-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WGCxGNoJIEPmFA6CUpSvdgoJKQuqhtGj3wMRHb9tcwAf9ZzEgKOYl3iuKcrCazJE SZAJargO/YiURfU9NbJuGg== 0000950147-98-000208.txt : 19980324 0000950147-98-000208.hdr.sgml : 19980324 ACCESSION NUMBER: 0000950147-98-000208 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980323 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: THREE FIVE SYSTEMS INC CENTRAL INDEX KEY: 0000032272 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 860654102 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-04373 FILM NUMBER: 98570660 BUSINESS ADDRESS: STREET 1: 1600 N DESERT DR CITY: TEMPE STATE: AR ZIP: 85281-1230 BUSINESS PHONE: 6024960035 MAIL ADDRESS: STREET 1: 1600 N DESERT DRIVE CITY: TEMPE STATE: AZ ZIP: 85281-1230 FORMER COMPANY: FORMER CONFORMED NAME: ELECTRONIC RESEARCH ASSOCIATES INC DATE OF NAME CHANGE: 19900507 10-K/A 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K/A Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 Commission File Number 1-4373 ------ THREE-FIVE SYSTEMS, INC. (Name of Issuer Specified in Its Charter) Delaware 86-0654102 ------------------------------- ---------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1600 North Desert Drive, Tempe, Arizona 85281 --------------------------------------------- (Address of Principal Executive Offices) (602) 389-8600 -------------- (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, Par Value $.01 Per Share New York Stock Exchange - -------------------------------------- ----------------------- Securities registered under Section 12(g) of the Exchange Act: None Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_____] State issuer's revenues for its most recent fiscal year: $84,642,000 As of March 6, 1998, the aggregate market value of the voting stock held by non-affiliates of the issuer, computed by reference to the price at which stock was sold as of such date in the stock market as reported on the New York Stock Exchange, was $152,309,391. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive and does not constitute an admission of affiliate status. As of March 6, 1998, there were 7,907,123 shares of the issuer's Common Stock outstanding. Documents incorporated by reference: Portions of the issuer's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the financial statements, the report thereon, the notes thereto and the supplementary data commencing at page F-1 of this Report, which financial statements, report, notes and data are incorporated herein by reference. 2 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 19, 1998 THREE-FIVE SYSTEMS, INC. By /s/ David R. Buchanan -------------------------------------- David R. Buchanan, Chairman of the Board, President, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ David R. Buchanan Chairman of the Board, President, March 19, 1998 - ------------------------------------ And Chief Executive Officer David R. Buchanan (Principal Executive Officer) /s/ Jeffrey D. Buchanan Vice President - Finance, Administration, and March 19, 1998 - ------------------------------------ Legal; Chief Financial Officer; Secretary; Jeffrey D. Buchanan and Treasurer (Principal Financial and Accounting Officer) Director March , 1998 - ------------------------------------ David C. Malmberg /s/ Burton E. McGillivray Director March 19, 1998 - ------------------------------------ Burton E. McGillivray /s/ Gary R. Long Director March 19, 1998 - ------------------------------------ Gary R. Long /s/ Kenneth M. Julien Director March 19, 1998 - ------------------------------------ Kenneth M. Julien
3 THREE-FIVE SYSTEMS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Public Accountants ....................................F-2 Consolidated Balance Sheets as of December 31, 1997 and 1996 ................F-3 Consolidated Statements of Income (Loss) for the years ended December 31, 1997, 1996 and 1995 .........................................F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 .............................F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 .........................................F-6 Notes to Consolidated Financial Statements ..................................F-7 Schedule II - Valuation and Qualifying Accounts and Reserves ................S-1 F-1 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Three-Five Systems, Inc.: We have audited the accompanying consolidated balance sheets of THREE-FIVE SYSTEMS, INC. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Three-Five Systems, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index of financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Phoenix, Arizona, January 20, 1998. F-2 THREE-FIVE SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) ASSETS December 31, -------------------- 1997 1996 -------- -------- CURRENT ASSETS: Cash and cash equivalents (Note 2) $ 16,371 $ 12,580 Accounts receivable, net 12,540 6,830 Inventories, net (Note 2) 8,255 4,606 Deferred tax asset (Note 6) 4,311 5,930 Other current assets 1,228 1,384 -------- -------- Total current assets 42,705 31,330 PROPERTY, PLANT AND EQUIPMENT, net (Note 2) 29,847 30,913 OTHER ASSETS 283 326 -------- -------- $ 72,835 $ 62,569 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 8,513 $ 4,289 Accrued liabilities (Note 2) 5,079 4,524 Current taxes payable (Note 6) -- 1,004 -------- -------- Total current liabilities 13,592 9,817 -------- -------- DEFERRED TAX LIABILITY (Note 6) 2,718 1,568 COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY (Note 4): Preferred stock, $.01 par value; 1,000,000 shares authorized -- -- Common stock, $.01 par value; 15,000,000 shares authorized, 7,928,023 shares issued, 7,905,523 shares outstanding at December 31, 1997; 7,779,829 shares issued, 7,757,329 shares outstanding at December 31, 1996 79 78 Additional paid-in capital 32,420 32,329 Retained earnings 24,259 19,016 Cumulative translation adjustment (Note 2) 20 14 Less- Treasury stock, at cost (22,500 shares) (253) (253) -------- -------- Total stockholders' equity 56,525 51,184 -------- -------- $ 72,835 $ 62,569 ======== ======== The accompanying notes are an integral part of these consolidated balance sheets. F-3 THREE-FIVE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME (LOSS) (in thousands, except share amounts)
Years Ended December 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- NET SALES (Notes 5 and 8) $ 84,642 $ 60,713 $ 91,585 ----------- ----------- ----------- COSTS AND EXPENSES: Cost of sales 64,760 58,321 70,481 Selling, general and administrative 6,557 5,351 5,386 Research and development 5,106 4,065 2,396 ----------- ----------- ----------- 76,423 67,737 78,263 ----------- ----------- ----------- Operating income (loss) 8,219 (7,024) 13,322 ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest, net 548 412 765 Other, net (190) (139) (122) ----------- ----------- ----------- 358 273 643 ----------- ----------- ----------- INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES 8,577 (6,751) 13,965 Provision for (benefit from) income taxes (Note 6) 3,334 (2,920) 5,548 ----------- ----------- ----------- NET INCOME (LOSS) $ 5,243 $ (3,831) $ 8,417 =========== =========== =========== EARNINGS (LOSS) PER COMMON SHARE (Note 2): Basic $ 0.67 $ (0.49) $ 1.09 =========== =========== =========== Diluted $ 0.65 $ (0.49) $ 1.04 =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES: Basic 7,854,053 7,767,744 7,715,996 =========== =========== =========== Diluted 8,089,975 7,767,744 8,083,551 =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. F-4 THREE-FIVE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in thousands, except share amounts)
Common Stock --------------------- Additional Cumulative Shares Paid-in Retained Translation Treasury Issued Amount Capital Earnings Adjustment Stock Total --------- --------- --------- --------- ---------- --------- --------- BALANCE, December 31, 1994 7,691,524 $ 77 $ 32,052 $ 14,430 $ 2 $ -- $ 46,561 Stock options exercised 44,221 -- 32 -- -- -- 32 Tax benefit from early disposition of incentive stock options (Note 6) -- -- 202 -- -- -- 202 Net income -- -- -- 8,417 -- -- 8,417 Translation adjustment -- -- -- -- 12 -- 12 --------- --------- --------- --------- --------- --------- --------- BALANCE, December 31, 1995 7,735,745 77 32,286 22,847 14 -- 55,224 Stock options exercised 44,084 1 11 -- -- -- 12 Tax benefit from early disposition of incentive stock options (Note 6) -- -- 32 -- -- -- 32 Net loss -- -- -- (3,831) -- -- (3,831) Purchase of treasury stock -- -- -- -- -- (253) (253) --------- --------- --------- --------- --------- --------- --------- BALANCE, December 31, 1996 7,779,829 78 32,329 19,016 14 (253) 51,184 Stock options exercised 148,194 1 50 -- -- -- 51 Tax benefit from early disposition of incentive stock options (Note 6) -- -- 41 -- -- -- 41 Net income -- -- -- 5,243 -- -- 5,243 Translation adjustment -- -- -- -- 6 -- 6 --------- --------- --------- --------- --------- --------- --------- BALANCE, December 31, 1997 7,928,023 $ 79 $ 32,420 $ 24,259 $ 20 $ (253) $ 56,525 ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated statements F-5 THREE-FIVE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, --------------------------------- 1997 1996 1995 --------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 5,243 $(3,831) $ 8,417 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,135 3,551 2,278 Provision for (reduction of) accounts receivable valuation reserves (69) 47 (1) Provision for (reduction of) inventory valuation reserves (2,473) 4,015 1,218 Loss on disposal of assets 2 12 24 Changes in assets and liabilities: (Increase) decrease in accounts receivable (5,641) 2,469 (624) (Increase) decrease in inventories (1,176) 5,082 (5,264) (Increase) decrease in other assets 505 (1,070) (32) Increase (decrease) in accounts payable and accrued liabilities 4,778 4,296 (3,170) Increase (decrease) in taxes payable, net 1,461 (2,358) (1,568) --------- --------- ------- Net cash provided by operating activities 6,765 12,213 1,278 --------- --------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (3,049) (948) (27,051) Proceeds from sale of property, plant and equipment 19 5 326 --------- --------- ------- Net cash used for investing activities (3,030) (943) (26,725) --------- --------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from (payments on) notes payable to banks - (3,000) 3,000 Principal payments on and retirement of long-term debt - - (182) Stock options exercised 52 12 32 Purchase of treasury stock - (253) - --------- --------- ------ Net cash provided by (used for) financing activities 52 (3,241) 2,850 --------- --------- ------- Effect of exchange rate changes on cash 4 - 12 --------- --------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,791 8,029 (22,585) CASH AND CASH EQUIVALENTS, beginning of year 12,580 4,551 27,136 --------- --------- ------- CASH AND CASH EQUIVALENTS, end of year $ 16,371 $ 12,580 $ 4,551 ========= ========= ======= SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 4 $ 60 $ 12 ========= ========= ======= Income taxes paid $ 1,973 $ 1,832 $ 7,296 ========= ========= =======
The accompanying notes are an integral part of these consolidated statements. F-6 THREE-FIVE SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 (1) ORGANIZATION AND OPERATIONS: The Company designs and manufactures a wide range of user interface devices for operational control and informational display functions required in the end products of original equipment manufacturers ("OEMs"). Most of the Company's sales consist of custom devices developed in close collaboration with its customers. Devices designed and manufactured by the Company find application in cellular telephones and other wireless communication devices as well as in medical equipment, office automation equipment, industrial process controls, instrumentation, consumer electronic products, automotive equipment, and industrial and military control products. The Company currently specializes in liquid crystal display ("LCD") and light emitting diode ("LED") components and technology in providing its design and manufacturing services for its customers. The Company markets its services primarily in North America, Europe, and Asia through direct technical sales persons and, to a much lesser extent, through an independent sales and distribution network. The Company maintains its primary manufacturing facility in Manila, the Philippines. A third-party subcontractor operates the facility under a sub-assembly agreement with the Company utilizing equipment, processes, and documentation owned by the Company. The sub-assembly agreement has a current term extending through December 31, 1999, and from year to year thereafter, but may be terminated by either party upon 180 days written notice. The termination of or the inability of the Company to obtain products pursuant to the sub-assembly agreement, even for a relatively short period, would have a material adverse effect on the operations and profitability of the Company. Since December 1994, the Company has made advances totaling approximately $1.7 million to the subcontractor to help the subcontractor in meeting its working capital needs, all of which have been paid in full in 1997. The Company plans on incorporating a wholly-owned subsidiary during 1998 which will be engaged in the manufacturing and sale of the Company's products in China. Management expects that capital expenditures to acquire the property, plant, and equipment for this expansion will total approximately $8.0 million in 1998. During 1995, the Company formed a wholly-owned subsidiary, Three-Five Systems Pacific, Inc. (Pacific). Pacific, a Philippines corporation, procures supplies primarily from Philippine vendors, as well as manages and assists production personnel of a third party subcontractor the Company employs. 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. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation and Preparation of Financial Statements The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-7 Fair Value of Financial Instruments 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. Cash and Cash Equivalents For purposes of the statements of cash flows, all highly liquid investments with a maturity of three months or less at the time of purchase are considered to be cash equivalents. Cash equivalents consist of investments in commercial paper, marketable debt securities, money market mutual funds, and United States government agencies' obligations and are classified as held-to-maturity in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Cash equivalents were $12,886,000 and $11,243,000 at December 31, 1997 and December 31, 1996, respectively. Inventories Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Reserves are established against Company-owned inventories for excess, slow-moving, and obsolete items and for items where the net realizable value is less than cost. The reserve for obsolete inventory totaled $4,309,000 and $6,782,000 at December 31, 1997 and December 31, 1996, respectively. Inventories at December 31 consist of the following: 1997 1996 --------- ---------- (in thousands) Raw materials $ 6,052 $ 3,147 Work-in-process 1,195 780 Finished goods 1,008 679 --------- ---------- $ 8,255 $ 4,606 ========= ========== Property, Plant and Equipment 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. During 1996, the Company placed into service a high-volume LCD glass manufacturing line in its Tempe, Arizona manufacturing facility. The Company is depreciating the LCD glass 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 at December 31 consist of the following: 1997 1996 ---------- ----------- (in thousands) Building and improvements $ 10,431 $ 10,431 Furniture and equipment 31,804 28,776 ---------- ----------- 42,235 39,207 Less- accumulated depreciation (12,388) (8,294) ---------- ----------- $ 29,847 $ 30,913 ========== =========== F-8 The Company intends to utilize a significant portion of the high-volume LCD glass manufacturing line facility to produce a substantial portion of its own requirements for LCD glass. The successful utilization of the manufacturing facility will require the Company (i) to produce LCD glass on a timely and cost-effective basis at quality levels at least equal to the LCD glass available from independent suppliers and (ii) to utilize the LCD glass it produces in devices it designs and manufactures in a manner satisfactory to its customers. Although management believes that the manufacturing facility will be successfully utilized, no assurance can be given that the Company will not experience problems or delays in the future in conducting its LCD glass manufacturing operations. Such problems could require the Company to continue to purchase its LCD glass requirements from third parties and result in the inability of the Company to recover its investment in the manufacturing facility. 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. Accrued Liabilities Accrued liabilities include accrued compensation of approximately $1,675,000 and $988,000 at December 31, 1997 and 1996, respectively. Foreign Currency Translation Financial information relating to the Company's foreign subsidiaries is reported in accordance with SFAS No. 52, Foreign Currency Translation. The gain or loss resulting from the translation of the subsidiaries' financial statements has been included as a separate component of stockholders' equity. The net foreign currency transaction loss in 1997, 1996 and 1995 was $183,000, $46,000, and $32,000, respectively, and has been included in other expenses in the accompanying statements of income (loss). Revenue Recognition The Company recognizes revenue upon shipment. The Company's distributor agreements provide for stock (inventory) rotation and price protection. Reserves are provided for each of these programs based on past return experience. These reserves are established at the time of shipment and reduce gross sales to arrive at net sales as presented in the accompanying consolidated statements of income (loss). These reserves are reflected as a reserve against accounts receivable from sales to distributors and totaled $125,000 and $89,000 at December 31, 1997 and 1996, respectively. The Company's distributors generally offset any returns and allowances against payments on accounts receivable. The Company also provides reserves for uncollectible accounts receivable. These reserves totaled $455,000 and $560,000 at December 31, 1997 and 1996, respectively. The Company performs ongoing credit evaluations of all of its customers and considers various factors in establishing its allowance for doubtful accounts. Research and Development Research and development costs are expensed as incurred. The Company currently is spending research and development dollars on 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 and development lab to cost-effective manufacturable products. Earnings (Loss) Per Share During 1997, the Company adopted SFAS No. 128, Earnings per Share. Pursuant to SFAS No. 128, basic earnings per common share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per common share for the years ended December 31, 1997, 1996 and 1995 are determined assuming that options were exercised at the beginning of each F-9 year or at the time of issuance, if later. No outstanding options were assumed to be exercised for purposes of calculating diluted earnings per share for the year ended December 31, 1996 as their effect was anti-dilutive. Below are the disclosures required pursuant to SFAS No. 128 for the years ended December 31, 1997, 1996 and 1995 (in thousands, except per share data): For the Years Ended December 31, ---------------------------- 1997 1996 1995 ------- ------- ------- Basic earnings (loss) per share: Income available to common shareholders $ 5,243 $(3,831) $ 8,417 Weighted average common shares 7,854 7,768 7,716 ------- ------- ------- Basic per share amount $ 0.67 $ (0.49) $ 1.09 ======= ======= ======= Diluted earnings (loss) per share: Income available to common shareholders $ 5,243 $(3,831) $ 8,417 Weighted average common shares 7,854 7,768 7,716 Options assumed converted 236 -- 368 ------- ------- ------- Total common shares plus assumed conversions 8,090 7,768 8,084 ------- ------- ------- Diluted per share amount $ 0.65 $ (0.49) $ 1.04 ======= ======= ======= (3) LONG-TERM DEBT: In May 1997, the Company entered into a new $15.0 million unsecured revolving line of credit which matures May 22, 1998. This line of credit bears interest at the bank's prime rate (8.50% at December 31, 1997) or at the LIBOR base rate (5.7% to 6.0% at December 31, 1997) plus 1.75%, and is payable monthly. There was no balance outstanding at December 31, 1997 or 1996. In addition, the Company has a $350,000 United Kingdom credit facility with interest due quarterly at the bank's base rate (7.75% at December 31, 1997) plus 2%. Any unpaid balance is due June 20, 1998, and is secured by United Kingdom accounts receivable. Management intends to renew the United Kingdom credit facility and does not anticipate any material changes to the existing terms. The lines of credit contain certain restrictive covenants which include, among other things, restrictions on the declaration or payment of dividends and the amount of capital expenditures. The lines also require 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. (4) BENEFIT PLANS: The Company has four stock option plans: the 1997 Stock Option Plan (1997 Plan), the 1994 Non-Employee Directors Stock Option Plan (1994 Plan), the 1993 Stock Option Plan (1993 Plan), and the 1990 Stock Option Plan (1990 Plan). 1997 Stock Option Plan The 1997 Plan provides for the granting of nonqualified options to purchase up to 100,000 shares of the Company's common stock. Under the 1997 Plan, options may be issued to key personnel and others providing valuable services to the Company and its subsidiaries. The options issued will be nonqualified stock options and shall not be "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986 (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 22,000 shares of the Company's common stock under the 1997 Plan at December 31, 1997. F-10 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 will be determined by the plan administrator, but may not be less than 100 percent 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. 1994 Non-Employee Directors Stock Option Plan 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 will receive an automatic grant of options to acquire 1,000 shares of common stock on the date of their first appointment or election to the Board of Directors. Those options become exercisable and vest in a series of three equal and successive annual installments, with the first such installment becoming exercisable 13 months after the automatic grant date. A non-employee member of the Board of Directors is not eligible to receive the 500 share automatic option grant if that option grant date is within 30 days of such non-employee member receiving the 1,000 share automatic option grant. The exercise price per share of common stock subject to options granted under the 1994 Plan will be equal to 100 percent of the fair market value of the Company's common stock on the date such options are granted. There were outstanding options to acquire 9,000 shares of the Company's common stock under the 1994 Plan at December 31, 1997. 1993 Stock Option Plan The 1993 Plan provides for the granting of options to purchase up to 385,454 shares of the Company's common stock (which includes 85,454 shares previously reserved for issuance under the Company's 1990 Stock Option Plan), the direct granting of common stock (stock awards), the granting of stock appreciation rights (SARs) and the granting of other cash awards (cash awards; stock awards, SARs and cash awards are collectively referred to herein as Awards). Under the 1993 Plan, options and Awards may be issued to key personnel and others providing valuable services to the Company and its subsidiaries. The options issued may be incentive stock options or nonqualified stock options. 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 309,750 shares of the Company's common stock under the 1993 Plan at December 31, 1997. 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 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 will be determined by the plan administrator, but may not be less than 100 percent (110 percent if the option is granted to a stockholder who at the time the option is granted owns stock representing more than ten percent of the total combined voting power of all classes of stock of the Company) of the fair market value of the common stock at the time of the grant. The 1993 Plan will remain in force until February 24, 2003. 1990 Stock Option Plan Under the 1990 Plan, there are 210,220 options issued but unexercised as of December 31, 1997. In conjunction with stockholder approval of the 1993 Plan, the Board terminated the 1990 Plan with respect to unissued options F-11 to purchase 85,454 shares of common stock which remained and were unissued as of the date the 1993 Plan was adopted. The 1990 Plan will remain in force through May 1, 2000. The expiration date, maximum number of shares purchasable, and the other provisions of the options granted under the 1990 Plan were established at the time of grant. Options were granted for terms of up to ten years and become exercisable in whole or in one or more installments at such times as were determined by the Board of Directors upon grant of the options. Tax benefits from early disposition of common stock by optionees under the 1993 and 1990 Plans and from the exercise of nonqualified options are credited to additional paid-in capital. Pursuant to the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the Company accounts for transactions with its employees pursuant to Accounting Principles Board Opinion No. 25, Accounting for Stock-Issued to Employees, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income (loss) and earnings (loss) per share would have been as follows (in thousands, except per share data):
1997 1996 1995 --------- ---------- --------- Net income (loss): As reported $ 5,243 $ (3,831) $ 8,417 Pro forma 4,785 (4,076) 8,327 Basic earnings (loss) per share: As reported $ 0.67 $ (0.49) $ 1.09 Pro forma 0.61 (0.52) 1.08 Diluted earnings (loss) per share: As reported $ 0.65 $ (0.49) $ 1.04 Pro forma 0.59 (0.52) 1.03
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for grants in 1997, 1996 and 1995, respectively: risk-free interest rates of 5.45%, 6.31% and 6.31%; expected dividend yields of zero; expected lives of 6.4, 6.1 and 5.7 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%, 61.9% and 58.7%. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The weighted average fair value of shares sold in 1997 was $14.98. F-12 A summary of the status of the Company's four stock option plans at December 31, 1997, 1996 and 1995 and changes during the three years then ended is presented in the table and narrative below:
1997 1996 1995 ------------------------ ----------------------------- -------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- --------- --------- -------- ---------- -------- Outstanding at beginning of year 551,776 $ 6.92 539,576 $ 8.06 465,326 $ 4.68 Granted 200,500 14.63 250,100 11.89 178,000 22.15 Exercised (162,306) 1.34 (44,900) 0.49 (44,250) 0.75 Expired (39,000) 12.23 (193,000) 18.04 (59,500) 29.24 --------- --------- ---------- Outstanding at end of year 550,970 $ 11.01 551,776 $ 6.92 539,576 $ 8.06 ========= ========= ========== Exercisable at end of year 165,110 294,982 308,940 ========= ========= ========== Weighted average fair value of options granted $ 9.19 $ 7.57 $ 13.19 ======== ====== ========
The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ----------------------------------------------------------- -------------------------- Weighted Number Average Weighted Number Weighted Range of Outstanding at Remaining Average Exercisable at Average Exercise December 31, Contractual Exercise December 31, Exercise Prices 1997 Life Price 1997 Price -------------- -------------- ------------ ----------- --------------- -------- $ 0.25 - $9.00 108,720 5.7 years $ 0.77 108,720 $ 0.77 9.01 - 20.00 422,250 8.0 years 13.06 51,390 13.52 20.01 - 34.38 20,000 8.9 years 23.23 5,000 26.93 --------- --------- -------- --------- ------ 550,970 7.6 years $ 11.01 165,110 $ 5.53 ========= ========= ======== ========= ======
401(k) Profit Sharing Plan Effective September 1, 1990, the Company adopted a profit sharing plan (401(k) Plan) pursuant to Section 401(k) of the 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, $65,000, and $0 for the years ended December 31, 1997, 1996, and 1995, respectively. F-13 (5) MAJOR CUSTOMERS: The Company's strategy involves concentrating its efforts on providing design and production services to leading companies in a limited number of fast growing industries. Beginning in 1996, 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, who accounted for approximately 65 percent and 81 percent of the Company's revenue in 1996 and 1995, respectively, accounted for approximately 35 percent of the Company's revenue during 1997. This reduced percentage occurred as a result of the increased sales to other customers and reduced product selling prices and revenues from that major customer. The Company's other significant customer accounted for 32 percent of the Company's revenue during 1997. Sales to this customer were less than 10 percent of the Company's revenue during 1996 and 1995. 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 a large number of customers, primarily in the cellular phone, computer hardware and other electronic products industries. These customers are located primarily in the United States and Europe. (6) INCOME TAXES: SFAS No. 109, Accounting for Income Taxes, 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. The provision for income taxes for the years ended December 31 consists of the following:
1997 1996 1995 ---------- ---------- -------- (in thousands) Current, net of operating loss carryforwards and tax credits utilized Federal, net of tax benefit from early termination of incentive stock options $ 356 $ 556 $ 2,775 State 97 58 790 Foreign 71 9 1,681 ---------- ---------- -------- 524 623 5,246 Deferred provision (benefit) 2,769 (3,575) 100 Tax benefit from early termination of incentive stock options, reflected in stockholders' equity 41 32 202 ---------- ---------- -------- Provision (benefit) for income taxes $ 3,334 $ (2,920) $ 5,548 ========== ========== ========
In accordance with SFAS No. 109, a tax benefit for net operating losses of approximately $35,000, $102,000, and $67,000 and tax credits of approximately $0, $938,000, and $1,478,000 utilized in 1997, 1996, and 1995, respectively, are included as a reduction of the provision for income taxes in the consolidated statements of income (loss). F-14 The components of deferred taxes at December 31 are as follows:
1997 1996 --------- -------- (in thousands) Net long-term deferred tax liabilities: Accelerated tax depreciation $ 2,685 $ 1,535 Other 33 33 --------- -------- $ 2,718 $ 1,568 ========= ======== Net short-term deferred tax assets: Inventory reserve $ 1,721 $ 2,675 Uniform capitalization 1,251 1,868 Accrued liabilities not currently deductible 1,080 1,080 Allowance for doubtful accounts 156 196 Tax effect of regular U.S. net operating loss carry forward 166 189 Other 91 76 --------- -------- 4,465 6,084 Valuation allowance (154) (154) --------- -------- $ 4,311 $ 5,930 ========= ========
SFAS No. 109 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As a result of certain limitations on the use of net operating loss carryforwards acquired in the ERA acquisition, a valuation allowance has been established for those net operating losses not likely to be realized. A reconciliation of the U.S. federal statutory rate to the Company's effective tax rate is as follows: 1997 1996 1995 ------ ------ ------ Statutory federal rate 34% 34% 34% Effect of state taxes 5 6 6 Other - 3 - ------ ------ ------ 39% 43% 40% ====== ====== ====== Net operating loss carryforwards for federal tax purposes totaled approximately $490,000 at December 31, 1997. The use of these carryforwards is limited to $67,000 per year and they expire through 2003. (7) COMMITMENTS AND CONTINGENCIES: In March 1995, the Company entered into a non-cancelable operating lease for its primary manufacturing facility in Manila, the Philippines. The lease expires December 31, 1999. In April 1995, the Company entered into a non-cancelable operating lease for an additional manufacturing facility in Manila, the Philippines. In February 1997, the Company exercised its option to renew the lease for two years. The lease expires March 31, 1999. Rent expense was approximately $793,000, $477,000 and $683,000 for the years ended December 31, 1997, 1996, and 1995, respectively. In April 1994, the Company entered into a ground lease (with purchase options) on a 5.7 acre site in Tempe, Arizona. Annual lease payments under the ground lease, which will expire on March 31, 2069, subject to renewal and purchase options as well as termination provisions, will average approximately $100,000 over the term of the lease subject to certain escalation provisions. A new design, manufacturing, and corporate headquarters facility containing approximately 97,000 square feet was completed on the land in 1995 at a cost of approximately $10.4 million. F-15 The Company's future lease commitments under the non-cancelable operating leases as of December 31, 1997, are as follows (in thousands): 1998 $ 419 1999 372 2000 100 2001 100 2002 100 Thereafter 6,625 -------- $ 7,716 ======== The Company is involved in certain administrative proceedings arising in the normal course of business. In the opinion of management, the Company's potential exposure under the pending administrative proceedings is adequately provided for in the accompanying financial statements. (8) GEOGRAPHIC SEGMENTS: Sales by geographic area and identifiable assets for the years ended December 31, 1997, 1996, and 1995 were as follows:
North America Europe Pacific Rim Eliminations Consolidated --------- --------- ----------- ------------ ------------ (in thousands) December 31, 1997: Net sales $ 73,887 $ 10,755 $ - $ - $ 84,642 Transfers to Europe 9,136 - - (9,136) - Transfers to North America - - 3,107 (3,107) - --------- --------- --------- ---------- -------- Total revenue $ 83,023 $ 10,755 $ 3,107 $ (12,243) $ 84,642 ========= ========= ========= ========== ========= Net income $ 4,728 $ 404 $ 65 $ 46 $ 5,243 ========= ========= ========= ========== ========= Identifiable assets $ 61,307 $ 4,896 $ 7,431 $ (799) $ 72,835 ========= ========= ========= ========== ========= December 31, 1996: Net sales $ 32,899 $ 27,814 $ - $ - $ 60,713 Transfers to Europe 25,810 - - (25,810) - Transfers to North America - - 1,494 (1,494) - --------- --------- --------- ---------- -------- Total revenue $ 58,709 $ 27,814 $ 1,494 $ (27,304) $ 60,713 ========= ========= ========= ========== ========= Net income (loss) $ (4,005) $ 19 $ 12 $ 143 $ (3,831) ========= ========= ========= ========== ========= Identifiable assets $ 52,951 $ 3,824 $ 6,164 $ (370) $ 62,569 ========= ========= ========= ========== ========= December 31, 1995: Net sales $ 24,235 $ 67,350 $ - $ - $ 91,585 Transfers to Europe 60,361 - - (60,361) - Transfers to North America - - 1,437 (1,437) - --------- --------- --------- ---------- -------- Total revenue $ 84,596 $ 67,350 $ 1,437 $ (61,798) $ 91,585 ========= ========= ========= ========== ========= Net income (loss) $ 5,093 $ 3,353 $ (46) $ 17 $ 8,417 ========= ========= ========= ========== ========= Identifiable assets $ 50,779 $ 8,491 $ 7,789 $ (3,279) $ 63,780 ========= ========= ========= ========== =========
F-16 THREE-FIVE SYSTEMS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
Balance at Charged to Charged to Balance at Beginning Costs and Other End of of Period Expenses Accounts Other Period --------- -------- -------- ----- ------ (in thousands) Allowance for doubtful accounts and sales returns and allowances: - ----------------------- Year ended December 31, 1997 $ 649 (105) 36(1) -- $ 580 Year ended December 31, 1996 $ 603 14 32(1) -- $ 649 Year ended December 31, 1995 $ 604 (36) 35(1) -- $ 603 Inventory Reserve: - ------------------ Year ended December 31, 1997 $6,782 1,114 (3,587)(2) $4,309 Year ended December 31, 1996 $2,767 5,939 142(2) (2,066)(2) $6,782 Year ended December 31, 1995 $1,548 1,563 391(3) (735)(2) $2,767
(1) Actual return activity (2) Obsolete inventory written off (3) Inventory adjustments S-1 -----END PRIVACY-ENHANCED MESSAGE-----