready appliances. We also recently entered into an
agreement with InFocus Systems, Inc. to create <I>LCoS</I>
microdisplay technology customized for front projector
applications. Under the agreement, we and InFocus will
collaborate to deliver a low-cost solution for high-performance,
high-resolution, and affordable data/video projectors based on
our <I>LCoS</I> microdisplay.
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<P align="left">
We will have undertaken extensive development efforts before the
first sale of <I>LCoS </I>products, and we expect to incur
substantial losses in the microdisplay business until the volume
production of <I>LCoS</I> microdisplays. We currently expect
initial production to commence in late 2000.
<P align="left"><B>Sales and Marketing</B>
<P align="left">
We approach sales and marketing on three levels: engineer to
engineer, salesperson to procurement, and factory to factory. Our
approach is to treat an existing program as a marketing platform
for the next program. Our engineering, marketing, and sales
groups provide ongoing services to our customers throughout the
life of product programs. These services include implementing
continuous improvement tools related to both the product’s
cost and technical performance. This service function allows us
to market future sales within our customer base.
<P align="left">
We market our services primarily in North America, Asia, and
Europe through a direct technical sales force resident in those
areas. A staff of in-house, Arizona-based engineering personnel
directs and aids all sales personnel. We have 15 sales
persons worldwide.
<P align="left">
Our sales to customers in Europe represented approximately 35.2%
of net sales in 1998, approximately 46.7% of net sales in 1999,
and approximately 47.5% of net sales in the first three months of
2000. Our sales to customers in Asia represented approximately
12.1% of net sales in 1998, approximately 35.3% of net sales in
1999, and approximately 31.9% of net sales in the first three
months of 2000.
<P align="left">
Recently, we signed an exclusive distributorship agreement with
Mitsui Co., Ltd. of Tokyo, Japan. Under this agreement, Mitsui
will market and sell our <I>LCiD </I>and <I>LCoS </I>products to
customers in Japan.
<P align="left"><B>Customers</B>
<P align="left">
Our strategy involves concentrating our efforts on providing
design and production services to leading companies in mobile
handsets and other wireless communication, data collection,
office automation, medical equipment, and other commercial and
consumer marketplaces. As a result, we derive our net sales from
services provided to a limited number of customers.
<P align="left">
Our largest customer is Motorola. Sales to Motorola accounted for
approximately 84.9% of our net sales in the first three months
of 2000, 86.1% of our net sales in 1999, and 63.6% of our net
sales in 1998. No customer other than Motorola accounted for more
than 10.0% of our net sales in 1998, 1999, or the first three
months of 2000. Sales to Motorola currently are made through
multiple national and international buyers, and products are
delivered to diverse geographical regions throughout the world,
including Asia, North America, and Europe. Substantially all of
our net sales to Motorola have been for mobile handset
applications, and we are currently in the design or manufacturing
phase for more than 20 of their programs. Motorola has an
LCD module allocation process in which it designates key LCD
module vendors, including us, and communicates to each vendor the
anticipated annual range of purchases. Although the allocation
process does not provide a guarantee of business to us, it
provides an indication that purchases by Motorola during 2000
could exceed 1999 levels. See “Risk Factors —
Motorola accounts for a significant portion of our sales.”
<P align="left">
One of our key strategic goals is to diversify our customer base
while increasing our sales to Motorola. During the first quarter
of 2000, we secured 11 new design wins. The design wins were for
LCD modules to be used in products such as mobile handsets, data
collection devices, and MP3 players. Of the 11 design wins, seven
are for new customers, five of which are mobile handset
manufacturers. We anticipate that production shipments for
several of these design wins will commence in the second half of
2000. However, design wins do not assure the commercial
introduction or success of a product. See “Risk
Factors — We are subject to lengthy development periods
and product acceptance cycles.”
<P align="left"><B>Backlog</B>
<P align="left">
As of March 31, 2000, we had a backlog of orders of
approximately $37.1 million. The backlog of orders as of
December 31, 1999 was approximately $46.3 million. Our
backlog consists of product orders for
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<DIV align="left">
which confirmed purchase orders have been received and which are
scheduled for shipment within 12 months. Most orders are
subject to rescheduling or cancellation by the customer with
limited penalties. Because of the possibility of customer changes
in delivery schedules or cancellations and potential delays in
product shipments, our backlog as of a particular date may not be
indicative of net sales for any succeeding period.
</DIV>
<P align="left"><B>Manufacturing Services, Facilities, and Quality Control</B>
<P align="left"><I>Manufacturing Services</I>
<P align="left">
We have organized our manufacturing geographically to optimize
the combination of technology and labor factors. This
organization enables us to compete solely on the basis of cost,
if necessary, with suppliers of similar products and services
throughout the world. Our advanced manufacturing techniques
include surface mount technologies, chip-on-board, chip-on-flex,
chip-on-glass, flip-chip, tape automated bonding, and
sophisticated testing systems throughout these processes.
<P align="left">
We seek to increase our value to our customers by providing
responsive, flexible, total manufacturing services. To date, our
manufacturing services have been concentrated on the manufacture
of LCDs and assembly of display modules that we have designed. We
provide extended manufacturing services beyond these core
services, however, if the customer requires them. Extended
services may include adding additional components, such as
keypads, microphones, speakers, light guides, and optics, or the
turnkey manufacture of a complete assembly.
<P align="left"><I>Manufacturing Facilities</I>
<P align="left">
We currently conduct manufacturing operations in Arizona; Manila,
the Philippines; and Beijing, China. The Arizona facility houses
a Class 1000 “clean room” and LCD fabrication and
prototyping operations. We utilize this facility primarily to
conduct LCD research and development, to produce prototype and
pre-production runs of devices for customer approval, to conduct
full production runs of low-volume devices, and to develop
advanced manufacturing processes that can be applied in Manila
and Beijing during full-scale production. In addition, the
facility has the largest fully automated LCD production capacity
in North America. This highly automated line enables us to
eliminate substantially our dependence on foreign suppliers of
LCDs. Facility personnel include a team of experts ranging from
LCD research scientists to specialized engineers with backgrounds
in electronics, mechanics, chemistry, physics, and
manufacturing. We maintain a wide variety of state-of-the-art
testing and quality control equipment at the facility.
<P align="left">
We have also recently completed a dedicated <I>LCoS</I>
microdisplay production line at our Arizona facility. As a result
of capacity and line-balancing issues, we decided to operate the
<I>LCoS</I> microdisplay fabrication line separately from the
LCD line. We are also completing construction of new clean rooms
so that we can perform all manufacturing, packaging, and module
assembly for <I>LCoS</I> products at our Arizona facility.
<P align="left">
We conduct high-volume LCD module manufacturing in Manila and
Beijing. In Manila, we are a party to a sub-assembly agreement
with Technology Electronic Assembly and Management Pacific
Corporation, or TEAM, under which TEAM supplies direct
manufacturing services at a facility that TEAM owns and that is
located on land TEAM leases from the Philippine government. We
also are party to a lease agreement with TEAM under which TEAM
leases space to us with respect to the manufacturing operations
services that TEAM performs under the sub-assembly agreement. At
the leased facility, TEAM manufactures, assembles, and tests
devices that we design pursuant to procedures set forth in the
sub-assembly agreement in accordance with our specifications.
Under the sub-assembly agreement, TEAM supplies only the direct
labor and certain incidental services required to manufacture our
products. We own the manufacturing, assembling, and testing
equipment, including automated die attach and wire bond equipment
with automatic pattern recognition features for die and wire
placement for LED die, as well as the processes and documentation
that TEAM uses at the Manila facility. We pay TEAM for the
direct manufacturing personnel based upon a negotiated available
hourly rate. We employ all professional personnel, including an
operations manager, with a support staff consisting of
manufacturing supervisors; manufacturing, quality, and process
engineers; and logistics and administrative personnel at the
Manila facility.
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<P align="left">
Our sub-assembly agreement and lease agreement with TEAM extend
through December 31, 2000, and each is renewable from year
to year thereafter. We have occupied this facility for more than
10 years. The sub-assembly agreement requires us to maintain
minimum production levels. The termination of the lease
agreement or sub-assembly agreement or the inability of TEAM to
fulfill its requirements under the sub-assembly agreement would
require us to acquire additional manufacturing facilities or to
contract for additional manufacturing services. See “Risk
Factors — We depend on our manufacturing operations in
the Philippines.” We are considering establishing an
additional production facility in Manila during the last half of
2000. In such event, we would likely retain the TEAM facility
because of expected capacity requirements in 2001.
<P align="left">
Our Beijing facility is a high-volume display module
manufacturing facility similar to our current facility in Manila.
We initially leased a facility in Beijing on a temporary basis,
and we commenced manufacturing at this facility in the third
quarter of 1998. We completed the construction of our permanent
facility in Beijing in July 1999, and all production during
and subsequent to the fourth quarter of 1999 occurred in that new
facility. We employ all of the direct and indirect manufacturing
employees at the facility, including technicians, supervisors,
and engineers.
<P align="left"><I>Quality Control</I>
<P align="left">
We recognize the need to maintain a strong reputation for quality
as a means of retaining existing customers and securing
additional orders from them as well as attracting new customers.
We have an extensive quality control program and maintain at each
of our facilities quality systems and processes that meet or
exceed the demanding standards set by many leading OEMs in
targeted industries. We base our quality control program upon
statistical process control, which advocates continual
quantitative measurements of crucial parameters and uses those
measurements in a closed-loop feedback system to control the
manufacturing process. We perform product life testing to help
ensure long-term product reliability. We analyze results of
product life tests and take actions to refine the manufacturing
process or enhance the product design.
<P align="left">
Increased global competition has led to increased customer
expectations with respect to price, delivery, and quality.
Customers often evaluate price in the quotation process and
evaluate delivery and quality only after receiving the product.
Therefore, many customers preview a company’s quality by
viewing the quality systems employed. We have received
ISO 9002 and QS 9000 certification of our Manila
manufacturing facility. ISO and QS are quality standards
established by international organizations that attempt to ensure
that the processes used in development and production remain
consistent. This is accomplished through documentation
maintenance, training, and management review of the processes
used. Although achieving an ISO 9002 or QS 9000
certification does not assure that we will obtain future
business, it is a factor that enables our customers to recognize
that our production processes meet these established, global
standards of performance.
<P align="left"><B>Components and Raw Materials</B>
<P align="left">
Components and raw materials constitute a substantial portion of
our product costs. The principal components and raw materials we
use in producing our displays consist of LCD glass, application
specific integrated circuits, or ASICs, circuit boards, molded
plastic parts, lead frames, and packaging materials. Our
procurement strategy is to secure alternative sources of supplies
for the majority of these materials. Many of these, however,
must be obtained from foreign suppliers, which subjects us to the
risks inherent in obtaining materials from foreign sources,
including supply interruptions and currency fluctuations. With
one exception, our suppliers generally are meeting our
requirements, and we believe our strategic supplier alliances
have further strengthened our relations with offshore suppliers.
We experienced material shortages of ASICs in 1999 and the first
quarter of 2000 as a result of the increased worldwide demand for
cellular handsets. These shortages prevented us from meeting
customer demand for certain of our products. The shortage of
ASICs is expected to continue through 2000. This shortage and
similar shortages in other materials could have a material
adverse effect on our business.
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<P align="left"><B>Research, Development, and Engineering</B>
<P align="left">
We conduct an active and ongoing research, development, and
engineering program that focuses on advancing technology,
developing improved design and manufacturing processes, and
improving the overall quality of the products and services that
we provide. Our goal is to provide our customers with new
solutions that address their needs. Research and development
personnel concentrate on LCD technology, especially on improving
the performance of current products and expanding the technology
to serve new markets. We also conduct research and development in
manufacturing processes, including those associated with
efficient, high-volume production and electronic packaging.
<P align="left">
With the availability of our high-volume LCD manufacturing line
in Arizona, we are focusing our research and development efforts
on new display technologies. We expect that these advanced
display technologies will enable us to provide our customers with
differentiating products or products that provide higher
information content. These new technologies include active
addressing, sunlight readable LCDs, color LCDs, plastic LCDs,
bi-stable LCDs, graphics and color graphics, organic and polymer
light emitting displays, and pixel-related display technologies.
These products may be available for use in custom devices or in
standard devices. We have undertaken a significant research and
development program and made substantial investments with respect
to the development of our <I>LCoS </I>microdisplays for
potential use in projectors, monitors, digital and
high-definition televisions, and portable applications. We expect
that the majority of our available research and development
personnel hours will be dedicated to <I>LCoS </I>microdisplays in
2000.
<P align="left">
In October 1999, we signed a letter 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 we and Tecdis design for our respective customers.
Recently, STMicroelectronics announced its participation in Dora
and its agreement to manufacture the ASICs designed by Dora.
<P align="left">
In February 2000, we established a strategic relationship
with Kyocera Industrial Ceramics Corporation to develop
reflective color LCD displays. We expect that manufacturers of
mobile handsets, Internet appliances, and smart phones will soon
begin to use color LCD displays. Reflective color displays
utilize ambient light to illuminate the display. As a result,
reflective color displays use less power than other types of
color displays, which is important for portable products where
battery life is a critical factor.
<P align="left"><B>Intellectual Property</B>
<P align="left">
We rely on a variety of intellectual property methods, including
patents, trade secrets, trademarks, confidentiality agreements,
licensing agreements, and other forms of contractual provisions,
to protect and advance our intellectual property. Although our
existing LCD display business has not historically depended on
intellectual property protection, we are manufacturing more
advanced display products for which we are actively seeking
intellectual property protection. For example, our <I>LCiD </I>
technology is patented. We have also applied for numerous other
process, product, and design patents, all related to display
technologies. There can be no assurance that any of these patents
will be issued to us.
<P align="left">
We have also taken several steps to both protect and advance our
<I>LCoS</I> microdisplay technology.
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
We filed several patents relating to our <I>LCoS </I>microdisplay
technology. These patents cover the areas of product design and
manufacturing process technology.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
In July 1999, we purchased the assets, including all
production and test equipment, specialized laboratory equipment,
and supporting design documentation and software, of the former
Light Valve business unit of National Semiconductor. We also
hired several key scientists of that business unit and acquired
an exclusive, paid-up, royalty free license on all of the patents
and intellectual property related to that business unit. This
license covers all intellectual property relating to the
processing, packaging, and testing of light valves and the
integrated circuits necessary to manufacture and sell both light
valves and light engines.</TD>
</TR>
</TABLE>
<P align="center">39
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<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
In August 1999, we licensed the microdisplay technology of
S-Vision Corporation, a former microdisplay competitor that had
recently ceased operations. Under this agreement, we acquired an
irrevocable, royalty free, fully paid-up, worldwide license to
the intellectual property associated with S-Vision’s digital
backplane and optical systems, which provides us rights to
manufacture certain microdisplay products and patented optical
engines. In addition, S-Vision assigned to us a patent relating
to the design and manufacture of microdisplay products.</TD>
</TR>
</TABLE>
<P align="left"><B>Competition</B>
<P align="left">
We believe that Hosiden, Hyundai, Optrex, PCI, Philips, Samsung,
Seiko-Epson, Seiko Instruments, and Sharp constitute the
principal competitors for our passive LCD devices. Most of these
competitors are large companies that have greater financial,
technical, marketing, manufacturing, vertical integration, and
personnel resources than we do. Our sales, profitability, and
success depend substantially upon our ability to compete with
other providers of display modules. We cannot provide assurance
that we will continue to be able to compete successfully with
these organizations.
<P align="left">
We currently compete principally on the basis of the technical
innovation, engineering service, and performance of our display
modules, including their ease of use and reliability, as well as
on their cost, timely design, and manufacturing and delivery
schedules. Our competitive position could be adversely affected
if one or more of our customers, particularly Motorola,
determines to design and manufacture their display modules
internally or secures them from other parties.
<P align="left">
Other large companies are currently pursuing microdisplay
solutions. Texas Instruments has developed a product, referred to
as a DMD microdisplay, that competes with our <I>LCoS </I>
technology, and IBM and JVC are producing a similar liquid
crystal on silicon display based on their own technology.
Numerous other established and start-up companies are also
pursuing similar and related technologies that may compete with
our <I>LCoS </I>technology.
<P align="left"><B>Environmental Regulations</B>
<P align="left">
Our operations create a small amount of hazardous waste,
including various epoxies, gases, inks, solvents, and other
wastes. The amount of hazardous waste we produce may increase in
the future depending on changes in our operations. The general
issue of the disposal of hazardous waste has received increasing
focus from federal, state, local, and international governments
and agencies and has been subject to increasing regulation.
<P align="left"><B>Employees</B>
<P align="left">
As of March 31, 2000, we employed a total of 2,162 persons,
of whom 1,114 were employed through third-party contracts. Of our
direct employees, 201 were full-time and 14 were temporary
employees at our principal U.S. facility in Arizona and U.S.
sales offices; 237 were employees at our manufacturing facility
in Manila; 588 were employees at our manufacturing facility in
Beijing; and eight were employees at our Three-Five Systems
Limited subsidiary in Swindon, England. We consider our
relationship with our employees to be good, and none of our
employees currently are represented by a union in collective
bargaining with us.
<P align="left">
TEAM provides the personnel engaged in the direct assembly of our
devices in Manila under the sub-assembly agreement between us
and TEAM. As of March 31, 2000, 1,114 persons performed
direct labor operations at the Manila facility through the
sub-assembly agreement with TEAM.
<P align="center">40
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<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>MANAGEMENT</B>
<P align="left"><B>Directors, Executive Officers and Key Employees</B>
<P align="left">
The following table sets forth certain information regarding our
directors, executive officers and key employees:
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="36%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="53%"> </TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Name</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Age</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Position Held</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Jack L. Saltich</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">56</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
President, Chief Executive Officer, and Director</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Jeffrey D. Buchanan</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">44</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Executive Vice President, Chief Financial Officer, Secretary,
Treasurer, and Director</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Carl E. Derrington</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">49</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Vice President, Chief Manufacturing Officer</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Robert L. Melcher</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">60</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Chief Technology Officer</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Robert T. Berube</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">62</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Principal Accounting Officer and Corporate Controller</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
James F. Bowser</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">58</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Vice President — New Business Development</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Charles K. Rahrig</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">45</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Vice President — Design Engineering</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Dan J. Schott</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">61</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Vice President — Research and Development</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Elizabeth A. Sharp</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">38</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Vice President — Corporate Relations</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Robert W. Harrison</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">39</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Director — LCD Marketing and Sales</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Allan L. Davis</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">47</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Director — Microdisplay Marketing and Sales</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
David C. Malmberg<SUP>(1)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">57</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Chairman of the Board</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Kenneth M. Julien<SUP>(2)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">45</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Director</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Gary R. Long<SUP>(1)(2)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">68</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Director</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Thomas H. Werner<SUP>(1)(2)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">40</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Director</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
David P. Chavoustie<SUP>(1)(2)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">57</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Director</FONT></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left">
<HR size="1" width="18%" align="left">
</DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="97%"></TD>
</TR>
<TR valign="top">
<TD>(1) </TD>
<TD align="left">
Member of the compensation committee.</TD>
</TR>
<TR valign="top">
<TD>(2) </TD>
<TD align="left">
Member of the audit committee.</TD>
</TR>
</TABLE>
<P align="left">
<I>Jack L. Saltich </I>has served as a director and the
President and Chief Executive Officer of our company since July
1999. Mr. Saltich served as Vice President of Advanced Micro
Devices from May 1993 until July 1999; as Executive Vice
President of Applied Micro Circuits Corp. from January 1991 until
March 1993; and as Vice President of VLSI from July 1988 until
January 1991. Mr. Saltich held a variety of executive
positions for Motorola from July 1971 until June 1988. These
positions included serving as an Engineering Manager from May
1974 until January 1980, an Operation Manager from January 1980
until May 1982, Vice President and Director of the Bipolar
Technology Center from May 1982 until June 1986, and Vice
President and Director of the Advanced Product Research and
Development Laboratory from June 1986 until June 1988.
<P align="left">
<I>Jeffrey D. Buchanan </I>has served as a director and
Executive Vice President — Finance, Administration, and
Legal of our company since June 1998; as Chief Financial Officer
and Treasurer since June 1996; and as Secretary since May 1996.
Mr. Buchanan served as our Vice President —
Finance, Administration, and Legal from June 1996 until July 1998
and as our Vice President — Legal and Administration
from May 1996 to June 1996. Mr. Buchanan served from June
1986 until May 1996 as a business lawyer with O’Connor,
Cavanagh, Anderson, Killingsworth & Beshears, where his
practice emphasized mergers and acquisitions, joint ventures, and
taxation. Mr. Buchanan was associated with the
international law firm of Davis Wright Tremaine from 1984 to
1986, and he was a senior staff person at Deloitte &
Touche from 1982 to 1984. Mr. Buchanan is a member of the
Arizona and Washington state bars and passed the certified public
accounting examination in 1983.
<P align="center">41
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<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="left">
<I>Carl E. Derrington </I>has been our Chief Manufacturing
Officer since May 1999. Dr. Derrington joined our company in
1986 as Director of Research and Development. Since that time,
Dr. Derrington has served as Plant Manager from January 1986
until September 1987, Director of Engineering from September
1987 until August 1989, Director of Manufacturing from August
1989 until April 1996, and Director of Manufacturing Engineering
from April 1996 until April 1999.
<P align="left">
<I>Robert L. Melcher </I>has been our Chief Technology
Officer since October 1999. Prior to joining our company,
Dr. Melcher was employed at IBM Research in a variety of
management positions since 1970. He served as the Program Leader
for Projection Displays from 1993 to 1999 and as Director of the
Physical Sciences Department from 1990 to 1993.
<P align="left">
<I>Robert T. Berube </I>has been our Principal Accounting
Officer since July 1998 and has served as our Corporate
Controller since July 1990. Mr. Berube served as Chief
Financial Officer of Electronic Research Associate, Inc., a
manufacturing company, from July 1977 until April 1990.
<P align="left">
<I>James F. Bowser </I>has been our Vice
President — New Business Development since June 1998.
He has also served as our Vice President of Sales and Marketing,
Vice President of Operations, Director of Sales, and Senior Vice
President of Marketing and New Product Development at various
times since August 1990. From 1985 until August 1990,
Mr. Bowser worked for National Computer Systems, a producer
of hardware and software for the financial and educational market
sectors, as Vice President and General Manager, Financial
Systems Division, and as Vice President of Operations.
<P align="left">
<I>Charles K. Rahrig </I>has been our Vice
President — Design Engineering since September 1998. He
joined our company in July 1996 as our Director of Program
Management. From 1979 until 1996, Mr. Rahrig held a variety
of technical and management posts at Honeywell, Inc., including
Engineering Section Head from 1988 until 1992 and
Engineering Department Manager from 1992 until his departure in
1996.
<P align="left">
<I>Dan J. Schott </I>has been our Vice President —
Research and Development since July 1996. From January 1994
until July 1996, he served as our Vice President of Technology.
From 1988 to January 1994, Mr. Schott was an Associate
Director with Honeywell Inc., where his responsibilities included
flat panel display research and development. From 1981 until
1987, Mr. Schott held various engineering management and
program management positions with Sperry Rand Corp.
<P align="left">
<I>Elizabeth A. Sharp </I>has been our Vice
President — Corporate Relations since April 1996.
Ms. Sharp served as our Director of Human Resources from May
1992 until April 1996, as our Corporate Administrator from April
1988 until May 1992, as our Personnel Manager from April 1987
until April 1988, and as our Administrative Assistant to the
President and Chief Financial Officer from May 1986 until April
1987.
<P align="left">
<I>Robert W. Harrison</I> has been our Senior
Director — LCD Marketing and Sales since June 1999.
Mr. Harrison served as a display industry consultant from
August 1998 until joining our company. He was General Manager for
display products for Hyundai Electronics America for CRT, flat
panel, and passive LCD products from April 1995 until August
1998. From January 1994 until April 1995, Mr. Harrison was the
Eastern Regional Sales Manager for Three-Five Systems. He held
various regional sales management and strategic sales managerial
positions with Optrex America, Inc., a manufacturer of liquid
crystal displays, from August 1988 until January 1994, including
Strategic Sales Manager to Motorola and Xerox.
<P align="left">
<I>Allan L. Davis</I> has been our Senior Director —
Microdisplay Marketing and Sales since September 1999. From
January 1997 to September 1999, Mr. Davis served as
Vice President of Sales and Marketing for S-Vision, Incorporated,
a microdisplay design company. From 1995 to 1997, Mr. Davis
was Director of Flat Panel Displays Group at Fujitsu
Microelectronics, Incorporated. From 1992 to 1995, Mr. Davis
held several executive operations, product and sales and
marketing positions, including Business Development Manager for
Microelectronics and Computer Technology Corporation, a developer
of electronic intelligence and semiconductor technology; Senior
Business Development Manager for Science Applications
International Corporation, a developer of technology for
government applications; and President and Chief Operating Office
for Notebook Computer Company.
<P align="center">42
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<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="left">
<I>David C. Malmberg </I>has been a director of our company
since April 1993 and Chairman of the Board since April 1999.
Mr. Malmberg is a private investor and management
consultant. Before resigning in May 1994, Mr. Malmberg spent
22 years at National Computer Systems, including
13 years as its President and Chief Operating Officer.
Mr. Malmberg serves as the Chairman of the Board of National
City Bancorporation and Fieldworks, Inc. and is a member of the
board of directors of PPT/ Vision, Inc., all publicly held
companies. He also serves on the Board of Trustees for Minnesota
State University, Mankato.
<P align="left">
<I>Kenneth M. Julien </I>has been a director of our company
since October 1996. Mr. Julien has served as President and a
director of Julien Aerospace Systems, Inc., an aerospace parts
supplier, since November 1996 and as Managing Director of Julien
Investments LLC, a real estate development and lending company,
since August 1994. Mr. Julien served as our Executive Vice
President and Chief Operating Officer from August 1992 to April
1993; as Vice President, Chief Financial Officer, and Secretary
of our company or one of our predecessors from May 1988 to August
1992; and as a director of our company or one of its
predecessors from July 1987 to May 1990. Mr. Julien served
as a Vice President and Chief Financial Officer of Cerprobe
Corporation, a publicly held company engaged in the business of
designing, manufacturing, and marketing semiconductor test
equipment, from October 1983 to May 1988. Mr. Julien also
served as a director of Cerprobe from February 1988 to June 1988
and currently serves on the board of Alanco Technologies, Inc., a
public company.
<P align="left">
<I>Gary R. Long </I>has been a director of our company since
October 1996. Mr. Long served as President and Chief
Executive Officer of CalComp Technology, Inc., a computer
peripherals company, from January 1994 until his retirement in
February 1997. Mr. Long served as Senior Vice President and
General Manager of CalComp’s Digitizer Products Division in
Scottsdale, Arizona, from 1980 to January 1994. Prior to 1980,
Mr. Long served as Vice President of Operations for Talos
Systems, which designed and manufactured digitizers for the
computer graphics industry.
<P align="left">
<I>Thomas H. Werner </I>has been a director of our company
since March 1999. Mr. Werner has served as Vice President
and General Manager for the Business Connectivity Division of
3Com Corporation since October 1998. From January 1996 until
September 1998, Mr. Werner was Vice President of the
Manufacturing Personal Communication Division of
U.S. Robotics, which 3Com Corporation acquired in June 1997.
Mr. Werner also served in various positions at Oak
Frequency Control, a manufacturer of telecommunications
components, most recently as President of the Networks Group,
from February 1994 until January 1996.
<P align="left">
<I>David P. Chavoustie </I>has been a director of our
company since January 2000. Since April 1998, Mr. Chavoustie
has served as Executive Vice President of Sales and Marketing of
ASML, a manufacturer of lithography equipment used to
manufacture semiconductors. From April 1992 until March 1998,
Mr. Chavoustie held several positions with Advanced Micro
Devices, Inc., a semiconductor company, including Vice President/
General Manager Customer Specific Products Division, Vice
President/ General Manager Embedded Processor Division, and Vice
President Worldwide Sales/ Marketing — Vantis (a wholly
owned subsidiary of AMD). From 1985 to 1992, Mr. Chavoustie
held various positions with VLSI Technology, Inc., an ASIC
semiconductor company, including Sales Director, Vice President
Sales and Corporate Marketing, and Senior Vice President/ General
Manager ASIC Products. From 1974 to 1984, Mr. Chavoustie
held various sales positions with Advanced Micro Devices,
including area sales — Southeast United States,
regional sales manager, and district sales manager —
Upstate New York.
<P align="left">
Directors hold office until the next annual meeting of
stockholders or until their successors have been elected and
qualified. Officers serve at the pleasure of the board of
directors.
<P align="center">43
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<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS</B>
<P align="left">
The following table sets forth certain information regarding the
beneficial ownership of our common stock on May 24, 2000, as
adjusted to reflect the three-for-two stock split effected on
May 12, 2000, by (1) each of our directors and
executive officers, and (2) all of our directors and
executive officers as a group. We are not aware of any person who
owns more than 5% of our common stock. Each of our directors and
executive officers may be reached through us at 1600 North
Desert Drive, Tempe, Arizona 85281.
<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="66%"> </TD>
<TD width="3%"> </TD>
<TD width="15%"> </TD>
<TD width="1%"> </TD>
<TD width="15%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Number of Shares</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Name of Beneficial Owner</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Beneficially Owned<SUP>(1)(2)(3)</SUP></B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>Directors and Executive Officers:</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Jack L. Saltich<SUP>(4)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">44,001</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Jeffrey D. Buchanan<SUP>(5)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">181,181</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Carl E. Derrington<SUP>(6)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">88,301</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Robert L. Melcher<SUP>(7)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Robert T. Berube<SUP>(8)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,246</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
David C. Malmberg<SUP>(9)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">57,145</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Kenneth M. Julien<SUP>(10)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11,543</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Gary R. Long<SUP>(11)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,043</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Thomas H. Werner<SUP>(12)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,474</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
David P. Chavoustie<SUP>(13)</SUP></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">125</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
All directors and executive officers as a group (ten persons)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">405,059</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left">
<HR size="1" width="18%" align="left">
</DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="4%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> (1) </TD>
<TD align="left">
Includes, when applicable, shares owned of record by the
stockholder’s minor children and spouse and by other related
individuals and entities over whose shares of common stock such
person has custody, voting control, or power of disposition.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> (2) </TD>
<TD align="left">
The number of shares shown includes the shares of common stock
which the person will have the right to acquire within
60 days of May 24, 2000. In calculating the percentage
of ownership, all shares which the identified person will have
the right to acquire within 60 days of May 24, 2000
upon the exercise of vested stock options are deemed to be
outstanding for the purpose of computing the percentage of shares
owned by such person, but are not deemed to be outstanding for
the purpose of computing the percentage of shares owned by any
other person.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> (3) </TD>
<TD align="left">
The number of shares beneficially owned by each of the identified
persons represents less than 1% of the outstanding shares. The
number of shares held by all directors and executive officers as
a group represents 2.11% of the outstanding shares prior to the
offering and 1.86% after the offering.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> (4) </TD>
<TD align="left">
Includes 40,002 shares issuable upon exercise of vested stock
options, but does not include 360,000 shares issuable upon
exercise of unvested stock options.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> (5) </TD>
<TD align="left">
Includes 125,001 shares issuable upon exercise of vested
stock options, but does not include 105,002 shares issuable upon
exercise of unvested stock options.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> (6) </TD>
<TD align="left">
Includes 300 shares held by Mr. Derrington as custodian
for his minor child and 16,001 shares issuable upon
exercise of vested stock options, but does not include 94,001
shares issuable upon exercise of unvested stock options.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> (7) </TD>
<TD align="left">
Does not include 120,002 shares issuable upon exercise of
unvested stock options.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> (8) </TD>
<TD align="left">
Includes 2,901 shares issuable upon exercise of vested stock
options, but does not include 14,102 shares issuable upon
exercise of unvested stock options.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> (9) </TD>
<TD align="left">
Includes 9,131 shares issuable upon exercise of vested stock
options, but does not include 625 shares issuable upon exercise
of unvested stock options.</TD>
</TR>
</TABLE>
<P align="center">44
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<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="4%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD>(10) </TD>
<TD align="left">
Includes 1,398 shares held by Mr. Julien as custodian for
his minor children and 5,129 shares issuable upon exercise of
vested stock options, but does not include 625 shares issuable
upon exercise of unvested stock options.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD>(11) </TD>
<TD align="left">
Includes 8,649 shares held by the Long Revocable Trust,
Gary R. Long and Carol L. Long, Trustees and
5,129 shares issuable upon exercise of vested stock options,
but does not include 625 shares issuable upon exercise of
unvested stock options.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD>(12) </TD>
<TD align="left">
Includes 792 shares issuable upon exercise of vested stock
options, but does not include 1,959 shares issuable upon exercise
of unvested stock options.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD>(13) </TD>
<TD align="left">
Includes 125 shares issuable upon exercise of vested stock
options, but does not include 2,125 shares issuable upon exercise
of unvested stock options.</TD>
</TR>
</TABLE>
<P align="center">45
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<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>UNDERWRITING</B>
<P align="left">
We are offering the shares of common stock described in this
prospectus through a number of underwriters. Banc of America
Securities LLC and Needham & Company, Inc. are the
representatives of the underwriters. We have entered into a firm
commitment underwriting agreement with the representatives.
Subject to the terms and conditions of the underwriting
agreement, we have agreed to sell to the underwriters, and each
underwriter has agreed to purchase, the number of shares of
common stock listed next to its name below at the public offering
prices less the underwriting discounts and commissions on the
cover page of this prospectus:
<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="73%"> </TD>
<TD width="3%"> </TD>
<TD width="10%"> </TD>
<TD width="1%"> </TD>
<TD width="10%"> </TD>
</TR>
<TR>
<TD align="center" nowrap colspan="2"><FONT size="2"><B>Underwriters</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Number of Shares</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="2"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Banc of America Securities LLC</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">752,500</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Needham & Company, Inc. </FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">752,500</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
ING Barings LLC</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">537,500</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
J.C. Bradford & Co. </FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">107,500</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Total</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,150,000</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
The underwriting agreement is subject to a number of terms and
conditions and provides that the underwriters must buy all of the
shares if they buy any of them. The underwriters will sell the
shares to the public when and if the underwriters buy the shares
from us.
<P align="left">
The underwriters initially will offer shares to the public at the
price specified on the cover page of this prospectus. The
underwriter may allow to some dealers a concession of not more
than $1.60 per share. The underwriters may also allow, and any
other dealers may reallow, a concession of not more than $0.10
per share to some other dealers. If all the shares are not sold
at the public offering price, the underwriters may change the
public offering price and the other selling terms. No change in
the selling terms will vary the proceeds to be received by us as
specified on the cover page of this prospectus. The common stock
is offered subject to a number of conditions, including:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
receipt and acceptance of the common stock by the underwriters;
and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the right on the part of the underwriters to reject orders in
whole or in part.</TD>
</TR>
</TABLE>
<P align="left">
We have granted the underwriters an option to buy up to 322,500
additional shares of common stock. These additional shares would
cover sales of shares by the underwriters that exceed the number
of shares specified in the table above. The underwriters may
exercise this option at any time within 30 days after the
date of this prospectus. If the underwriters exercise this
option, they will each purchase, subject to a number of terms and
conditions, additional shares approximately in proportion to the
amounts specified in the table above.
<P align="left">
The following table shows the per share and total underwriting
discounts and commissions to be paid to the underwriters. These
amounts are shown assuming no exercise and full exercise of the
underwriters’ option to purchase additional shares.
<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="68%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="7%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Full</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>No Exercise</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Exercise</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Per share underwriting discounts and commissions</FONT></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">$</FONT></TD>
<TD align="right" valign="top" nowrap><FONT size="2">2.75</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">$</FONT></TD>
<TD align="right" valign="top" nowrap><FONT size="2">2.75</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total underwriting discounts and commissions to be paid by us</FONT></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">$</FONT></TD>
<TD align="right" valign="top" nowrap><FONT size="2">5,912,500</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">$</FONT></TD>
<TD align="right" valign="top" nowrap><FONT size="2">6,799,375</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
The expenses of the offering, not including underwriting
discounts and commissions, are estimated to be approximately
$550,000 and will be paid by us. Expenses of the offering,
exclusive of underwriting discounts and commissions, include the
SEC filing fee, printing expenses, transfer agent and
registration and other miscellaneous fees.
<P align="left">
We and our executive officers and directors have entered into
lock-up agreements with the underwriters. Under these agreements,
subject to exceptions, we may not issue any new shares of common
stock, and our executive officers and directors may not offer,
sell, contact to sell, or otherwise dispose of or hedge any
<P align="center">46
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<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="left">
common stock or securities convertible into or exchangeable for
shares of common stock. These restrictions will be in effect for
a period of 90 days after the date of this prospectus. At
any time and without notice, Banc of America Securities LLC and
Needham & Company, Inc. may, in their sole discretion,
release all or some of the securities from these lock-up
agreements.
</DIV>
<P align="left">
We will indemnify the underwriters against some liabilities,
including some liabilities under the Securities Act. If we are
unable to provide this indemnification, we will contribute to
payments the underwriters may be required to make in respect of
those liabilities.
<P align="left">
In connection with this offering, the underwriters may engage in
activities that stabilize, maintain or otherwise affect the price
of the common stock. These transactions may include:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
short sales;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
over-allotment;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
purchases to cover positions created by short sales; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
stabilizing transactions.</TD>
</TR>
</TABLE>
<P align="left">
Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this
offering. In order to cover a short position, the underwriters
may bid for and purchase shares of common stock in the open
market or may exercise their over-allotment option. Stabilizing
transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the
common stock while this offering is in progress.
<P align="left">
The underwriters may also impose a penalty bid. This means that
if the representatives purchase shares in the open market in
stabilizing transactions or to cover short sales, the
representatives can require the underwriters that sold those
shares as part of this offering to repay the underwriting
discount received by them.
<P align="left">
As a result of these activities, the price of the common stock
may be higher than the price that otherwise might exist in the
open market. If the underwriters commence these activities, they
may discontinue them at any time. The underwriters may carry out
these transactions on the New York Stock Exchange, in the
over-the-counter market or otherwise.
<P align="center"><B>LEGAL MATTERS</B>
<P align="left">
The validity of the common stock offered by this prospectus will
be passed upon for us by Greenberg Traurig, LLP, Phoenix,
Arizona. Certain legal matters relating to this offering will be
passed upon for the underwriters by Gray Cary Ware &
Freidenrich LLP, Palo Alto, California. Members of Greenberg
Traurig, LLP own a total of approximately 21,000 shares of our
common stock.
<P align="center"><B>EXPERTS</B>
<P align="left">
The audited financial statements included in this prospectus and
elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated
in their reports with respect thereto, and are included herein
in reliance upon the authority of said firm as experts in giving
said reports.
<P align="center"><B>WHERE YOU CAN FIND MORE INFORMATION</B>
<P align="left">
We have filed a registration statement on Form S-3 with the
Securities and Exchange Commission relating to the common stock
offered by this prospectus. This prospectus does not contain all
of the information set forth in the registration statement and
the exhibits and schedules to the registration statement.
Statements contained in this prospectus as to the contents of any
contract or other document referred to are not necessarily
complete and in each instance we refer you to the copy of the
contract or other document
<P align="center">47
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<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="left">
filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference.
</DIV>
<P align="left">
For further information with respect to Three-Five Systems, Inc.
and the common stock offered by this prospectus, we refer you to
the registration statement, exhibits and schedules. A copy of the
registration statement may be inspected by anyone without charge
at the public reference facilities maintained by the SEC in
Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549; the Chicago Regional Office, Suite 1400,
500 West Madison Street, Citicorp Center, Chicago, Illinois
60661; and the New York Regional Office, Suite 1300,
7 World Trade Center, New York, New York 10048. Copies of
all or any part of the registration statement may be obtained
from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of the
prescribed fees. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The registration statement is also available
through the SEC’s Web site at the following address:
http://www.sec.gov.
<P align="center"><B>INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE</B>
<P align="left">
The SEC allows us to incorporate by reference the information we
file with it, which means that we can disclose important
information to you by referring you to those documents. The
information incorporated by reference is considered to be part of
this prospectus and information we file later with the SEC will
automatically update and supersede this information. We
incorporate by reference the documents listed below and any
future filings made by us with the SEC under Sections 13(a),
13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until
the sale of all of the shares of common stock that are part of
this offering. The documents we are incorporating by reference
are as follows:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="1%"></TD>
<TD width="96%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
our Annual Report on Form 10-K for the year ended
December 31, 1999, filed on March 14, 2000;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000, filed on April 26, 2000;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
the description of our common stock contained in our registration
statement on Form 8-A (Registration No. 1-4373)
declared effective by the SEC on December 28, 1994,
including any amendments or reports filed for the purpose of
updating that description; and</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
our Proxy Statement, filed on March 28, 2000.</TD>
</TR>
</TABLE>
<P align="left">
Any statement contained in a document that is incorporated by
reference will be modified or superseded for all purposes to the
extent that a statement contained in this prospectus (or in any
other document that is subsequently filed with the SEC and
incorporated by reference) modifies or is contrary to that
previous statement. Any statement so modified or superseded will
not be deemed a part of this prospectus except as so modified or
superceded.
<P align="left">
You may request a copy of these filings at no cost by writing or
telephoning our investor relations department at the following
address and telephone number:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="6%"></TD>
<TD width="94%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
Three-Five Systems, Inc.</TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
1600 North Desert Drive</TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
Tempe, Arizona 85281</TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
(602) 389-8600</TD>
</TR>
</TABLE>
<P align="center">48
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
<P align="center">
<B>INDEX TO CONSOLIDATED FINANCIAL STATEMENTS</B>
<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="92%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Page</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Report of Independent Public Accountants</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">F-2</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Consolidated Balance Sheets as of December 31, 1998 and 1999
and March 31, 2000</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">F-3</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Consolidated Statements of Income (Loss) for the years ended
December 31, 1997, 1998, and 1999 and the three months ended
March 31, 1999 and 2000</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">F-4</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Consolidated Statements of Stockholders’ Equity for the
years ended December 31, 1997, 1998, and 1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">F-5</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998, and 1999 and the three months ended
March 31, 1999 and 2000</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">F-6</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Notes to Consolidated Financial Statements</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">F-7</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="center">F-1
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS</B>
<P align="left">To Three-Five Systems, Inc.:
<P align="left">
We have audited the accompanying consolidated balance sheets of
THREE-FIVE SYSTEMS, INC. (a Delaware corporation) and
subsidiaries (the Company) as of December 31, 1998 and 1999,
and the related consolidated statements of income,
stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
<P align="left">
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
<P align="left">
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Company as of December 31, 1998 and 1999, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="38%"></TD>
<TD width="62%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
/S/ ARTHUR ANDERSEN LLP</TD>
</TR>
</TABLE>
<P align="left">
Phoenix, Arizona
<DIV align="left">
January 21, 2000
</DIV>
<P align="center">F-2
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
<P align="center">
<B>CONSOLIDATED BALANCE SHEETS</B>
<DIV align="center">
<B>(in thousands, except share data)</B>
</DIV>
<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="56%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="6%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="7"></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>December 31,</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>March 31,</B></FONT></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>2000</B></FONT></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>(unaudited)</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2">
<B>ASSETS</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Current Assets:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Cash and cash equivalents</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,946</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45,363</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45,413</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Accounts receivable, net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18,601</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">20,886</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18,509</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Inventories</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12,493</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12,344</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12,865</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Deferred tax asset</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,680</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,231</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,202</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Other current assets</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,313</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,047</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,839</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Total current assets</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">41,033</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">82,871</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">82,828</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Property, Plant and Equipment, net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">33,314</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">40,546</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">42,171</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Other Assets, net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,557</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,513</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,001</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">77,904</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">126,930</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">129,000</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2">
<B>LIABILITIES AND STOCKHOLDERS’ EQUITY</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Current Liabilities:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Accounts payable</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10,649</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">13,450</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10,153</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Accrued liabilities</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,673</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,526</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,279</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Current taxes payable</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">235</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,042</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,096</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Current portion of long-term debt</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">651</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Total current liabilities</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,208</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">22,018</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">19,528</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Long-term Debt</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,444</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Deferred Tax Liability</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,156</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,692</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,711</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Commitments and Contingencies</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Stockholders’ Equity:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Preferred stock, $.01 par value; 1,000,000 shares authorized, no
shares issued or outstanding</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Common stock, $.01 par value; 60,000,000 shares authorized,
15,949,802 shares issued, 14,010,215 shares outstanding at
December 31, 1998; 18,859,138 shares issued, 18,858,549
shares outstanding at December 31, 1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">159</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">189</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">190</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Additional paid-in capital</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">32,484</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">67,388</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">68,343</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Retained earnings</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">26,770</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">33,639</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">37,226</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Cumulative translation adjustment</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Less — Treasury stock, at cost; 1,939,587 shares at
December 31, 1998 and 589 shares at December 31,
1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(8,325</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Total stockholders’ equity</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">51,096</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">101,220</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">105,761</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">77,904</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">126,930</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">129,000</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="center">
The accompanying notes are an integral part of these consolidated
balance sheets.
<P align="center">F-3
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
<P align="center">
<B>CONSOLIDATED STATEMENTS OF INCOME (LOSS)</B>
<DIV align="center">
<B>(in thousands, except share and per share data)</B>
</DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="33%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="11"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Three Months Ended</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="11"><FONT size="2"><B>Years Ended December 31,</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>March 31,</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="11"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>2000</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>(unaudited)</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net Sales</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">84,642</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">95,047</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">147,408</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">23,044</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">39,162</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Costs and Expenses:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Cost of sales</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">64,760</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">76,149</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">117,583</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">20,191</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">29,360</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Selling, general, and administrative</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,557</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,334</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11,170</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,449</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,262</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Research, development, and engineering</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,106</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,159</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,745</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,821</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,763</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">76,423</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">90,642</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">137,498</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">24,461</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">34,385</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Operating income (loss)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,219</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,405</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9,910</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1,417</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,777</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Other Income (Expense):</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Interest, net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">548</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">75</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">51</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(155</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">604</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Other, net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(190</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(117</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(69</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(30</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(24</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">358</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(42</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(18</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(185</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">580</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Income (loss) before provision for (benefit from) income taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,577</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,363</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9,892</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1,602</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,357</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Provision for (benefit from) income taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,334</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,773</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,968</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(960</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,770</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net income (loss)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,243</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,590</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,924</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(642</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,587</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Earnings (loss) Per Common Share:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Basic</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.33</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.17</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.44</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.05</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.19</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Diluted</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.32</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.17</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.43</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.05</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.18</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Weighted Average Number of Common Shares:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Basic</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,708,107</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,277,262</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,563,121</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">14,018,060</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18,926,154</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Diluted</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,179,950</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,604,082</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,005,050</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">14,018,060</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">20,047,340</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="center">
The accompanying notes are an integral part of these consolidated
financial statements.
<P align="center">F-4
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
<P align="center">
<B>CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY</B>
<DIV align="center">
<B>For the Years Ended December 31, 1997, 1998, and 1999</B>
</DIV>
<DIV align="center">
<B>(in thousands, except share data)</B>
</DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="22%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="7"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Common Stock</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Total</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Additional</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Cumulative</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Stock-</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Compre-</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Shares</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Paid-in</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Retained</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Translation</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Treasury</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Holders’</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>hensive</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Issued</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Amount</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Capital</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Earnings</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Adjustment</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Stock</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Equity</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Income</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
<B>Balance, December 31, 1996</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,559,658</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">155</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">32,329</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18,939</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">14</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(253</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">51,184</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net income</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,243</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,243</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,243</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Other comprehensive income</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Foreign currency translation adjustments</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Comprehensive income</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,249</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Stock options exercised</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">296,388</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">50</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(2</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">51</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Early disposition of incentive stock options</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">41</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">41</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
<B>Balance, December 31, 1997</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,856,046</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">158</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">32,420</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">24,180</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">20</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(253</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">56,525</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net income</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,590</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,590</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,590</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Other comprehensive income</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Foreign currency translation adjustments</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(12</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(12</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(12</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Comprehensive income</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,578</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Stock options exercised</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">93,756</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">64</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">65</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Purchase of treasury stock</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(8,072</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(8,072</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
<B>Balance, December 31, 1998</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,949,802</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">159</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">32,484</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">26,770</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(8,325</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">51,096</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net income</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,924</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,924</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,924</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Other comprehensive income</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Foreign currency translation adjustments</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Comprehensive income</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,923</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Stock options exercised</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">150,650</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">184</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">41</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">226</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Warrants issued</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">555</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">555</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Early disposition of incentive stock options</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">30</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">30</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Sale of common stock, net of offering expenses of $3,007.</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,758,686</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">28</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">34,135</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(54</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,281</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">42,390</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
<B>Balance, December 31, 1999</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18,859,138</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">189</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">67,388</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">33,639</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">101,220</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="center">
The accompanying notes are an integral part of these consolidated
financial statements.
<P align="center">F-5
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
<P align="center">
<B>CONSOLIDATED STATEMENTS OF CASH FLOWS</B>
<DIV align="center">
<B>(in thousands)</B>
</DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="42%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Three Months</B></FONT></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD colspan="11"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Ended</B></FONT></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD align="center" nowrap colspan="11"><FONT size="2"><B>Years Ended December 31,</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>March 31,</B></FONT></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD align="center" nowrap colspan="11"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>2000</B></FONT></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>(unaudited)</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
<B>CASH FLOWS FROM OPERATING ACTIVITIES:</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
Net income</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,243</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,590</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,924</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(642</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,587</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
Adjustments to reconcile net income to net cash</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="4" align="left" valign="top"><FONT size="2">
Provided by (used in) operating activities:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Depreciation and amortization</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,135</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,693</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,898</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,279</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,590</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Provision for (reduction of) accounts receivable valuation
reserves</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(69</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(64</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">234</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">57</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Loss on disposal of assets</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Changes in assets and liabilities:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
(Increase) decrease in accounts receivable</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(5,641</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(5,997</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(2,519</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">898</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,319</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
(Increase) decrease in inventories</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3,649</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(4,238</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">149</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(784</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(520</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
(Increase) decrease in other assets</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">505</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1,425</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,271</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(328</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(788</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Increase (decrease) in accounts payable and accrued liabilities</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,778</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,730</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,654</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,544</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(4,544</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Increase in taxes payable and deferred taxes, net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,461</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,649</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">823</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">73</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,100</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Net cash provided by (used in) operating activities</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,765</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(62</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18,434</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,085</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,801</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
<B>CASH FLOWS FROM INVESTING ACTIVITIES:</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
Purchase of property, plant and equipment</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3,050</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(8,119</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(12,537</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(2,727</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3,205</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
Proceeds from sale of property, plant and equipment</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">19</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
Investment in Inviso, Inc.</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3,320</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(500</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Net cash used in investing activities</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3,031</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(11,439</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(12,537</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(2,727</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3,705</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
<B>CASH FLOWS FROM FINANCING ACTIVITIES:</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
Net proceeds from (payments on) notes payable to banks</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,095</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(8,095</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,000</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
Stock options exercised</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">51</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">65</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">226</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">65</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">956</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
Purchase of treasury stock</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(8,072</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
Net proceeds from equity offering</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">42,390</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Net cash provided by financing activities</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">51</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">88</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">34,521</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,065</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">956</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
Effect of exchange rate changes on cash and cash equivalents</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(12</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(2</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
<B>NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,791</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(11,425</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">40,417</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,423</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">50</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
<B>CASH AND CASH EQUIVALENTS, beginning of year</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12,580</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,371</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,946</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,946</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45,363</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
<B>CASH AND CASH EQUIVALENTS, end of year</B></FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,371</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,946</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45,363</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,369</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45,413</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
<B>SUPPLEMENTAL CASH FLOW INFORMATION:</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
Interest paid</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">364</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">914</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
Income taxes paid, net of refunds</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,973</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">992</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,209</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
<B>SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="5" align="left" valign="top"><FONT size="2">
Value of warrants granted</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">555</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="center">
The accompanying notes are an integral part of these consolidated
financial statements.
<P align="center">F-6
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="center"><B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
<P align="center">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</B>
<DIV align="center">
<B>December 31, 1997, 1998 and 1999</B>
</DIV>
<P align="left"><B>(1) Organization and Operations:</B>
<P align="left">
Three-Five Systems, Inc. and subsidiaries (the Company) offers
advanced design and manufacturing services to a wide range of
original equipment manufacturers (OEMs). Most of the
Company’s sales consist of custom display modules developed
in close collaboration with its customers. Modules designed and
manufactured by the Company are used in mobile handsets and other
wireless communication devices as well as in the data
collection, medical electronics, and other commercial and
consumer marketplaces. The Company currently specializes in
liquid crystal display (LCD) components and technology in
providing its design and manufacturing services for its
customers. The Company markets its services primarily in North
America, Europe, and Asia through direct technical sales persons
and, to a much lesser extent, through an independent sales and
distribution network.
<P align="left">
The Company currently conducts manufacturing operations in Tempe,
Arizona; Manila, the Philippines; and Beijing, China. The
Company believes that the Arizona facility has the largest fully
automated LCD glass production capacity in North America.
High-volume LCD module manufacturing is done in Manila, the
Philippines and Beijing, China. In Manila, a third-party
subcontractor operates the facility under a sub-assembly
agreement with the Company utilizing equipment, processes, and
documentation owned by the Company. The sub-assembly agreement
has a current term extending through December 31, 2000, and
from year to year thereafter, but may be terminated by either
party upon 180 days written notice. The termination of or
the inability of the Company to obtain products pursuant to the
sub-assembly agreement, even for a relatively short period, would
have a material adverse effect on the operations and
profitability of the Company. The Company commenced manufacturing
operations in China during 1998. The China facility is a
high-volume LCD module manufacturing facility similar to the
Company’s facility in Manila. The Company initially leased a
facility in Beijing on a temporary basis, which expired in
mid-1999, and the Company commenced manufacturing operations in
that temporary facility in the second quarter of 1998. In
July 1999, the Company completed construction of its own
facility in Beijing and commenced manufacturing operations in the
new facility in September of 1999.
<P align="left">
The Company’s strategy involves concentrating its efforts on
providing design and production services to leading companies in
a limited number of fast-growing industries. The Company has
been undertaking substantial efforts to diversify its business,
broaden its customer base, and expand its markets. The
Company’s historical major customer accounted for
approximately 35%, 64%, and 86% of the Company’s net sales
in 1997, 1998, and 1999, respectively and 75% (unaudited) and
84.9% (unaudited) for the three months ended March 31, 1999
and 2000, respectively. This increased percentage occurred
principally as a result of increased sales to that customer. The
Company’s other significant customer accounted for 32% of
the Company’s net sales during 1997 and less than 10% of the
Company’s net sales during both 1998 and 1999 and the three
months ended March 31, 1999 and 2000, respectively
(unaudited). A significant decrease in orders for the
Company’s products from the Company’s historical major
customer or a decline in the demand for mobile handsets would
result in a material adverse impact on the Company’s results
of operations and financial position.
<P align="left">
The significant amount of sales to a few customers results in
certain concentrations of credit risk for the Company. The
Company’s accounts receivable balance, including the
accounts receivable of the Company’s largest customers, is
comprised of customers, primarily in the mobile handset, computer
hardware, and other electronic products industries. These
customers are located primarily in the United States, Asia and
Europe.
<P align="center">F-7
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="center">
<B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
</DIV>
<P align="center">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)</B>
<P align="left"><B>(2) Summary of Significant Accounting Policies:</B>
<P align="left"><B> </B><I>Principles of Consolidation and Preparation
of Financial Statements</I>
<P align="left">
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material
intercompany transactions have been eliminated.
<P align="left">
Three-Five Systems Limited (Limited), a wholly owned subsidiary
of the Company, is incorporated in the United Kingdom. Limited
sells and distributes the Company’s products to customers on
the European continent.
<P align="left">
Three-Five Systems Pacific, Inc. (Pacific), a wholly owned
Philippines corporation, procures supplies primarily from
Philippine vendors. Pacific also manages and assists production
personnel of the third-party subcontractor that operates the
facility in the Philippines.
<P align="left">
During the first quarter of 1998, the Company formed a wholly
owned subsidiary in China, Three-Five Systems (Beijing) Co., Ltd.
(Beijing). Beijing manufactures and sells the Company’s
products to customers primarily located in Asia.
<P align="left">
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
<P align="left"><B> </B><I>Unaudited Interim Results</I>
<P align="left">
The accompanying interim consolidated financial statements as of
March 31, 2000, and for the three months ended
March 31, 1999 and 2000, together with the related notes,
are unaudited. The unaudited interim financial statements have
been prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments,
necessary to present fairly the Company’s financial
position, results of operations and its cash flows as of
March 31, 2000 and for the three months ended March 31,
1999 and 2000. The results for the three months ended
March 31, 2000 are not necessarily indicative of the results
to be expected for the year ending December 31, 2000.
<P align="left"><B> </B><I>Fair Value of Financial Instruments</I>
<P align="left">
The estimated fair value of financial instruments has been
determined by the Company using available market information and
valuation methodologies. Considerable judgment is required in
estimating fair values. Accordingly, the estimates may not be
indicative of amounts that would be realized in a current market
exchange. The carrying values of cash, accounts receivable, and
accounts payable approximate fair value due to the short
maturities of these instruments. In addition, at
December 31, 1998, the carrying amount on the outstanding
revolving line of credit facility is estimated to approximate
fair value as the actual interest rate is consistent with rates
estimated to be currently available for debt with similar terms
and remaining maturities.
<P align="left"><B> </B><I>Cash Equivalents</I>
<P align="left">
For purposes of the statements of cash flows, all highly liquid
investments with a maturity of three months or less at the time
of purchase are considered to be cash equivalents. Cash
equivalents consist of investments in commercial paper,
marketable debt securities, money market mutual funds, and United
States government agencies’ obligations. A portion of the
Company’s funds held in money market mutual funds are
invested in repurchase agreements. These repurchase agreements
are collateralized by U.S. Treasury and
<P align="center">F-8
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="center">
<B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
</DIV>
<P align="center">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)</B>
<P align="left">
Government obligations. Cash equivalents were $1,992,000 and
$42,962,000 at December 31, 1998 and 1999, respectively.
<P align="left"><B> </B><I>Inventories</I>
<P align="left">
Inventories are stated at the lower of cost (first-in, first-out)
or net realizable value. Write-downs are established against
Company-owned inventories for excess, slow-moving, and obsolete
items and for items where the net realizable value is less than
cost. The write-downs totaled $1,125,000 and $3,028,000 at
December 31, 1998 and 1999, respectively.
<P align="left">
Inventories consist of the following at (in thousands):
<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="63%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="6%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="7"></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>December 31,</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>March 31,</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>2000</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>(unaudited)</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Raw materials</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9,367</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9,554</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9,033</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Work-in-process</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,459</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,336</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,770</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Finished goods</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,667</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,454</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,062</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12,493</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12,344</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12,865</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left"><B> </B><I>Property, Plant and Equipment</I>
<P align="left">
Property, plant and equipment is recorded at cost and generally
is depreciated using the straight-line method over the estimated
useful lives of the respective assets, which range from 3 to
39 years. Depreciation expense totaled $4,094, $4,653 and
$5,860 for the years ended December 31, 1997, 1998 and 1999,
respectively. During 1996, the Company placed into service a
high-volume LCD manufacturing line in its Tempe, Arizona
manufacturing facility. The Company is depreciating the LCD
manufacturing line using the units of production method.
Depreciation expense recorded using this method may be subject to
significant fluctuation from year to year resulting from changes
in actual production levels and ongoing analysis of the capacity
of the equipment. Property, plant and equipment consist of the
following at (in thousands):
<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="61%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="6%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="7"></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>December 31,</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>March 31,</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>2000</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>(unaudited)</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Building and improvements</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">13,031</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,411</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,411</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Furniture and equipment</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">37,324</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">47,036</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">50,242</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">50,355</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">63,447</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">66,653</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Less accumulated depreciation</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(17,041</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(22,901</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(24,482</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">33,314</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">40,546</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">42,171</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
The Company utilizes a significant portion of the high-volume LCD
manufacturing line at its Arizona facility to produce a
substantial portion of its own requirements for LCDs and intends,
at least initially, to produce all of its microdisplays on a
dedicated line at this facility. Any event that causes a
disruption of the operation of this facility for even a
relatively short period of time would adversely affect the
Company’s ability to provide both technical and
manufacturing support for its customers. Such disruptions could
require the Company to purchase its LCD requirements from third
parties, resulting in the Company’s inability to recover its
investment in the LCD manufacturing facility.
<P align="center">F-9
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="center">
<B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
</DIV>
<P align="center">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)</B>
<P align="left"><B> </B><I>Accrued Liabilities</I>
<P align="left">
Accrued liabilities include accrued compensation of approximately
$975,000 and $3,788,000 at December 31, 1998 and 1999,
respectively.
<P align="left"><B> </B><I>Income Taxes</I>
<P align="left">
Statement of Financial Accounting Standards
(SFAS) No. 109, <I>Accounting for Income Taxes, </I>
requires the use of an asset and liability approach in accounting
for income taxes. Deferred tax assets and liabilities are
recorded based on the differences between the financial statement
and tax bases of assets and liabilities and the tax rates in
effect when these differences are expected to reverse.
<P align="left"><B> </B><I>Foreign Currency Translation</I>
<P align="left">
Financial information relating to the Company’s foreign
subsidiaries is reported in accordance with SFAS No. 52, <I>
Foreign Currency Translation</I>. The functional currency of
Pacific is the same as the local currency. The gain or loss
resulting from the translation of Pacific’s financial
statements has been included as a separate component of
stockholders’ equity. Non-U.S. assets and liabilities
are translated into U.S. dollars using the year-end exchange
rates. Revenues and expenses are translated at average rates
during the year.
<P align="left">
The functional currency of Beijing and Limited is the
U.S. dollar. Beijing, however, maintains its books and
records in the renminbi. Therefore, the Company utilizes the
remeasurement method of foreign currency translation when Beijing
is consolidated. Any resulting remeasurement gain or loss is
reported in the Company’s consolidated statements of
operations.
<P align="left">
The net foreign currency transaction loss in 1997, 1998, and 1999
was $183,000, $177,000, and $49,000, respectively, and has been
included in other expenses in the accompanying statements of
income.
<P align="left"><B> </B><I>Revenue Recognition</I>
<P align="left">
The Company recognizes revenue upon shipment. The Company
provides reserves for uncollectible accounts receivable. These
reserves totaled $431,000 and $650,000 at December 31, 1998
and 1999, respectively. The Company performs ongoing credit
evaluations of all of its customers and considers various factors
in establishing its allowance for doubtful accounts.
<P align="left"><B> </B><I>Research, Development, and Engineering</I>
<P align="left">
Research, development, and engineering costs are expensed as
incurred. The Company currently is incurring research,
development, and engineering costs for several new technologies
that it plans to introduce in the future. There is a risk that
some or all of those technologies may not successfully make the
transition from the research, development, and engineering lab to
cost-effective manufacturable products.
<P align="left"><B> </B><I>Earnings Per Share</I>
<P align="left">
During 1997, the Company adopted SFAS No. 128, <I>Earnings
per Share</I>. Pursuant to SFAS No. 128, basic earnings per
common share are computed by dividing net income by the weighted
average number of shares of common stock outstanding during the
year. Diluted earnings per common share are determined
<P align="center">F-10
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="center">
<B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
</DIV>
<P align="center">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)</B>
<P align="left">
assuming that outstanding options and warrants were exercised at
the beginning of each year or at the time of issuance, if later.
Set forth below are the disclosures required pursuant to SFAS
No. 128:
<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="37%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD colspan="11"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Three Months Ended</B></FONT></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD align="center" nowrap colspan="11"><FONT size="2"><B>Years Ended December 31,</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>March 31,</B></FONT></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD align="center" nowrap colspan="11"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>2000</B></FONT></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD colspan="19"></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><FONT size="2"><B>(in thousands, except per share data)</B></FONT></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD colspan="11"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD colspan="11"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>(unaudited)</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="4" align="left" valign="top"><FONT size="2">
Basic earnings per share:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="4" align="left" valign="top"><FONT size="2">
Income available to common stockholders</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,243</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,590</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,924</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(642</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,587</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Weighted average common shares</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,708</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,277</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,563</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">14,018</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18,926</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Basic per share amount</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.33</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.17</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.44</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.05</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.19</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="4" align="left" valign="top"><FONT size="2">
Diluted earnings per share:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="4" align="left" valign="top"><FONT size="2">
Income available to common stockholders</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,243</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,590</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,924</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(642</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,587</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Weighted average common shares</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,708</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,277</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,563</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">14,018</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18,926</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Options and warrants assumed exercised</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">472</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">327</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">442</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,121</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Total common shares plus common stock equivalents</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,180</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,604</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,005</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">14,018</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">20,047</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Diluted per share amount</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.32</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.17</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.43</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.05</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.18</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
<I>Recently Issued Accounting Standards</I>
<P align="left">
In 1998, the Company adopted SFAS No. 130, <I>Reporting
Comprehensive Income,</I> which requires companies to report all
changes in equity during a period, except those resulting from
investment by owners and distribution to owners, in a financial
statement for the period in which they are recognized. The
Company has chosen to disclose comprehensive income, which
encompasses net income and foreign currency translation
adjustments, in the Consolidated Statement of Stockholders’
Equity. Prior years have been restated to conform to the SFAS
No. 130 requirements.
<P align="left">
Comprehensive income (loss) for the interim periods are as
follows:
<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="72%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Three Months Ended</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>March 31,</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>2000</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>(in thousands)</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>(unaudited)</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net income (loss)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(642</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,587</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Other comprehensive income (loss):</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Cumulative foreign currency translation adjustment</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(2</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Comprehensive income (loss)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(642</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,585</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
In 1998, the Company also adopted SFAS No. 131, <I>
Disclosures about Segments of an Enterprise and Related
Information</I>. The new rules establish revised standards for
public companies relating to the reporting of financial and
descriptive information about their operating segments in
financial statements. The Company adopted SFAS No. 131 and
all of the required disclosures. (See Note 8.)
<P align="left">
In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, <I>“Accounting for
Derivative Instruments and Hedging Activities,” </I>which
requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and
measure those instruments at fair value. The issuance of SFAS
No. 137, <I>“Accounting for Derivative Instruments and
Hedging Activities — Deferral of the Effective Date of
FASB Statement No. 133,” </I>delayed the required
effective date of SFAS No. 133 to all
<P align="center">F-11
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<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="center">
<B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
</DIV>
<P align="center">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)</B>
<P align="left">
fiscal years beginning after June 15, 2000. The Company will
be required to adopt SFAS No. 133 during the year ending
December 31, 2001. Management does not believe that the
adoption of SFAS No. 133 will have a material impact on its
results of operations or financial position.
<P align="left">
<B>(3) Long-Term Debt:</B>
<P align="left">
Long-term debt consists of the following at (in thousands):
<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="79%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>December 31,</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
$15.0 million revolving line of credit, interest due monthly at
the bank’s prime rate (8.5% at December 31, 1999) or at
the LIBOR base rate (6.13% at December 31, 1999) plus
1.75%, unpaid balance due May 22, 2000, secured by all
assets of the Company other than real property</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
$10.0 million revolving line of credit/term loan, interest due
monthly at the bank’s prime rate or at the LIBOR base rate
plus 2.375%, unpaid balance due August 5, 2004, secured by
all assets of the Company other than real property</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,095</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
$350,000 United Kingdom credit facility, interest due quarterly
at the bank’s base rate plus 2%, unpaid balance due
July 15, 2000, secured by Limited’s accounts receivable</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,095</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Less current maturities</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(651</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,444</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
In November 1998, the Company entered into a commitment from
Imperial Bank and the National Bank of Canada for a $25.0
million credit facility. This credit facility consists of
(i) a $15.0 million revolving line of credit for general
corporate needs, and (ii) a $10.0 million term loan, which
provides available funds to repurchase a portion of the
Company’s common stock. Under this credit facility the
Company is required to apply all proceeds from the sale of any
treasury stock to the outstanding principal balance of the term
loan. The credit facility also contains restrictive covenants
that include, among other things, restrictions on the declaration
or payment of dividends and the amount of capital expenditures.
The credit facility also requires the Company to maintain a
specified net worth, as defined, to maintain required debt to
equity ratio, and to maintain certain other financial ratios.
<P align="left">
On January 21, 2000, the Company entered into a new $25.0
million unsecured revolving line of credit with Imperial Bank,
which matures on January 19, 2001. This new revolving line
of credit bears interest at the bank’s prime rate, or at the
LIBOR base rate plus 1.5%, and is payable monthly. The new
revolving line of credit contains restrictive covenants that
include, among other things, restrictions on the declaration or
payment of dividends and the sale or transfer of assets. The new
revolving line of credit facility also requires the Company to
maintain a specified net worth, as defined, to maintain a
required debt to equity ratio, and to maintain certain other
financial ratios.
<P align="left"><B>(4) Stockholders Equity:</B>
<P align="left">
On November 8, 1999, the Board of Directors approved a
four-for-three stock split, to be effected in the form of a
33 percent stock dividend. The stock split was paid on
December 17, 1999, to stockholders of record at the close of
business on December 3, 1999. This stock split has been
given retroactive recognition for all periods presented in the
accompanying consolidated financial statements.
<P align="left">
On April 18, 2000, the Board of Directors approved a
three-for-two stock split, to be effected in the form of a stock
dividend. The Board’s approval of the stock split was
contingent upon the approval by the stockholders of an increase
in the number of authorized shares of common stock, which
occurred on
<P align="center">F-12
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<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="center">
<B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
</DIV>
<P align="center">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)</B>
<P align="left">
April 27, 2000. At that time, the stockholders approved an
increase in the number of authorized shares of the Company’s
common stock from 15 million to 60 million. The stock
dividend was paid on May 12, 2000, to stockholders of record
at the close business on May 1, 2000. The increase in the
authorized shares and the stock split have been given retroactive
recognition for all periods presented in the accompanying
consolidated financial statements (unaudited).
<P align="left">
In July 1999, the Company purchased certain assets and
licensed silicon technologies from National Semiconductor
relating to liquid crystal on silicon (<I>LCoS™</I>)
microdisplays for approximately $3.0 million in cash and
warrants, with a fair market value of $555,000 as determined by
the Black-Scholes method, to purchase 140,000 shares of common
stock at a price of $8.47 per share, which was the closing price
of the Company’s common stock at the grant date. The
warrants become exercisable on July 12, 2000 and expire on
July 12, 2002.
<P align="left">
In September 1999, the Company issued 4,000,226 shares of
common stock at $9.69 per share (the Offering). The Offering
consisted of 4,600,000 shares of common stock comprised of
4,000,226 newly issued Company shares and 599,774 shares sold by
an existing shareholder. In October 1999, the Company issued
690,000 shares of common stock at $9.69 per share to cover
over-allotments pertaining to the Offering.
<P align="left"><B>(5) Benefit Plans:</B>
<P align="left">
The Company has five stock option plans, the 1990 Stock Option
Plan (1990 Plan), the 1993 Stock Option Plan (1993 Plan), the
1994 Non-Employee Directors Stock Option Plan (1994 Plan), the
1997 Stock Option Plan (1997 Plan), and 1998 Stock Option Plan
(1998 Plan).
<P align="left">
<I> 1990 Stock Option Plan</I>
<P align="left">
Under the 1990 Plan, there were options issued but unexercised to
purchase 203,277 shares as of December 31, 1999. In
conjunction with stockholder approval of the 1993 Plan, the Board
terminated the 1990 Plan with respect to unissued options to
purchase 170,909 shares of common stock, which remained and were
unissued as of the date the 1993 Plan was adopted. The exercise
prices of options are determined by the plan administrator, but
may not be less than 100% (110% if the option is granted to a
stockholder who at the time the option is granted owns stock
representing more than 10% of the total combined voting power of
all classes of stock of the Company). The 1990 Plan will remain
in force through May 1, 2000.
<P align="left">
The expiration date, maximum number of shares purchasable, and
the other provisions of the options granted under the 1990 Plan
were established at the time of grant. Options were granted for
terms of up to ten years and become exercisable in whole or in
one or more installments at such times as were determined by the
Board of Directors upon grant of the options.
<P align="left">
<I> 1993 Stock Option Plan</I>
<P align="left">
The 1993 Plan provides for the granting of options to purchase up
to 770,909 shares of the Company’s common stock (which
includes 170,909 shares previously reserved for issuance under
the Company’s 1990 Plan), the direct granting of common
stock (stock awards), the granting of stock appreciation rights
(SARs) and the granting of other cash awards (cash awards; stock
awards, SARs, and cash awards are collectively referred to herein
as Awards). Under the 1993 Plan, options and Awards may be
issued to key personnel and others providing valuable services to
the Company. The options issued may be incentive stock options
or nonqualified stock options. If any option or SAR terminates or
expires without having been exercised in full, stock not issued
under such option or SAR will again be available for grant
pursuant to the 1993 Plan. There were options outstanding to
acquire 721,029 shares of the Company’s common stock under
the 1993 Plan at December 31, 1999.
<P align="left">
To the extent that granted options are incentive stock options,
the terms and conditions of those options must be consistent with
the qualification requirement set forth in the Internal Revenue
Code of 1986 (the
<P align="center">F-13
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<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="center">
<B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
</DIV>
<P align="center">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)</B>
<P align="left">
Code). The expiration date, maximum number of shares purchasable,
and the other provisions of the options will be established at
the time of grant. Options may be granted for terms of up to ten
years and become exercisable in whole or in one or more
installments at such time as may be determined by the plan
administrator upon grant of the options. The exercise prices of
options are determined by the plan administrator, but may not be
less than 100% (110% if the option is an incentive stock option
granted to a stockholder who at the time the option is granted
owns stock representing more than 10% of the total combined
voting power of all classes of stock of the Company) of the fair
market value of the common stock at the time of the grant. The
1993 Plan will remain in force until February 24, 2003.
<P align="left">
<I> 1994 Non-Employee Directors Stock Option Plan</I>
<P align="left">
During 1999, the Board of Directors amended the 1994 Plan to
decrease the number of available shares for issuance from 200,000
shares to 100,000 shares.
<P align="left">
The 1994 Plan provides for the automatic grant of stock options
to non-employee directors to purchase up to 100,000 shares of the
Company’s common stock. Under the 1994 Plan, options to
acquire 500 shares of common stock will be automatically granted
to each non-employee director at the meeting of the Board of
Directors held immediately after each annual meeting of
stockholders, with such options to vest in a series of 12 equal
and successive monthly installments commencing one month after
the annual automatic grant date. In addition, each non-employee
director serving on the Board of Directors on the date the 1994
Plan was approved by the Company’s stockholders received an
automatic grant of options to acquire 1,000 shares of common
stock and each subsequent newly elected non-employee member of
the Board of Directors receives an automatic grant of options to
acquire 1,000 shares of common stock on the date of their first
appointment or election to the Board of Directors. Those options
become exercisable and vest in a series of three equal and
successive annual installments, with the first such installment
becoming exercisable immediately after the director’s second
successive election to the Board of Directors (the First Vesting
Date), the second installment becoming exercisable
10 months after the First Vesting Date, and the third
installment becoming exercisable 22 months after the First
Vesting Date (provided that the director has not ceased serving
as a director prior to a vesting date). A non-employee member of
the Board of Directors is not eligible to receive the 500 share
automatic option grant if that option grant date is within
30 days of such non-employee member receiving the 1,000
share automatic option grant. The exercise price per share of
common stock subject to options granted under the 1994 Plan will
be equal to 100% of the fair market value of the Company’s
common stock on the date such options are granted. There were
outstanding options to acquire 19,008 shares of the
Company’s common stock under the 1994 Plan at
December 31, 1999.
<P align="left">
<I> 1997 Stock Option Plan</I>
<P align="left">
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 Plan from 200,000 shares to 350,000
shares (unaudited).
<P align="left">
The 1997 Plan provides for the granting of nonqualified options.
Under the 1997 Plan, options may be issued to key personnel and
others providing valuable services to the Company. The options
issued will be nonqualified stock options and shall not be
incentive stock options as defined in Section 422 of the
Code. Any option that expires or terminates without having been
exercised in full will again be available for grant pursuant to
the 1997 Plan. There were options outstanding to acquire 199,038
shares of the Company’s common stock under the 1997 Plan at
December 31, 1999.
<P align="left">
The expiration date, maximum number of shares purchasable, and
the other provisions of the options will be established at the
time of grant. Options may be granted for terms of up to ten
years and become exercisable in whole or in one or more
installments at such time as may be determined by the plan
administrator upon grant of the options. The exercise prices of
the options are determined by the plan administrator, but may not
be less than 100% of the fair market value of the common stock
at the time of the grant. The 1997 Plan will remain in force
until May 12, 2007.
<P align="center">F-14
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<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="center">
<B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
</DIV>
<P align="center">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)</B>
<P align="left">
<I>1998 Stock Option Plan</I>
<P align="left">
During 1999, the stockholders approved an amendment to the 1998
Plan to increase the number of shares of the Company’s
common stock that may be issued from 600,000 shares to 1,100,000
shares.
<P align="left">
The 1998 Plan provides for the granting of incentive stock
options and/or nonqualified options. Under the 1998 Plan, options
may be issued to key personnel and others providing valuable
services to the Company. The options issued will be incentive
stock options or nonqualified stock options as defined in
Section 422 of the Code. Any option that expires or
terminates without having been exercised in full will again be
available for grant pursuant to the 1998 Plan. There were options
outstanding to acquire 593,007 shares of the Company’s
common stock under the 1998 Plan at December 31, 1999.
<P align="left">
The expiration date, maximum number of shares purchasable, and
the other provisions of the options will be established at the
time of grant. Options may be granted for terms of up to ten
years and become exercisable in whole or in one or more
installments at such time as may be determined by the plan
administrator upon grant of the options. The exercise prices of
the options are determined by the plan administrator, but may not
be less than 100% of the fair market value of the common stock
at the time of the grant (110% if the option is an incentive
stock option granted to a stockholder who at the time the option
is granted owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company).
The 1998 Plan will remain in force until January 28, 2008.
<P align="left">
Tax benefits from early disposition of common stock by optionees
with incentive stock options are credited to additional paid-in
capital.
<P align="left">
A summary of the status of the Company’s five stock option
plans at December 31, 1997, 1998, and 1999 and changes
during the years then ended, are presented in the table and
narrative below:
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="34%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="7"></TD>
<TD></TD>
<TD colspan="7"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>1999</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Weighted</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Weighted</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Weighted</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Average</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Average</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Average</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Exercise</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Exercise</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Exercise</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Options</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Price</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Options</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Price</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Options</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Price</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Outstanding at beginning of year</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,103,621</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.46</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,110,014</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.54</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,399,706</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.10</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Granted</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">409,022</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.39</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">669,689</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.93</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,019,944</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.52</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Exercised</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(324,615</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.65</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(94,046</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.54</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(157,470</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.94</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Expired</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(78,014</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.11</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(285,951</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.72</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(526,821</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.56</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Outstanding at end of year</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,110,014</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.54</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,399,706</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.10</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,735,359</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.76</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Exercisable at end of year</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">330,210</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">455,060</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">447,678</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Weighted average fair value of options granted</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.51</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.13</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.54</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
The weighted average fair value of options granted for the years
ended 1997, 1998 and 1999 were $7.39, $6.93 and $8.52,
respectively.
<P align="center">F-15
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="center">
<B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
</DIV>
<P align="center">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)</B>
<P align="left">
The following table summarizes information about stock options
outstanding at December 31, 1999:
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="23%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="6%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
</TR>
<TR>
<TD colspan="13"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="13"><FONT size="2"><B>Options Outstanding</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Options Exercisable</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="13"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Number</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Weighted Average</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Number</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Range of</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Outstanding at</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Remaining</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Weighted Average</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Exercisable at</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Weighted Average</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Exercise</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>December 31,</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Contractual</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Exercise</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>December 31,</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Exercise</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Prices</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Life</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Price</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Price</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
$ 0.12 – $ 4.50</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">54,745</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.7</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2.63</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16,742</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.38</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
4.51 – 10.00</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,448,600</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.0</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.14</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">393,933</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.57</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
10.01 – 23.33</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">232,014</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.3</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12.84</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">37,003</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.30</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,735,359</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.1</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.76</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">447,678</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.73</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
Pursuant to the provisions of SFAS No. 123, <I>Accounting
for Stock-Based Compensation</I>, the Company accounts for
transactions with its employees pursuant to Accounting Principles
Board Opinion No. 25, <I>Accounting for Stock Issued to
Employees</I>, under which no compensation cost has been
recognized. However, the Company has computed for pro forma
disclosure purposes the value of all options granted during 1997,
1998 and 1999, using the Black-Scholes option pricing method
with the following weighted assumptions: risk-free interest rates
of 5.45%, 4.52%, and 6.34%; expected dividend yields of zero;
expected lives of 6.4, 6.6, and 6.2 years; and expected
volatility (a measure of the amount by which a price has
fluctuated or is expected to fluctuate during a period) of 60.0%,
61.4%, and 61.9%. Had compensation cost for these plans been
determined consistent with SFAS No. 123, the Company’s
net income and earnings per share would have been as follows:
<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="57%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="11"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="11"><FONT size="2"><B>Years Ended December 31,</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="11"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="11"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="11"><FONT size="2"><B>(in thousands, except per share data)</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net income:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
As reported</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,243</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,590</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,924</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Pro forma</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,636</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,980</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,393</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Basic earnings per share:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
As reported</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.33</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.17</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.44</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Pro forma</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.30</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.13</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.35</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Diluted earnings per share:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
As reported</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.32</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.17</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.43</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Pro forma</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.29</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.13</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.34</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
The pro forma compensation costs reflected in the above table
were $994,000, $1,028,000 and $2,187,000, for the years ended
1997, 1998 and 1999, respectively.
<P align="left"><I> 401(k) Profit Sharing Plan</I>
<P align="left">
Effective September 1, 1990, the Company adopted a profit
sharing plan (401(k) Plan) pursuant to Section 401(k) of the
Code. The 401(k) Plan covers substantially all full-time
employees who meet the eligibility requirements and provides for
a discretionary profit sharing contribution by the Company and an
employee elective contribution with a discretionary Company
matching provision. The Company expensed discretionary
contributions pursuant to the 401(k) Plan in the amount of
$71,000, $100,000, and $159,000 for the years ended
December 31, 1997, 1998, and 1999, respectively.
<P align="center">F-16
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="center">
<B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
</DIV>
<P align="center">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)</B>
<P align="left"><B>(6) Income Taxes:</B>
<P align="left">
The provision (benefit) for income taxes for the years ended
December 31 consists of the following (in thousands):
<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="60%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="4" align="left" valign="top"><FONT size="2">
Current, net of operating loss carryforwards and tax credits
utilized:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Federal, net of tax benefit from early termination of incentive
stock options</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">356</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(509</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,619</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
States</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">97</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(24</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">210</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Foreign</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">71</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">237</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">832</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">524</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(296</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,661</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Deferred provision (benefit)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,769</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,069</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(723</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD colspan="3" align="left" valign="top"><FONT size="2">
Tax benefit from early termination of incentive stock</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="2" align="left" valign="top"><FONT size="2">
options, reflected in stockholders’ equity</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">41</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">30</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Provision for income taxes</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,334</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,773</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,968</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="4"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
In accordance with SFAS No. 109, a tax benefit for net
operating losses of approximately $35,000, $-0-, <BR>
and $-0-, and tax credits of approximately $-0-, $-0-, and
$115,362 were utilized in 1997, 1998, and 1999, respectively, are
included as a reduction of the current provision for income
taxes in the consolidated statements of income.
<P align="left">
The components of deferred taxes at December 31 are as
follows (in thousands):
<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="75%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net long-term deferred tax liabilities:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Accelerated tax depreciation</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,156</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,229</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Investments in foreign affiliates</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">463</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,156</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,692</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net short-term deferred tax assets:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Inventory reserve</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">436</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,140</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Uniform capitalization</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,076</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">692</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Accrued liabilities not currently deductible</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,022</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,128</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Allowance for doubtful accounts</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">156</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">233</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Other</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(10</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">38</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,680</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,231</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
A reconciliation of the U.S. federal statutory rate to the
Company’s effective tax rate is as follows:
<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="72%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Statutory federal rate</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">34</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">34</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">34</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Effect of state taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Foreign earnings taxed at different rates</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(4</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Other, net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Benefit from prior year state refund claims</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(6</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">39</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">41</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">30</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
The favorable state tax benefit is the result of settled state
refund claims from prior years.
<P align="center">F-17
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="center">
<B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
</DIV>
<P align="center">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)</B>
<P align="left">
A deferred U.S. tax liability has not been provided on the
undistributed earnings of certain foreign subsidiaries because it
is the intent of the Company to permanently reinvest such
earnings. Undistributed earnings of foreign subsidiaries, which
have been or are intended to be permanently invested in
accordance with Accounting Principles Board (“APB”)
No. 23, <I>Accounting for Income Taxes — Special
Areas</I>, aggregated approximately $990,000 at December 31,
1999.
<P align="left"><B>(7) Commitments and Contingencies:</B>
<P align="left">
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 March 31, 2000
and has been renewed through March 31, 2001 (unaudited).
<P align="left">
Rent expense was approximately $793,000, $917,000, and $763,000,
for the years ended December 31, 1997, 1998, and 1999,
respectively.
<P align="left">
In April 1994, the Company entered into a ground lease (with
purchase options) on a 5.7 acre site in Tempe, Arizona.
Annual lease payments under the ground lease, which will expire
on March 31, 2069, subject to renewal and purchase options
as well as termination provisions, will average approximately
$100,000 over the term of the lease subject to certain escalation
provisions. A design, manufacturing, and corporate headquarters
facility containing approximately 97,000 square feet was
completed on the land in 1995 at a cost of approximately
$10.4 million. During 1996, the Company entered into a
transaction, in which it conveyed its Tempe, Arizona facility and
certain improvements to the City of Tempe as consideration for a
rent-free 75-year lease. The Company has the option to
repurchase the facility for $1,000 after ten years; therefore,
the lease is accounted for as a capital lease.
<P align="left">
The Company’s future lease commitments under the
non-cancelable operating leases as of December 31, 1999 are
as follows (in thousands):
<CENTER>
<TABLE width="60%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="89%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
2000</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">466</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
2001</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">160</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
2002</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">144</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
2003</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">100</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Thereafter</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,524</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,394</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
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.
<P align="left"><B>(8) Segment Information:</B>
<P align="left">
The Company offers advanced design and manufacturing services to
a wide range of original equipment manufacturers (OEMs). The
majority of the Company’s sales are attributed to the LCD
product line. The Company’s products are included in
end-user devices for the following product categories:
communication devices, office, industrial, medical and commercial
electronics.
<P align="left">
Management monitors and evaluates the financial performance of
the Company’s operations by its four operating segments
located throughout the world. These segments consist of three
manufacturing operations,
<P align="center">F-18
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="center">
<B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
</DIV>
<P align="center">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)</B>
<P align="left">
located in the United States, China, and the Philippines, and a
sales and distribution operation in the United Kingdom.
<P align="left">
The following operating segment information includes financial
information (in thousands) for all four of the Company’s
operating segments. Financial information for the China operation
is presented beginning from the date those operations commenced,
June 1998.
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="40%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>United</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>United</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>States</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Kingdom</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>China</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Philippines</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Eliminations</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Total</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>December 31, 1997</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net sales</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">83,023</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10,755</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,107</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(12,243</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">84,642</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Income before provision for income taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,990</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">436</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">104</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">47</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,577</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Provision for income taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,263</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">32</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">39</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,334</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Depreciation</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,058</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">27</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,094</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total assets</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">68,039</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,896</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">354</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(454</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">72,835</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Capital expenditures</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,036</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">14</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,050</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="40%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>United</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>United</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>States</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Kingdom</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>China</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Philippines</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Eliminations</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Total</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>December 31, 1998</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net sales</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">92,251</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">33,438</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,205</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,010</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(40,857</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">95,047</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Income (loss) before provision for income taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,643</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">676</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(947</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(2</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(7</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,363</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Provision for income taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,537</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">209</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">27</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,773</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Depreciation</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,408</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">36</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">168</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">41</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,653</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total assets</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">60,514</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9,195</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12,301</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">642</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(4,748</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">77,904</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Capital expenditures</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,809</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,298</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,119</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="40%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>United</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>United</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>States</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Kingdom</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>China</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Philippines</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Eliminations</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Total</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>December 31, 1999</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net sales</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">134,028</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">68,798</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">40,257</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,291</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(98,966</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">147,408</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Income before provision for income taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,381</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,624</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,147</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">65</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(325</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9,892</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Provision for income taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,140</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">811</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">17</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,968</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Depreciation</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,983</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">21</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">856</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,860</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total assets</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">101,562</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10,421</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">19,235</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">696</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(4,984</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">126,930</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Capital expenditures</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,459</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,624</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">13,092</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="40%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>United</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>United</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>States</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Kingdom</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>China</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Philippines</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Eliminations</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Total</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>Three Months Ended March 31, 1999 </B>(unaudited)</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net sales</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,948</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10,351</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,745</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">23,044</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Intersegment sales</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,091</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,145</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">791</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(17,027</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Income (loss) before provision for (benefit from) income
taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1,954</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">137</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">57</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">143</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(1,602</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center">F-19
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV align="center">
<B>THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES</B>
</DIV>
<P align="center">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)</B>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="40%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>United</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>United</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>States</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Kingdom</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>China</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Philippines</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Eliminations</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Total</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>Three Months Ended March 31, 2000 </B>(unaudited)</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net sales</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15,597</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18,596</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,969</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">39,162</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Intersegment sales</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">19,063</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,723</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">699</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(24,485</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Income before provision for income taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,499</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,485</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,413</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">14</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(54</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,357</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
Net sales are generated from the sale of LCD display devices,
which are applied in several different end-use products. Total
net sales by these product categories are as follows (in
thousands):
<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="62%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="11"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="11"><FONT size="2"><B>Years Ended December 31,</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="11"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Mobile handsets and other wireless communication devices</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">31,415</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">62,073</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">128,634</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Office automation equipment</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">33,528</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12,658</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7,908</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Other</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">19,699</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">20,316</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10,866</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Total</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">84,642</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">95,047</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">147,408</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left"><B>(9) Selected Quarterly Financial Data (Unaudited)</B>
<P align="left">
The following table summarizes the unaudited consolidated
quarterly results of operations as reported for 1998 and 1999 (in
thousands, except per share amounts):
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="32%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="31"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="31"><FONT size="2"><B>Quarters Ended</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="31"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD colspan="15"></TD>
<TD></TD>
<TD colspan="15"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><FONT size="2"><B>1999</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Mar. 31</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>June 30</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Sep. 30</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Dec. 31</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Mar. 31</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>June 30</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Sep. 30</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Dec. 31</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net sales</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18,479</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">22,682</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">24,572</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">29,314</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">23,044</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">31,600</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">42,723</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">50,041</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Gross profit</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,792</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,587</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,329</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,190</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,853</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,497</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,841</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11,634</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Net income (loss)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">995</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,123</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(403</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">875</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(642</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,040</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,037</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,489</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Earnings (loss) per common share:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Basic</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.06</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.07</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.03</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.06</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.05</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.07</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.14</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.24</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Diluted</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.06</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.07</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.03</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.06</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.05</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.07</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.14</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.23</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="center">F-20
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Inside Back Cover
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Top: (heading) “High-Volume World Class Manufacturing”; beneath the
heading are subheadings and text, in bullet point form. The
subheadings and text read, “Tempe, Arizona: LCD/
microdisplay manufacturing; High-volume automated LCD
manufacturing line; Design, research and technology center; Total
quality management; Manila, The Philippines: Display module
manufacturing/ assembly; ISO 9002 certified; Highly trained
work force; Advanced manufacturing techniques; Capacity:
approximately 14 million modules per year; Beijing, China: Display module
manufacturing/ assembly; Positioned for emerging growth markets;
Cost effective labor; Capacity: approximately 12 million modules per
year”
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Right-margin: Three pictures of assembly lines from the three
manufacturing facilities.
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<FONT size="4">2,150,000 Shares</FONT>
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<FONT size="4">[THREE-FIVE SYSTEMS LOGO]</FONT>
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Prospectus
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May 26, 2000
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<FONT size="4"> <B>Banc of America Securities LLC</B></FONT>
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<B><FONT size="4">Needham & Company, Inc.</FONT></B>
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<B><FONT size="4">ING Barings</FONT></B>
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<B><FONT size="4">J.C. Bradford & Co.</FONT></B>
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