Three-Five Systems announces second-quarter results

July 20, 2001
. Excluding special charges, the company reported a net loss for the second quarter of 2001 of $6.3 million, or $0.29 per share, compared to a net profit of $4.4 million, or $0.21 per share, for the second quarter of 2000.

According to Three-Five Systems Inc., sales for the second quarter were $25.0 million compared to $44.9 million for the second quarter of 2000. Excluding special charges, the company reported a net loss for the second quarter of 2001 of $6.3 million, or $0.29 per share, compared to a net profit of $4.4 million, or $0.21 per share, for the second quarter of 2000. The net loss is primarily attributable to lower revenue, a decrease in operating efficiencies resulting from lower unit volume shipments, and reduced gross margins on the sales of LCD modules. Those factors occurred primarily as a result of intense pricing pressures in the display industry resulting from excess LCD capacities, as well as inventory issues with the OEM users of displays, such as mobile handset makers.

The company's special charges in the quarter included write-downs of its inventory, the write-off of a strategic investment in a start-up company, and the write-off of certain costs associated with an enterprise resource planning system implementation that was discontinued during the second quarter. Including those special expenses, the company reported a net loss for the quarter of $11.3 million, or $0.53 per share.

Sales for the first six months of 2001 were $60.6 million compared to $84.1 million for the same period of 2000. Including the special charges, the company reported a net loss of $11.1 million, or $0.52 per share, for the first six months of 2001, compared to a net income of $8.0 million, or $0.39 per share, for the same period of 2000.

The company ended the second quarter of 2001 with $154.4 million in cash and liquid investments, no outstanding borrowings on its working capital line of credit, and no long-term debt. Despite the large net loss for the quarter, operating cash outflow was only about $700,000, due primarily to a one-third reduction in the company's inventory. Inventory balances decreased by over $8.8 million during the quarter partially as a result of $2.4 million in inventory write-downs and partially as a result of a focused effort by the company to slow component purchases and reduce inventory levels. The inventory write-downs primarily occurred as a result of cancellations by customers on end-of-life programs.

Notes Three-Five President and CEO Jack L. Saltich: “`During the quarter, we made the strategic decision to move our front-end, high-volume LCD line from the United States to Asia later this year. This decision is a significant step forward in two ways. First, we expect that this move will reduce the costs of our LCD display modules. This cost reduction is imperative to our continuing success in the direct view display market. Second, the move will free up space in our U.S. production facility for the full-scale assembly of Brillian LCoS microdisplays and the pursuit of other new display technologies. Our Beijing and Manila module production facilities will continue to support our needs, and we expect to incur no interruption in our shipments of LCD modules.”

During the second quarter of 2001, the company announced that weak and uncertain demand in the cellular handset industry and continued issues with handset inventories had led to cancellations, delays, and push-outs for existing and new customers' programs. This resulted in limited visibility for the company with regard to revenue expectations for the remainder of the year. In addition, the company said that the pressure on display prices had intensified and that it was experiencing accelerated reductions of its LCD module selling prices.

The company currently expects those conditions to extend into the second half of the year. Thus, its management expects revenue in the third quarter of 2001 to be in the range of $20 million to $30 million and to report a loss in the third quarter in the range of $0.15 to $0.25 per share. The company believes that the fourth quarter of 2001 will show some improvement in revenue over the third quarter and a further improvement in earnings.

According to Saltich, the handset industry, and consequently the firm's core direct view LCD display business, remains unpredictable. He adds that customers have indicated that they are seeing some service providers engage in some spot cell phone buying, which is resulting in very little lead time for those orders that are coming in. The result for suppliers of custom products to the handset industry is very short forward-looking visibility and sporadic orders that require a quick response time.'

“The demand for our Brillian line of LCoS microdisplays remains extremely strong, particularly in the television and high-end LCD projector markets,” says Saltich. “During the second quarter, we shipped samples of our two newest microdisplays, the Brillian 1024 and the Brillian 1920. The Brillian 1920 is our highest-resolution LCoS microdisplay and is already being considered by customers for next-generation high-definition television applications. This quarter, we shipped our highest number yet of microdisplay products, and the demand for additional microdisplays greatly exceeded shipments. We are currently working on methods to increase yield and throughput so that we can meet our customers' demands for the second half of the year. The increased R&D costs we experienced during the second quarter are a reflection of those activities.

“We believe that there is a strong market for projection microdisplays. However, the near-to-the-eye microdisplay market is developing more slowly. We previously had made an investment of $3.8 million in Inviso, Inc., a start-up company with patented optics and a unique silicon backplane approach for the LCoS microdisplay near-to-the-eye market. Inviso is currently in the process of raising additional funds in this very difficult venture capital market. Even if this fund-raising effort is successful, we believe it would dilute the value of our original investment to a negligible amount. Therefore, while we still believe that Inviso has some of the most innovative approaches to the near-to-the-eye microdisplay market, we have determined that the asset is 'impaired' under generally accepted accounting principles and that we must write off our investment at this time.”

Saltich concludes, “`We have the financial strength to weather the current economic environment, while remaining focused on our long-term strategies. I have stated before that one of our goals is to continue to add new display technologies to our product offerings. During this second quarter, we continued to execute on that strategy by announcing the creation of a new company, Three-D OLED L.L.C., a joint venture with DuPont Displays that will design, market and sell OLED displays. I am pleased to report that we have hired a general manager for Three-D OLED and have begun to communicate the details of this new technology to our customer base.”

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