SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
For the Quarter Ended September 30, 2003
Commission file number 1-4373
THREE-FIVE SYSTEMS, INC.
| Delaware | 86-0654102 | |
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| (State or Other Jurisdiction | (I.R.S. Employer Identification No.) | |
| of Incorporation or Organization) |
| 1600 North Desert Drive, Tempe, Arizona | 85281 | |||
| (Address of Principal Executive Offices) | (Zip Code) | |||
(602) 389-8600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, at the latest practical date.
| CLASS | OUTSTANDING AS OF OCTOBER 31, 2003 | |||
Common
Par value $.01 per share |
21,319,618 | |||
THREE-FIVE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
| Page | ||||||||
PART I |
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| ITEM 1. | FINANCIAL STATEMENTS: |
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Condensed Consolidated Balance Sheets -
December 31, 2002 and September 30, 2003 (unaudited) |
1 | |||||||
Condensed Consolidated Statements of Operations (unaudited) -
Three Months and Nine Months Ended September 30, 2002 and 2003 |
2 | |||||||
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended September 30, 2002 and 2003 |
3 | |||||||
Notes to Condensed Consolidated Financial Statements |
4 | |||||||
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
10 | ||||||
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
19 | ||||||
| ITEM 4. | CONTROLS AND PROCEDURES |
19 | ||||||
PART II |
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| ITEM 5. | OTHER INFORMATION |
19 | ||||||
| ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K |
19 | ||||||
| SIGNATURES | 20 | |||||||
ITEM 1. FINANCIAL STATEMENTS
THREE-FIVE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
| DECEMBER 31, | SEPTEMBER 30, | |||||||||
| 2002 | 2003 | |||||||||
| (unaudited) | ||||||||||
ASSETS |
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Current Assets: |
||||||||||
Cash and cash equivalents |
$ | 18,389 | $ | 15,325 | ||||||
Short-term investments |
62,178 | 13,540 | ||||||||
Accounts receivable, net |
16,606 | 26,303 | ||||||||
Inventories |
17,292 | 25,331 | ||||||||
Taxes receivable |
561 | 657 | ||||||||
Deferred tax asset |
2,357 | 130 | ||||||||
Assets held for sale |
841 | — | ||||||||
Other current assets |
2,204 | 2,457 | ||||||||
Short-term assets of discontinued operations |
4,455 | — | ||||||||
Total current assets |
124,883 | 83,743 | ||||||||
Property, Plant and Equipment, net |
23,345 | 35,007 | ||||||||
Intangibles, net |
5,292 | 8,074 | ||||||||
Goodwill |
34,901 | 34,614 | ||||||||
Long-term Deferred Tax Asset |
10,764 | — | ||||||||
Other Assets, net |
455 | 669 | ||||||||
Long-term Assets of Discontinued Operations |
23,054 | — | ||||||||
Total Assets |
$ | 222,694 | $ | 162,107 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities: |
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Accounts payable |
$ | 8,244 | $ | 19,083 | ||||||
Accrued liabilities |
4,491 | 4,915 | ||||||||
Deferred revenue |
23 | 128 | ||||||||
Current portion of term loans |
2,714 | 4,260 | ||||||||
Current portion of capital leases |
— | 2,334 | ||||||||
Current liabilities of discontinued operations |
1,526 | — | ||||||||
Total current liabilities |
16,998 | 30,720 | ||||||||
Long-term Debt |
20 | 1,441 | ||||||||
Capital Leases |
— | 7,148 | ||||||||
Other Long-term Liabilities |
8 | — | ||||||||
Commitments and Contingencies (Note J) |
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Minority Interest in Consolidated Subsidiary |
— | 2,499 | ||||||||
Stockholders’ Equity: |
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Common stock |
219 | 220 | ||||||||
Additional paid-in capital |
200,763 | 200,921 | ||||||||
Retained earnings |
13,695 | (71,682 | ) | |||||||
Stock subscription note receivable |
(174 | ) | (183 | ) | ||||||
Accumulated other comprehensive loss |
(332 | ) | (474 | ) | ||||||
Less – treasury stock, at cost |
(8,503 | ) | (8,503 | ) | ||||||
Total stockholders’ equity |
205,668 | 120,299 | ||||||||
Total Liabilities and Stockholders’ Equity |
$ | 222,694 | $ | 162,107 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
THREE-FIVE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
| Three Months | Nine Months | |||||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||||
| 2002 | 2003 | 2002 | 2003 | |||||||||||||||
Net Sales |
$ | 18,239 | $ | 41,778 | $ | 64,987 | $ | 113,094 | ||||||||||
Costs and Expenses: |
||||||||||||||||||
Cost of sales |
17,023 | 42,050 | 59,599 | 111,297 | ||||||||||||||
Selling, general, and administrative |
2,431 | 4,941 | 7,866 | 12,753 | ||||||||||||||
Research, development, and engineering |
1,208 | 1,285 | 3,791 | 3,939 | ||||||||||||||
Loss (gain) on sale of assets |
— | (15 | ) | 4,545 | (20 | ) | ||||||||||||
Amortization of customer lists/distribution rights |
— | 510 | — | 1,532 | ||||||||||||||
| 20,662 | 48,771 | 75,801 | 129,501 | |||||||||||||||
Operating loss |
(2,423 | ) | (6,993 | ) | (10,814 | ) | (16,407 | ) | ||||||||||
Other Income (Expense): |
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Interest, net |
716 | (475 | ) | 2,722 | 19 | |||||||||||||
Other, net |
39 | 24 | 125 | (13 | ) | |||||||||||||
| 755 | (451 | ) | 2,847 | 6 | ||||||||||||||
Minority Interest in Loss of Consolidated Subsidiary |
— | 71 | 84 | 28 | ||||||||||||||
Loss before Income Taxes |
(1,668 | ) | (7,373 | ) | (7,883 | ) | (16,373 | ) | ||||||||||
Provision for (benefit from) income taxes |
(913 | ) | 17,576 | (3,194 | ) | 14,306 | ||||||||||||
Loss from Continuing Operations |
(755 | ) | (24,949 | ) | (4,689 | ) | (30,679 | ) | ||||||||||
Loss from Discontinued Operations, net of taxes |
(2,625 | ) | (5,931 | ) | (9,641 | ) | (10,552 | ) | ||||||||||
Net Loss |
$ | (3,380 | ) | $ | (30,880 | ) | $ | (14,330 | ) | $ | (41,231 | ) | ||||||
Loss per Common Share – Basic and Diluted: |
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Loss from Continuing Operations |
$ | (0.04 | ) | (1.17 | ) | (0.22 | ) | (1.44 | ) | |||||||||
Loss from Discontinued Operations |
(0.12 | ) | (0.28 | ) | (0.45 | ) | (0.50 | ) | ||||||||||
Net Loss |
$ | (0.16 | ) | $ | (1.45 | ) | $ | (0.67 | ) | $ | (1.94 | ) | ||||||
Weighted Average Number of Common Shares: |
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Basic and diluted |
21,518 | 21,305 | 21,515 | 21,295 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
THREE-FIVE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2002 | 2003 | ||||||||||
Cash Flows from Operating Activities: |
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Net loss |
$ | (14,330 | ) | $ | (41,231 | ) | |||||
Less loss – discontinued operations |
(9,641 | ) | (10,552 | ) | |||||||
Loss – continuing operations |
(4,689 | ) | (30,679 | ) | |||||||
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities: |
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Depreciation and amortization |
2,791 | 5,514 | |||||||||
Stock compensation |
92 | 50 | |||||||||
Minority interest in consolidated subsidiary |
(84 | ) | (28 | ) | |||||||
Deferred revenue |
— | 105 | |||||||||
Provision for accounts receivable valuation reserves |
124 | 21 | |||||||||
Loss (gain) on disposal of assets |
4,545 | (20 | ) | ||||||||
Provision for (benefit from) deferred taxes, net |
(7,039 | ) | 12,991 | ||||||||
Interest on notes payable |
— | 96 | |||||||||
Interest on officer loan |
(8 | ) | (9 | ) | |||||||
Changes in assets and liabilities: |
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(Increase) decrease in accounts receivable |
6,232 | (9,997 | ) | ||||||||
Decrease in inventories |
3,482 | 2,353 | |||||||||
Decrease in other assets |
869 | 124 | |||||||||
Increase (decrease) in accounts payable and accrued liabilities |
(5,504 | ) | 9,794 | ||||||||
Increase (decrease) in taxes payable/receivable |
4,096 | (96 | ) | ||||||||
Net cash (used in) provided by operating activities |
4,907 | (9,781 | ) | ||||||||
Cash Flows from Investing Activities: |
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Purchases of property, plant, and equipment |
(895 | ) | (2,131 | ) | |||||||
Proceeds from sale of assets |
1,100 | 606 | |||||||||
Purchase of intangibles |
(581 | ) | (433 | ) | |||||||
Purchase of short-term investments |
(95,884 | ) | (13,262 | ) | |||||||
Proceeds from maturities/sales of short-term investments |
113,874 | 61,838 | |||||||||
Licenses and acquisitions |
(11,950 | ) | (9,680 | ) | |||||||
Net cash provided by investing activities |
5,664 | 36,938 | |||||||||
Cash Flows from Financing Activities: |
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Payments on notes payable |
— | (2,734 | ) | ||||||||
Stock options exercised |
202 | 109 | |||||||||
Payments on capital leases |
— | (1,135 | ) | ||||||||
(Distribution to) receipt from minority interest |
(239 | ) | 2,527 | ||||||||
Purchase of treasury stock |
(634 | ) | — | ||||||||
Net cash used in financing activities |
(671 | ) | (1,233 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents |
(62 | ) | (80 | ) | |||||||
Net increase in cash and cash equivalents – continuing operations |
9,838 | 25,844 | |||||||||
Net cash used in and contributed to discontinued operations |
(21,224 | ) | (28,908 | ) | |||||||
Net decrease in cash and cash equivalents |
(11,386 | ) | (3,064 | ) | |||||||
Cash and cash equivalents, beginning of period |
37,003 | 18,389 | |||||||||
Cash and cash equivalents, end of period |
$ | 25,617 | $ | 15,325 | |||||||
Noncash Investing and Financing Activities: |
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Note payable due on purchase of DI distribution rights |
$ | — | $ | 2,882 | |||||||
Note payable due on purchase of Microtune inventory and equipment |
— | 2,723 | |||||||||
Capital lease due on purchase of Unico equipment |
— | 9,375 | |||||||||
Capital leases due on purchase of ETMA equipment |
— | 1,242 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Note A | The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In our opinion, all adjustments, which include only normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for all periods presented, have been made. The results of operations for the nine-month period ended September 30, 2003 are not necessarily indicative of the operating results that may be expected for the entire year ending December 31, 2003. These financial statements should be read in conjunction with our December 31, 2002 financial statements and the accompanying notes thereto. | |
| On September 1, 2003, we transferred all of the net assets of our microdisplay division, plus approximately $20.9 million in cash, into a newly created Delaware corporation called Brillian Corporation (Brillian). Brillian had $44.1 million of net assets on the spin-off date. On September 15, 2003, we spun off Brillian by distributing all of the outstanding common stock of Brillian to our stockholders on a pro rata basis, with each stockholder of Three-Five Systems, Inc. (TFS) receiving one share of Brillian common stock for each four shares of TFS common stock held. Brillian is now traded on the Nasdaq National Market under the symbol “BRLC.” For more information on the reason for the spin-off, as well as the description of business and risks associated with the spin-off, please refer to the Form 10 and the related amendments and associated documents filed with the Securities and Exchange Commission by Brillian. The microdisplay business that we transferred to Brillian is now reported in these consolidated financial statements as Discontinued Operations. | ||
| Net loss from discontinued operations was $10.6 million for the first nine months of 2003 and $9.6 million for the first nine months of 2002. Sales from discontinued operations were $1.6 million and $794,000 for the first nine months of 2003 and 2002, respectively. The major classes of discontinued assets and liabilities included in the Consolidated Balance Sheet as of December 31, 2002 and the day of spin-off are as follows (in thousands): |
| December 31, | September 15, | |||||||||
| 2002 | 2003 | |||||||||
Assets: |
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Cash | ||||||||||