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Three-Five Systems, Inc.
(TFS)
9/7/00
Three-Five Systems, Inc. designs and manufactures display modules for use in the end products of original equipment manufacturers (OEMs). The Company currently specializes in custom liquid crystal display (LCD) components and technology for the communications, medical electronics, industrial process control, wireless data collection and office automation industries.
Three-Five Systems, Inc. is known for its depth of engineering and manufacturing expertise. Three-Five Systems, Inc owns several proprietary display technologies. In addition to its traditional LCD module business, the Company is pursuing the commercialization of its liquid crystal on silicon microdisplays following substantial research and development over the past two years. The Company markets its services in North America, Europe, and Asia through a direct technical sales force.
Three-Five System's Website
Industry Overview
Liquid Crystal Displays
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.
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.
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.
The Custom Passive LCD Market
Stanford Resources estimated that the worldwide market for passive LCD display modules was approximately $2.8 billion in 1998. This market includes displays used in mobile handsets and other wireless communication devices as well as in office automation equipment, industrial controls, medical equipment, and instrumentation, but excludes displays for use in low-end consumer products, such as watches and calculators, according to Stanford Resources. Of the $2.8 billion market, $1.4 billion represented LCD displays used in mobile handset applications. Mobile handsets are the largest and fastest growing market for LCD modules. According to Gartner Group’s Dataquest, the worldwide market for mobile wireless handsets has grown from 18.7 million units produced in 1993 to 283 million units in 1999. This represents a compound annual growth rate well in excess of 50%. Industry sources project that mobile handset production will exceed 400 million units in 2000. Additional fast growing
markets for LCD display modules include pagers, personal digital assistants, or
PDAs, and palm top computers.
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.
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.
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.
The Emerging Microdisplay Market
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.
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.
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 front projectors, or shine the image through a translucent screen, as in rear projectors. Potential near-term microdisplay applications include use in office projection equipment, high-definition televisions, and computer monitors. Potential longer-term applications include use in wireless access to the Internet through 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.
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 projectors currently use transmissive polysilicon microdisplay technology. Reflective liquid crystal on silicon technology, however, is expected to provide more information at a lower cost.
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 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.
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 communications devices. It is widely assumed that converged voice and data communications 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.
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 communications 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 communications products with large information content at low cost, and many of these vendors are beginning to assess portable microdisplays for use in these products.
The Three-Five Approach
Three-Five seeks to provide 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, research and development activities focus on technological developments intended to meet the current and future requirements of customers. Value is added by Three-Five's 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.
By eliminating the duplication and overlap of investment and resources, Three -Five's OEM customers are able to work together and grow at a faster rate than would otherwise be possible. Three-Five concentrates on the development of display technologies and their applications to products, while customers devote time and resources on market development for these products.
Three-Five's 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.
Strategy
Three-Five's strategy is to enhance its position as a major, worldwide supplier of custom-designed and manufactured displays for application in various high-growth segments of the electronics industry. Key elements of its strategy include the following:
Target Leading Customers in High-Growth Industries
Identify industries that have the greatest long-term potential for growth. Current targeted industries include mobile handsets and other wireless communications, data collection, office automation, medical equipment, and industrial controls.
Within an industry, Three-Five targets leading companies that they believe would benefit from their design and manufacturing services. Targeted customers typically are Fortune 1000 manufacturing companies whose products require display devices. Three-Five's sales and engineering staffs then attempt to demonstrate the benefits that the potential customer would derive by outsourcing the design and production of display devices required in their products.
Expand Customer Base
Three-Five intends to intensify their efforts to diversify their customer base. They also plan to target specialized markets that have substantial volume requirements. They will continue to seek opportunities in growing and emerging markets, both in the United States and internationally.
Establish Close Relationships with Customers
Three-Five seeks to establish strong and long-lasting customer relationships through our fundamental business practice, which we refer to as “customer partnering.” Customer partnering involves aligning prospects with those of customers and seeking to make production staffs seamless extensions of the product design and production departments of our customers. This includes engineers spending a significant portion of their time assisting customers with their own research and development efforts at their facilities. In addition, Three-Five's customers’ engineers spend a significant amount of time conducting research and development in our facilities.
Provide Advanced Custom Design and Manufacturing Services
Three-Five seeks 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. Their design processes utilize advanced computer-aided design software to provide custom solutions for customers’ products in time frames and on cost bases that they believe are substantially shorter and lower-priced than industry norms.
Three-Five utilizes flexible manufacturing systems that can accommodate low-volume product runs in Arizona and high-volume, price-sensitive runs in Manila and Beijing. Their LCD facility in Arizona allows us to supply a majority of our LCD requirements. Production in Manila and Beijing, with advanced, efficient, and highly automated manufacturing processes utilizing state-of-the-art manufacturing and test equipment, provides us with low-cost, high-volume production capacity. Three Five anticipates that their ability to design, prototype, and manufacture product solutions will be enhanced by the expansion of their engineering personnel, Three-Five's increased design capacity, and their ability to meet LCD requirements. Three-Five continues to increase production personnel and add sophisticated manufacturing equipment to meet expanding capacity requirements.
- Display Technology Center
In 1999, Three-Five Systems (TFS) established a Display Technology Center that incorporates the Design Engineering and Research and Development groups. This combined Research and Technology Team serves as an integrated display solution resource, providing our customers with a one-stop shop in meeting their display needs.
By combining the R&D staff with the Engineering Design group, TFS has formed a team environment that is unmatched by others. The Engineering staff's expertise with current display technologies and their broad understanding of customer needs provides the R&D group with invaluable insight into future display needs, allowing them to become more customer focused. In turn, our Engineering staff benefits from the innovative solutions and different perspective to problem solving provided by the R&D department. This team approach helps Three-Five develop and better understand future customer needs as well as find innovative solutions to current display technology challenges. This dual technology and customer focus will help solidify the growth TFS will create through the introduction of new technologies and maintain the company's leadership in the traditional custom LCD business.
The development of the Display Technology Center emphasizes Three-Five's goal of technology leadership and the company's drive to become a fully integrated display technology company.
Products and Services
TFS currently engages in the design and manufacture of LCD display modules and the development and commercialization of manufacturing technologies for use in various products of OEMs.
LCD Display Modules and Services
TFS currently emphasizes 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, Three-Five works directly with the 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. Three-Five also provides 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 Three-Five's net sales.
TFS has developed a sophisticated design process to meet the specific needs of their customers’ applications. Each design project normally involves a cross-functional team of engineers who are assigned to a customer program. The team consults with the customer’s engineers throughout the design, prototype development, and manufacturing process. TFS continues 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.
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, TFS has developed a four phase program development process described below. TFS combines the program development process with their philosophy of being a “seamless extension of our customer.” This results in a very flexible, responsive, accurate, and fast development cycle that enables customers to introduce their products into the market rapidly.
TFS also designs and produces 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, TFS standard devices accounted for less than 3% of our net sales and consisted of non-LCD devices.
New Proprietary LCDs
TFS ispursuing two new technology initiatives for LCD module business. First, a patented new type of sunlight readable LCD display that is called Liquid Crystal intense Display, or LCiD™. This lower information content device provides a multi-colored, emissive-looking display at passive LCD prices. Also they have created a higher information content display with numerous gray shades but at the price of a more typical LCD. This new product is called Liquid Crystal active Drive, or LCaD®. This technology is based, in part, on technology we license from Motif, Inc. and additional proprietary technology that TSF has developed.
LCiD 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. TFS began production shipments of LCiD in the fourth quarter of 1999. TFS expects that LCiD 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. Typical applications for standard LCiD 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.
LCaD display devices would typically have 1/4 VGA (320 x 240 pixels) resolution. The LCaD display would consist of a complete display system incorporating an LCD panel, lighting, memory, an LCD controller, and interface electronics.
LCoS Microdisplays
The display market demands continually greater information content at reduced prices. In response to these demands, TFS is pursuing the commercialization of their liquid crystal on silicon, or LCoS, microdisplays following two years of extensive research and development activities. LCoS 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. TFS believes that the inherent capability of LCoS technology provides a cost-effective solution to increased information demands.
TFS current plan for the development of our LCoS 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 LCoS module platform. To meet their business objective of becoming the leading supplier of microdisplay visual systems, they must rapidly commercialize LCoS microdisplay technology on a cost-effective basis. This requires TFS to focus on common LCoS module platforms that provide economies of scale, rapid time to market, and broad market penetration. Specifically, the strategy calls for a business preparation phase and a business growth phase. TFS is currently in the preparation phase in which they are emphasizing research, development, and licensing opportunities to expand the technology portfolio, design engineering of LCoS 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.
TFS believes another market for LCoS microdisplay products will be converged wireless products requiring high-information content displays for e-mail and access to the Internet. Use of an LCoS 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.
TFS plans to offer a range of LCoS 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 LCoS microdisplays, TFS will have the opportunity to price our products on a value-added basis and to rapidly introduce new LCoS products. TFS will have undertaken extensive development efforts before the first sale of LCoS products, and expects to incur substantial losses in the microdisplay business until the volume production of LCoS microdisplays. TFS currently expects initial production to commence in late 2000.
Liquid Crystal Displays (LCDs) are used in thousands of products that range from office appliances, such as fax machines, to notebook computers to children's toys. However, it is with the cellular telephone and other portable devices that the LCD's advantages dominate over other display technologies such as LED (light-emitting diode) and VF (vacuum fluorescent). LCDs are thin, light in weight, have high display information content (resolution), and use very little electrical power. These qualities are a perfect match for today's portable and miniature computing and communications products.
Three-Five Systems core business is the design and development of custom LCD displays. With over 10 years experience developing some of the lowest power, ruggedized and thinnest display modules in the business, the Three-Five engineering team embraces those opportunities, which require advanced research and development activity, and demand complex design engineering.
Our expertise in electrical, mechanical and optical technologies enables us to design the best all around display for your application. This tailor-made approach allows Three-Five to design a display that doesn't just fit on the front of a product, it is a display that enhances the technology inside. Three-Five Systems present LCD technology capabilities include TN, STN and FSTN.
TN-LCD (Twisted Nematic):
The lowest cost material and mature technology that offers high contrast (darkness of characters compared to background screen). This material is limited to low information content displays, such as basic calculators and toys.
STN-LCD (Super Twisted Nematic):
A low cost material and mature technology that offers good contrast for medium to high information content displays, such as cellular telephones and PDAs.
FSTN-LCD (Film Compensated Super Twisted Nematic):
A medium cost material and progressing technology that offers very good contrast for medium to high information content, monochrome and gray scale displays, such as cellular telephones and PDAs. Its appearance is black characters on a silver background.
Three-Five Systems' patented LCiDTM (Liquid Crystal Intense Display) is a high contrast, color display. This sunlight readable display technology has no loss of readability when taken from a low light level "night time" environment to high light level "daytime" environment. Unlike its LED counterpart which will suffer from "washout" at high ambient light levels, a product that incorporates the LCiD technology is fully functional regardless of the lighting conditions. Direct sunlight renders LED based portable products virtually useless due to unreadable displays, but the LCiD technology results in a display that actually becomes brighter or more intense as the ambient light level increases.
LCiD simulates the high intensity and emissivity of a typical LED, but has higher information content and reduced power requirements. A typical high brightness LCiD module replacing an eight character LED display module requires approximately 1/8th the power. When using an LCiD module to replace a 1 x 8 LED matrix character display, two LEDs are used in place of 320 LEDs, resulting in a light weight, more portable product.
Available in an array of saturated, bright colors, including red, amber, orange, yellow, green, yellow-green, blue, white or multicolor displays, this passive matrix technology can fit the need for a wide variety of consumer and industrial applications. This high contrast, sunlight readable display has found its way into many portable products where the consumer appeal of a color display is desired along with the need for lower power consumption than traditional LED displays. Typical applications for the LCiD technology include: MP3 players, Car radios, Portable CD players, Car radar detectors, Industrial control modules, Vending machines, and Mobile phones.
Three-Five Systems' LCaD® (Liquid Crystal Active Drive) is an active addressing display technology, which is capable of high information content, high contrast ratio and sixteen level gray scale.
This eye-catching display technology provides many of the advantages of active matrix displays, but at lower system costs, due to the reduced power supply requirements and reduced tooling costs for custom formats. The sixteen levels of gray scale allow for nearly photograph like images to be displayed.
LCaD is suitable for a wide range of products from small displays for cell phones with browser capability to quarter VGA formats for products such as PDAs, marine and other instrumentation. If the application requires high contrast ratios for readability or gray scale for rich, photograph like images LCaD can provide a solution at low system cost.
LCoSTM (liquid crystal on silicon) microdisplays are the most recent addition to Three-Five Systems' family of display products. A microdisplay is essentially a very small, thumbnail size display with high resolution and content that employs optics for viewing. The display itself is typically less than 1.0" diagonal, but can offer resolutions from 1/4 VGA (78 thousand pixels) to
UXGA+ (over 2 million pixels).
Microdisplays have the ability to show images at higher resolution like a CRT, because each of these active matrix LCDs is comprised of a very high number of pixels. Microdisplays would make possible the manufacture of a projection TV that will unlock the rich content of new broadcast mediums, such as HDTV. A TV that incorporates Three-Five's microdisplay technology would immerse you with color and brightness and could be made thinner than current projection TVs.
Because they are reflective and are not direct view displays, these tiny, high information content displays also have the advantage of being able to display, with optics, an image that is larger than the physical size of the product. This fits in perfectly with the wireless revolution that is taking place. LCoS technology is leading the charge to new innovative products - portable, lightweight products can be developed that display a very large image even though the viewing area is less than 1/2 inch square. Today's most mobile high content display is a laptop, which although convenient still does not afford ultra portability. Three-Five's microdisplay technology could be used to develop a light, portable viewer that would give you access to information like a laptop, all in the convenience of a product that fits in the palm of your hand.
The two basic markets for microdisplay are projection and near to eye (NTE) applications.
Near-to-eye display systems using microdisplay technology are the cornerstone of ultra-portable PC or wireless information appliance applications. This low power application provides a rich user experience when viewing high information content material. LCoS technology can be adapted to all industry standard display types now and in the future due to its easily scalable architecture and manufacturing process. The NTE mode of operation typically uses a single LCoS display with a magnifier to be brought near to the eye so that the observer sees a magnified virtual image.
Projection display systems benefit from LCoS microdisplay technology with higher color depth, improved contrast and higher resolution at an affordable system cost. Improvements to the projected display cut across all application, including audio-visual projection, computer monitor and television systems (inlcuding HDTV formats) Projection is divided into front and rear projection units.
For front projection, the image is projected onto a screen, as done with a slide projector or in a movie theater. For rear projection, the image is projected on a transparent screen from the backside.
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Engineering
Three-Five sets high requirements for technical expertise in its Engineering department. The additional skills possessed beyond the typical LCD module design that include mechanical packaging, software, and electrical design allow Three-Five to provide "value added" engineering. In addition to the skills associated with the Mechanical and Electrical engineering disciplines, all engineers are trained and mentored in LCD technology, backlighting technology, and optical technology.
Three-Five Systems engineering team adheres to the philosophy of being a "seamless extension" of TFS customer's own engineering resources. The highly responsive and flexible design team utilizes state-of-the-art development tools that allow for efficient and rapid changes from the customer as part of the development process. The end result is that the cycle time for design/development is the fastest of any LCD module provider in the industry.
The Program Development Process has also helped ensure that time to market, qualification success, and cycle time are the best or equal in the market. As a part of this process, Three-Five engineering utilizes a unique "Program Notebook" data management system that allows for the extraction and analysis of any program parameters including: Schedule, Action Items, Configurations, Build Plans, Change Orders, All Engineering Analysis/Verifications, and Deviations. This data management system enhances the time to market and the assurance that qualification success is usually achieved the first time.
Based in the U.S., Three-Five Systems, Inc. is located within hours from the majority of all of our major OEM customer design centers. This allows for same day resolution of engineering issues and investigations. TFS also, as part of the design process, will send electronic files back and forth to customers and conduct real time design reviews that allow for expediency in time to market and thus reduce cycle time.
Research and Development
Three-Five Systems' corporate headquarters in Tempe, Arizona houses the company's Research and Development laboratory dedicated to advanced display technologies. The R&D staff is an international, highly respected group of individuals with areas of expertise in Chemistry, Physics, Optics, and Electrical, Mechanical and Chemical Engineering. This creative group is focused on developing innovative technologies that will bring about new products or open the door to new markets for TFS. A combined team of research and development and product engineering allows Three-Five Systems to develop revenue-producing products in world class competitive time. LCiDTM, LCaD® and LCoSTM microdisplays are the most recent additions to Three-Five's display technology showcase. This ability to develop new products and smoothly transition them to production highlights Three-Five's technology leadership and the company's dedication to building for the
future.
Because of Three-Five's experience as a high-volume display systems manufacturer, the R&D ideas go from the concept to the production floor with a sharp sense of manufacturability. The LCD manufacturing line is only steps away from the R&D center so the cycle time from the creation of a new display technology to a manufacturable technology innovation is minimized. The ability to produce LCD displays in large volumes provides the company with a strong technology platform from which a number of exciting and proprietary new products can be launched.
TFS plans to expand their 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. TFS is currently exploring the development and expansion of existing LCD technologies as well as new technologies, such as actively 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. New technologies also include our LCoS microdisplays, which address the increased demands for high-information displays in a small size and at a relatively low cost.
In October 1999, TFS 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 TFS and Tecdis design for their respective customers. Recently, STMicroelectronics announced its participation in Dora and its agreement to manufacture the ASICs designed by Dora.
Three-Five Systems, Inc. filings with the SEC can be found at the Securities Exchange Commissions website. The latest company filing with the SEC was form 10-Q on 7-2-00.
Manufacturing Facilities
TFS currently conducts manufacturing operations in Arizona; Manila, the Philippines; and Beijing, China. The Arizona facility houses a Class 1000 “clean room” and LCD fabrication and prototyping operation. TFS utilizes 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 TFS to eliminate substantially its 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. TFS maintains a wide variety of state-of-the-art testing and quality
control equipment at the facility.
Three-Five Systems' success and manufacturing expertise is based on its state-of-the-art global manufacturing facilities, advanced manufacturing processes and a cohesive team approach in developing each display solution. The manufacturing engineers work hand in hand with design, development and quality systems ensuring that every project will pass smoothly from phase to phase. Supply chain management lays the material foundation for this interactive approach and guarantees timely, cost effective product delivery. Flexible and lean approaches facilitate rapid configuration of the manufacturing process to meet our customer product requirements. The combination of Three-Five's team approach and manufacturing expertise result in a portfolio that is unmatched by other companies and surpasses customer's expectations.
The extensive Value Added Engineering and Extended Manufacturing services give customers the peace of mind to rely on Three-Five Systems expertise in design and advanced manufacturing equipment and processes. Current manufacturing capabilities include technology ranging from LED displays to LCDs; Chip-on-Glass technology to surface mount and Three-Five Systems is recognized as a world leader in Chip-on-Board technology.
To meet manufacturing needs, Three Five Systems has over 80,000 square feet of manufacturing space in cost-effective, off-shore facilities. These facilities combined can produce volumes of 110,000 modules per week. In addition, Three-Five has the largest capacity LCD glass line in North America, which is capable of producing more than 40 million square inches of glass per year. This is comparable to 27 million displays for cell phones or 800,000 computer monitors.
Three-Five's manufacturing and assembly expertise has evolved over many years to address the complex, individual requirements of the company's customers. The team approach, flexibility, advanced manufacturing capabilities, world class facilities, value added engineering and extended manufacturing services give customers the complete package: a quality product and the peace of mind to know that it will be done right.
Three-Five Systems is best known as a producer of custom designed and manufactured LCD and LED-based displays, however TFS has also been producing high quality, low cost, highly integrated assemblies and turnkey products for the world's premier original equipment manufacturers (OEMs) for over a decade. Frequently, Three-Five designs and manufactures the LCD, electrical system, input system and PCB, but that is not the limit of the manufacturing capability. Any practical manufacturing solution is available, ranging from components to completed end products.
Many OEMs have chosen to use TFS' advanced manufacturing equipment, processes and expertise rather than spending time and money for in-house development. Each of TFS word-wide facilities can support labor intensive assembly operations, specialty component attachment, procedures and process specification development, assembly of molded plastic housing and lightguide assemblies. Three-Five Systems can alleviate complicated and costly steps in the production process and be an important contributor to the end product assembly process.
In addition to the turn-key manufacture of complete end products, Three-Five Systems has the capability to integrate the display module with a variety of devices, including touch sensitive panels, keypads, keycaps and software programming. Additional assemblies, including the manual soldering of terminal components such as batteries, speakers and buzzers can easily be supported by Three-Five's worldwide facilities. Three-Five's value added engineering is the key to these extended manufacturing services. Not only can TFS manufacture a complete end product, but customers can rely on their design expertise for each component of their product.
Three-Five Systems' turn-key and extended manufacturing services helps to give customers a competitive edge. Their highly automated line produces high quality, high volume and cost efficient LCDs, which equals faster time to market product cycles. The strategic relationship between TFS value added engineering and manufacturing services provides a benefit that few other LCD manufacturers can offer.
Three-Five Systems (TFS) manufacturing expertise, gained from the company's 15+ years experience in manufacturing LCD display systems gives Three-Five a distinct competitive advantage in the manufacture of
microdisplays. Mass production of displays is a complex process, however Three-Five's experience in producing small size displays for cell phones and medical equipment transfers directly to microdisplay manufacturing, reducing the learning curve effects. In addition to being able to handle quantities in the lab stage, TFS has the advantage of being able to produce mass quantities of
microdisplays. The microdisplay production line can produce 400,000 SVGA or 100,000 SXGA units per month if required by the market.
Three-Five Systems manufacturing concept with the manufacture of LCDs and now with microdisplays is "Control the process". Three-Five's experience shows that by controlling the process, you can guarantee the quality of the product in line, eliminating the need for testing in each stage of the manufacturing process. To achieve process control on microdisplays, the processes that were developed in the LCD line are also used in manufacturing microdisplays. Whenever possible, known processes, known equipment and a workforce already skilled in LCD manufacturing are used when making microdisplays. The company's experience in mass-producing LCDs over the past several years has led to the development of a unique manufacturing technique that is now being employed in Three-Five's production of microdisplays. This proprietary process is clean and fast, which leads to high yields.
Three-Five has made the investment in equipment and facilities necessary for producing microdisplays. The existing high volume production line in Tempe is used for manufacturing the glass for microdisplays. In addition, the company has already completed upgrades to produce microdisplay glass in a cleanroom Class 100 status. With recent acquisitions of technology and equipment, TFS has rounded out its microdisplay technology portfolio. This portfolio and the company's strong financial standing provide a secure foundation for the future of its microdisplay business.
Three-Five Systems has developed a global supply-chain, which integrates the capabilities of world-class suppliers, logistics providers, and Three-Five Systems' manufacturing excellence to provide cost competitive products.
Three-Five Systems has Sourcing Departments in both Asia and North America allowing the company to benefit from suppliers in all regions of the world. The sourcing experts are seasoned professionals responsible for supplier selection, development, and performance management. Each is focused on specific technologies and suppliers to meet Three-Five customer requirements in the most cost effective and timely manner.
Three-Five Systems prides itself on being cost competitive on materials and logistics. Cross-functional teams constantly analyze cost structures, cost performance to goals, cost comparison to the market, and take actions required to minimize a customer's product cost. This cost management approach, Three-Five Systems' dedication to customer satisfaction and the overall global supply chain management allows Three-Five to meet customer needs in a cost effective and timely manner.
Quality systems engineering is integrated in all aspects of the design and manufacturing process and are compliant to the following standards:
- ISO9002
- ISO9001
- QS9002
- QSR standards
- MIL-I-45208
- FDA-GMP
Quality engineering, like the rest of the organization, is in the pursuit of continuous improvement in processes and products to help better serve our customers.
When it was founded in 1985, Three-Five Systems made a commitment to become a global leader. The company's worldwide presence has grown significantly throughout the years and is exemplified with the recent opening of the factory in China. This facility, the company's third manufacturing plant, allowed Three-Five to double its production capacity and reach production synergies across its worldwide manufacturing base.
Three-Five Systems conducts its manufacturing operations in two phases. First, LCD glass is manufactured in a high-volume, automated production environment at the Tempe, Arizona corporate headquarters. This is the largest capacity LCD glass manufacturing line in North America. The second phase of the manufacturing operations, the assembly of LCD modules and systems, is completed in one of our two international production facilities located in Manila, the Philippines and Beijing, the People's Republic of China.
Three-Five Systems prides itself on the ability to provide a variety of engineering, design and manufacturing services. Whether it is an application that requires a simple dot matrix LCD module, or a turnkey product incorporating a high information content display and full assembly, Three-Five Systems can provide the display solution.
Sales and Marketing
FS approaches sales and marketing on three levels: engineer to engineer, salesperson to procurement, and factory to factory. TFS approach is to treat an existing program as a marketing platform for the next program. TFS 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 TFS to market future sales within their customer base.
TFS markets their 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.
TFS sales to customers in Europe represented approximately 35.2% of net sales in 1998 and approximately 46.7% of net sales in 1999. Our sales to customers in Asia represented approximately 12.1% of net sales in 1998 and approximately 35.3% of net sales in 1999.
Recently, TFS signed an exclusive distributorship agreement with Mitsui Co., Ltd. of Tokyo, Japan. Under this agreement, Mitsui will market and sell our LCiD, LCaD, and LCoS products to customers in Japan.
Customers
TFS strategy involves concentrating efforts on providing design and production services to leading companies in five primary industries: mobile handsets and other wireless communications, data collection, office automation, medical equipment, and industrial controls. As a result, TFS generally derives net sales from services provided to a limited number of customers.
TFS largest customer is Motorola. Sales to Motorola accounted for approximately 86.1% of net sales in 1999, 63.6% of net sales in 1998, and 34.6% of net sales in 1997. Hewlett-Packard accounted for 32.0% of net sales in 1997. No customer other than Motorola accounted for more than 10.0% of net sales in 1998 or 1999. 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 TFS net sales to Motorola have been for mobile handset applications, and TFS is currently in design or manufacture on at least 15 programs. Motorola has an LCD module allocation process in which it designates key LCD module vendors, including TFS, and communicates to each vendor the anticipated annual range of purchases.
Backlog
As of December 31, 1999, TFS had a backlog of orders of approximately $46.3 million. The backlog of orders as of December 31, 1998 was approximately $23.3 million. TFS backlog consists of product orders for 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, TFS backlog as of a particular date may not be indicative of net sales for any succeeding period.
David Malmberg
Director and Chairman of the Board
Mr. MALMBERG has been a director of the 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.
Jack Saltich Director, President and Chief Operating Officer
Mr. SALTICH has served as a director and the President and Chief Executive Officer of the 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, a Vice President and Director of the Bipolar Technology Center from May 1982 until June 1986, and a Vice President and Director of the Advanced Product Research and Development Laboratory from June 1986 until June 1988.
Kennerth M. Julien Director
Mr. JULIEN has been a director of the 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 April 1993. 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.
GARY R. LONG 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.
Jeffrey D. Buchanan Director, Executive Vice President - Finance
JEFFREY D. BUCHANAN has served as a director and Executive Vice President - Finance, Administration, and Legal of our company since July 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 until 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.
Corporate Financial Snapshot
Approximate as of 9/5/00
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Shares Outstanding:21.5M
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Shares in the Float: 18.3M
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Market Cap $677M
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Sales per Share: $9.43
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Book Value: $11.11
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Cash Per Share: $8.10
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52 Wk Lo/Hi $9.40-$82.50
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Daily Vol. (10day): 277K
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9/7/00
Disclaimer
(This report was written by SmallCapReview.com and has not been paid for or approved by Three-Five Systems, Inc. (TFS). SmallCapReview.com feature stock reports are intended to be stock ideas, NOT recommendations. Please do your own research before investing. It is crucial that you at least look at current SEC filings and read the latest press releases. More information can be found by reading our disclaimer page.) For continuing coverage of TFS, please sign up for our free newsletter, SmallCapReview News. Information contained in this report was extracted from current SEC documents, particularly the Annual Report filed by TFS and from other sources deemed reliable. This information was not supplied to SmallCapReview.com by the company and SmallCapReview.com has received no compensation from the company
for this article. TFS has not assisted in any form or manner in the gathering of information presented herein. For more information see our disclaimer section, a link of which can be found on the home page of this site. This document contains forward-looking statements, particularly as related to the business plans of the Company, within the meaning of Section 27A of the Securities Act of 1933 and Sections 21E of the Securities Exchange Act of 1934, and are subject to the safe harbor created by these sections. Actual results may differ
materially from the Company's expectations and estimates.
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