UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
o TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-18908
INFOCUS CORPORATION
(Exact name of registrant as specified in its charter)
Oregon |
|
93-0932102 |
(State or other
jurisdiction of incorporation |
|
(I.R.S. Employer Identification No.) |
|
|
|
27700B SW Parkway Avenue, Wilsonville, Oregon |
|
97070 |
(Address of principal executive offices) |
|
(Zip Code) |
|
|
|
Registrants telephone number, including area code: 503-685-8888 |
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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Common stock without par value |
|
39,633,707 |
(Class) |
|
(Outstanding at November 1, 2004) |
INFOCUS CORPORATION
FORM 10-Q
INDEX
1
PART I - FINANCIAL INFORMATION
INFOCUS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(unaudited)
|
|
September 30, |
|
December 31, |
|
||
|
|
|
|
|
|
||
Assets |
|
|
|
|
|
||
Current Assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
24,043 |
|
$ |
94,181 |
|
Marketable securities |
|
30,027 |
|
30,232 |
|
||
Restricted cash, cash equivalents, and marketable securities |
|
21,158 |
|
15,000 |
|
||
Accounts receivable, net of allowances of $9,337 and $11,796 |
|
119,295 |
|
116,138 |
|
||
Inventories |
|
158,667 |
|
62,255 |
|
||
Income taxes receivable |
|
339 |
|
434 |
|
||
Deferred income taxes |
|
914 |
|
713 |
|
||
Outsourced manufacturer receivables |
|
195 |
|
3,947 |
|
||
Other current assets |
|
14,021 |
|
16,495 |
|
||
Total Current Assets |
|
368,659 |
|
339,395 |
|
||
|
|
|
|
|
|
||
Marketable securities |
|
|
|
4,822 |
|
||
Restricted marketable securities |
|
4,084 |
|
|
|
||
Property and equipment, net of accumulated depreciation of $45,220 and $42,156 |
|
17,876 |
|
15,890 |
|
||
Deferred income taxes |
|
2,633 |
|
2,513 |
|
||
Other assets, net |
|
8,832 |
|
3,478 |
|
||
Total Assets |
|
$ |
402,084 |
|
$ |
366,098 |
|
|
|
|
|
|
|
||
Liabilities and Shareholders' Equity |
|
|
|
|
|
||
Current Liabilities: |
|
|
|
|
|
||
Accounts payable |
|
$ |
113,244 |
|
$ |
85,869 |
|
Payroll and related benefits payable |
|
4,376 |
|
6,519 |
|
||
Marketing incentives payable |
|
9,583 |
|
7,647 |
|
||
Accrued warranty |
|
10,513 |
|
10,663 |
|
||
Other current liabilities |
|
9,357 |
|
13,844 |
|
||
Total Current Liabilities |
|
147,073 |
|
124,542 |
|
||
|
|
|
|
|
|
||
Other Long-Term Liabilities |
|
3,551 |
|
3,677 |
|
||
|
|
|
|
|
|
||
Shareholders' Equity: |
|
|
|
|
|
||
Common stock, 150,000,000 shares authorized; shares issued and outstanding: 39,633,002 and 39,520,009 |
|
89,666 |
|
88,787 |
|
||
Additional paid-in capital |
|
75,835 |
|
75,835 |
|
||
Accumulated other comprehensive income: |
|
|
|
|
|
||
Cumulative currency translation adjustment |
|
26,932 |
|
28,608 |
|
||
Unrealized gain on equity securities |
|
25,034 |
|
8,352 |
|
||
Retained earnings |
|
33,993 |
|
36,297 |
|
||
Total Shareholders' Equity |
|
251,460 |
|
237,879 |
|
||
Total Liabilities and Shareholders' Equity |
|
$ |
402,084 |
|
$ |
366,098 |
|
The accompanying notes are an integral part of these balance sheets.
2
INFOCUS CORPORATION
CONSOLIDATED STATEMENTS OF
OPERATIONS
(In thousands, except per share amounts)
(unaudited)
|
|
Three months ended Sept. 30, |
|
Nine months ended Sept. 30, |
|
||||||||
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Revenues |
|
$ |
162,183 |
|
$ |
139,310 |
|
$ |
469,861 |
|
$ |
418,758 |
|
Cost of revenues |
|
134,406 |
|
126,696 |
|
387,683 |
|
381,978 |
|
||||
Gross profit |
|
27,777 |
|
12,614 |
|
82,178 |
|
36,780 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
||||
Marketing and sales |
|
18,663 |
|
17,476 |
|
53,541 |
|
55,305 |
|
||||
Research and development |
|
6,929 |
|
7,746 |
|
21,450 |
|
25,208 |
|
||||
General and administrative |
|
6,205 |
|
6,928 |
|
17,079 |
|
22,347 |
|
||||
Restructuring costs |
|
|
|
|
|
450 |
|
3,700 |
|
||||
Long-lived asset impairment |
|
|
|
26,400 |
|
|
|
26,400 |
|
||||
|
|
31,797 |
|
58,550 |
|
92,520 |
|
132,960 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Loss from operations |
|
(4,020 |
) |
(45,936 |
) |
(10,342 |
) |
(96,180 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
(2 |
) |
(127 |
) |
(3 |
) |
(237 |
) |
||||
Interest income |
|
372 |
|
494 |
|
1,201 |
|
1,263 |
|
||||
Other, net |
|
5,370 |
|
95 |
|
6,691 |
|
263 |
|
||||
|
|
5,740 |
|
462 |
|
7,889 |
|
1,289 |
|
||||
Income (loss) before income taxes |
|
1,720 |
|
(45,474 |
) |
(2,453 |
) |
(94,891 |
) |
||||
Provision (benefit) for income taxes |
|
|
|
401 |
|
(150 |
) |
3,599 |
|
||||
Net income (loss) |
|
$ |
1,720 |
|
$ |
(45,875 |
) |
$ |
(2,303 |
) |
$ |
(98,490 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Basic net income (loss) per share |
|
$ |
0.04 |
|
$ |
(1.16 |
) |
$ |
(0.06 |
) |
$ |
(2.50 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Diluted net income (loss) per share |
|
$ |
0.04 |
|
$ |
(1.16 |
) |
$ |
(0.06 |
) |
$ |
(2.50 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Shares used in per share calculations: |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
39,612 |
|
39,436 |
|
39,585 |
|
39,368 |
|
||||
Diluted |
|
40,346 |
|
39,436 |
|
39,585 |
|
39,368 |
|
The accompanying notes are an integral part of these statements.
3
INFOCUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
|
|
For the nine months ended Sept. 30, |
|
||||
|
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
||
Cash flows from operating activities: |
|
|
|
|
|
||
Net loss |
|
$ |
(2,303 |
) |
$ |
(98,490 |
) |
Adjustments to reconcile net loss to net cash used by operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
7,086 |
|
14,259 |
|
||
Deferred income taxes |
|
(348 |
) |
2,329 |
|
||
Long-lived asset impairment |
|
|
|
26,400 |
|
||
Other non-cash (income) expense |
|
(2,323 |
) |
432 |
|
||
(Increase) decrease in: |
|
|
|
|
|
||
Restricted cash |
|
(10,242 |
) |
(17,685 |
) |
||
Accounts receivable, net |
|
(4,074 |
) |
42,462 |
|
||
Inventories, net |
|
(97,465 |
) |
26,694 |
|
||
Income taxes receivable, net |
|
88 |
|
19,385 |
|
||
Oustourced manufacturer receivables |
|
3,752 |
|
10,209 |
|
||
Other current assets |
|
2,407 |
|
7,617 |
|
||
Increase (decrease) in: |
|
|
|
|
|
||
Accounts payable |
|
28,066 |
|
(43,375 |
) |
||
Payroll and related benefits payable |
|
(2,110 |
) |
(2,525 |
) |
||
Marketing incentives payable, accrued warranty and other current liabilities |
|
(2,645 |
) |
(2,067 |
) |
||
Other long-term liabilities |
|
(114 |
) |
1,785 |
|
||
Net cash used by operating activities |
|
(80,225 |
) |
(12,570 |
) |
||
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
||
Purchase of marketable securities |
|
(29,216 |
) |
(7,224 |
) |
||
Maturities of marketable securities |
|
45,243 |
|
12,091 |
|
||
Proceeds from sale of marketable securities |
|
5,682 |
|
|
|
||
Payments for purchase of property and equipment |
|
(8,398 |
) |
(6,685 |
) |
||
Proceeds received from sale of property and equipment |
|
210 |
|
125 |
|
||
Payments for investments in patents and trademarks |
|
(995 |
) |
(560 |
) |
||
Dividend payments received from joint venture |
|
725 |
|
|
|
||
Other assets, net |
|
(3,284 |
) |
335 |
|
||
Net cash provided (used) by investing activities |
|
9,967 |
|
(1,918 |
) |
||
|
|
|
|
|
|
||
Cash flows from financing activities: |
|
|
|
|
|
||
Proceeds from sale of common stock |
|
597 |
|
256 |
|
||
Net cash provided by financing activities |
|
597 |
|
256 |
|
||
|
|
|
|
|
|
||
Effect of exchange rate on cash |
|
(477 |
) |
2,892 |
|
||
Decrease in cash and cash equivalents |
|
(70,138 |
) |
(11,340 |
) |
||
|
|
|
|
|
|
||
Cash and cash equivalents: |
|
|
|
|
|
||
Beginning of period |
|
94,181 |
|
104,230 |
|
||
End of period |
|
$ |
24,043 |
|
$ |
92,890 |
|
The accompanying notes are an integral part of these statements.
4
INFOCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The consolidated financial information included herein has been prepared by InFocus Corporation without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2003 is derived from our 2003 Annual Report on Form 10-K. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2003 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to current year presentation. Results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
Note 2. Inventories
Inventories are valued at the lower of purchased cost or market, using average purchase costs, which approximate the first-in, first-out (FIFO) method. Following is a detail of our inventory (in thousands):
|
|
September 30, |
|
December 31, |
|
||
Raw materials and components |
|
$ |
5,760 |
|
$ |
10,027 |
|
Work-in-process |
|
9,925 |
|
2,669 |
|
||
Finished goods |
|
142,982 |
|
49,559 |
|
||
Total, net |
|
$ |
158,667 |
|
$ |
62,255 |
|
Finished goods inventory consists of new projectors held for sale, remanufactured projectors, accessories, service parts and demonstration units.
Note 3. Earnings Per Share
Since we were in a loss position for the three month period ended September 30, 2003 and the nine month periods ended September 30, 2004 and 2003, there was no difference between the number of shares used to calculate basic and diluted loss per share for those periods. A reconciliation of the shares used for the basic and fully diluted calculation for the three month period ended September 30, 2004 is as follows (in thousands):
Shares used for basic calculation |
|
39,612 |
|
Common stock equivalents: |
|
|
|
Stock options |
|
734 |
|
Shares used for diluted calculation |
|
40,346 |
|
Potentially dilutive securities that are not included in the diluted EPS calculations because they would be antidilutive include the following (in thousands):
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
Stock options |
|
3,056 |
|
5,553 |
|
5,186 |
|
5,553 |
|
5
Note 4. Comprehensive Gain (Loss)
Comprehensive gain (loss) includes foreign currency translation gains and losses and unrealized gains and losses on marketable equity securities available for sale that are recorded directly to shareholders equity. The following table sets forth the calculation of comprehensive gain (loss) for the periods indicated (in thousands):
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
Net income (loss) |
|
$ |
1,720 |
|
$ |
(45,875 |
) |
$ |
(2,303 |
) |
$ |
(98,490 |
) |
Foreign currency translation gains/(losses) |
|
2,631 |
|
1,421 |
|
(1,676 |
) |
11,651 |
|
||||
Reversal of unrealized gains |
|
(3,604 |
) |
|
|
(4,335 |
) |
|
|
||||
Unrealized gain/(loss) on marketable equity securities |
|
(9,971 |
) |
3,231 |
|
21,017 |
|
4,902 |
|
||||
Total comprehensive income (loss) |
|
$ |
(9,224 |
) |
$ |
(41,223 |
) |
$ |
12,703 |
|
$ |
(81,937 |
) |
The increase in the unrealized gain on equity securities of $21.0 million during the first nine months of 2004 and the remaining unrealized gain on equity securities of $25.0 million as of September 30, 2004 primarily relates to the increase in value of our investment in Phoenix Electric Co., a Japanese lamp manufacturing company. In the three and nine month periods ending September 30, 2004, we sold a portion of our investments in marketable equity securities, primarily Phoenix Electric Co., resulting in a realized gain of $3.6 million and $4.3 respectively that is included in other income on our statements of operations.
Note 5. Stock-Based Compensation
We account for stock options using the intrinsic value method as prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Pursuant to Statement of Financial Accounting Standards (SFAS) No. 148 Accounting for Stock-Based Compensation - Transition and Disclosure, we have computed, for pro forma disclosure purposes, the impact on net income (loss) and net income (loss) per share as if we had accounted for our stock-based compensation plans in accordance with the fair value method prescribed by SFAS No. 123 Accounting for Stock-Based Compensation as follows (in thousands, except per share amounts):
|
|
Three Months Ended |
|
Nine Months Ended |
|
|||||||||||
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|||||||
Net income (loss), as reported |
|
$ |
1,720 |
|
$ |
(45,875 |
) |
$ |
(2,303 |
) |
$ |
(98,490 |
) |
|||
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards |
|
(1,816 |
) |
(2,254 |
) |
(5,192 |
) |
(6,200 |
) |
|||||||
Net loss, pro forma |
|
$ |
(96 |
) |
$ |
(48,129 |
) |
$ |
(7,495 |
) |
$ |
(104,690 |
) |
|||
Basic and diluted net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|||||||
As reported |
|
$ |
0.04 |
|
$ |
(1.16 |
) |
$ |
(0.06 |
) |
$ |
(2.50 |
) |
|||
Pro forma |
|
$ |
0.00 |
|
$ |
(1.22 |
) |
$ |
(0.19 |
) |
$ |
(2.66 |
) |
|||
To determine the fair value of stock-based awards granted, we used the Black-Scholes option pricing model and the following weighted average assumptions:
Three and Nine Months Ended September 30, |
|
2004 |
|
2003 |
|
Risk-free interest rate |
|
2.86% - 3.85 |
% |
2.50% - 3.00 |
% |
Expected dividend yield |
|
0.00 |
% |
0.00 |
% |
Expected lives (years) |
|
2.6 3.1 |
|
4.2 |
|
Expected volatility |
|
79.2% - 81.1 |
% |
81.6% - 82.8 |
% |
6
Note 6. Product Warranties
We evaluate our obligations related to product warranties on a quarterly basis. In general, we offer a standard two-year warranty and, for certain customers, products and regions, the warranty period can be longer or shorter than two years. We monitor failure rates on a product category basis through data collected by our manufacturing sites, factory repair centers and authorized service providers. The service organizations also track costs to repair each unit. Costs include labor to repair the product, replacement parts for defective items and freight costs, as well as other costs incidental to warranty repairs. Any cost recoveries from warranties offered to us by our suppliers covering defective components are also considered. This data is then used to calculate the accrual based on actual sales for each product category and remaining warranty periods. For new product introductions, our quality control department estimates the initial failure rates based on test and manufacturing data and historical experience for similar products. If circumstances change, or a dramatic change in the failure rates were to occur, our estimate of the warranty accrual could change significantly. Revenue generated from sales of extended warranty contracts is deferred and amortized to revenue over the term of the extended warranty coverage. Deferred warranty revenue totaled $1.6 million and $1.5 million at September 30, 2004 and December 31, 2003, respectively, and is included in other current liabilities on our consolidated balance sheets. Our warranty accrual at September 30, 2004 and December 31, 2003 totaled $13.8 million and $14.0 million, respectively, and is included as accrued warranty and other long-term liabilities on our consolidated balance sheets. The long-term portion of the warranty accrual was $3.3 million at both September 30, 2004 and December 31, 2003.
The following is a reconciliation of the changes in the warranty liability for the nine months ended September 30, 2004 and 2003 (in thousands).
|
|
Nine Months Ended |
|
||||
|
|
2004 |
|
2003 |
|
||
Warranty accrual, beginning of period |
|
$ |
13,965 |
|
$ |
7,886 |
|
Reductions for warranty payments made |
|
(12,477 |
) |
(15,995 |
) |
||
Warranties issued |
|
13,491 |
|
14,852 |
|
||
Adjustments and changes in estimates |
|
(1,212 |
) |
6,951 |
|
||
Warranty accrual, end of period |
|
$ |
13,767 |
|
$ |
13,694 |
|
Note 7. Letters of Credit
At September 30, 2004, we had one outstanding letter of credit totaling $20.0 million, which expires February 2, 2005. This letter of credit collateralizes our obligations to a supplier for the purchase of finished goods inventory. The fair value of this letter of credit approximates its contract value. The letter of credit is collateralized by approximately $24.0 million of cash and marketable securities that is reported as restricted on the consolidated balance sheet.
Note 8. Restructuring
Restructuring charges of $0.5 million in the nine-month period ended September 30, 2004 were primarily for costs related to our facilities consolidation at our Wilsonville, Oregon headquarters.
At September 30, 2004, we had $1.3 million of restructuring costs accrued on our consolidated balance sheet as other current liabilities. We expect the majority of these costs to be paid within the next quarter. The following table displays a roll-forward of the restructuring accruals (in thousands):
|
|
Accrual at |
|
2004 Net |
|
2004 |
|
Accrual at |
|
||||
Severance and related |
|
$ |
3,638 |
|
$ |
|
|
$ |
2,883 |
|
$ |
755 |
|
Lease loss |
|
1,702 |
|
450 |
|
1,626 |
|
526 |
|
||||
Other |
|
195 |
|
|
|
195 |
|
|
|
||||
|
|
$ |
5,535 |
|
$ |
450 |
|
$ |
4,704 |
|
$ |
1,281 |
|
7
Note 9. China Importation Investigation
During the second quarter of 2003, our Chinese subsidiary became the subject of an investigation by Chinese authorities. We continue to work closely with the Chinese customs officials. During the second quarter of 2004, we received formal notification that our case in now considered Administrative in nature, which indicates that the Chinese authorities have ruled out any potential of willful intent to underpay duties by our Chinese subsidiary. In addition, during the second quarter of 2004, we were allowed to start selling previously impounded inventory and transferring agreed upon amounts per unit directly to Shanghai Customs to represent an additional deposit pending final resolution of the case. Subsequent to the end of the third quarter of 2004, we secured the release of approximately 60 percent of the projectors being held by Shanghai Customs and have since sold those units to a customer in China. As a result, we have made an additional deposit with Shanghai Customs of approximately $5.9 million.
As of September 30, 2004, Chinese customs officials held a cash deposit of approximately $6.4 million, which is recorded in other current assets on our consolidated balance sheet, and $2.8 million of inventory. The release of the cash deposit, now totaling $12.3 million, is dependent on final case resolution. At this time, we are not able to estimate when this case will ultimately be resolved or its financial impact on us and therefore have not recorded any expense in our statement of operations related to this matter. For a more complete description of this investigation, see Item 3. in our 2003 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 10, 2004.
Note 10. 3M Lawsuits
In January 2004, 3M Corporation (3M) filed a lawsuit in United States District Court in Minnesota, claiming that our light engine technology violated one of their patents. On April 22, 2004, 3M formally served InFocus with the lawsuit. We have reviewed the complaint and the relevant patent and believe we have meritorious defenses to the claims made in the lawsuit, and therefore, have not recorded any expense in our statement of operations related to this matter. During the second quarter of 2004, we filed for dismissal of the suit in Minnesota and for a declaratory judgment in Oregon, which, if successful, would dismiss the current case in Minnesota and narrow jurisdictional scope of the lawsuit to an Oregon court. No decisions have been reached on these legal actions.
In the third quarter of 2004, we filed a lawsuit against 3M in United States District Court in Oregon, claiming that 3M is selling products that incorporate our patented projection lamp safety interlock system. We are seeking monetary damages, as well as injunctive relief to prevent 3M from continuing to sell products to its customers that incorporate this technology.
Note 11. Subsequent Event
Line of Credit
On October 25, 2004, we entered into a two-year $40 million revolving credit facility with Wells Fargo Foothill, Inc. (WFF). Pursuant to the terms of the agreement, we may borrow up to $40 million subject to a borrowing base determined on eligible accounts receivable. In connection with the credit facility, we also entered into a security agreement granting WFF a continuing security interest in our personal property excluding intellectual property and other miscellaneous property. The credit facility also secures our obligations to Wells Fargo Bank and its affiliates for various banking products such as credit card facilities, cash management services and foreign currency hedging agreements.
Interest on outstanding borrowings is at prime plus .25% or at LIBOR plus 2.25% at our option upon initiating advances under the line. However, at no time, will the interest rate be below 4%. We may issue letters of credit under the credit facility in amounts up to $25 million. Fees for letters of credit are 1.5% of the principal amount of the letter of credit. The agreement requires us to pay a .5% commitment fee over the two-year term and an additional .375% per annum on the unused portion of the credit facility.
8
The credit facility contains various restrictive covenants. Such restrictions are subject to usual and customary exceptions which would be typical for a credit facility of this nature. The restrictions include, among others, maintaining a minimum level of earnings, a maximum amount of capital expenditures per annum, not creating liens on company assets or incurring additional debt, limiting investments and acquisitions by the company, and preventing dissolution, liquidation, merger or a sale of company assets.
The credit facility also contains usual and customary events of default (subject to certain threshold amounts and grace periods) on the occurrence of events such as nonpayment of amounts due under the credit facility, violation of the restrictive covenants referred to above, or violation of other contract provisions. If an event of default occurs and is continuing, the interest rate on any outstanding borrowings increases 2%, and we may be required to repay any outstanding borrowings under the credit facility.
We expect to borrow against the line of credit as our working capital needs require over the term of the credit facility.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Company Profile
InFocus Corporation is the worldwide leader in digital projection technology and services. Our products are used in business, education, government and home markets for training sessions, meetings, sales presentations, technical seminars, group collaboration, entertainment and other applications involving the sharing of computer-generated and/or video information with an audience.
We have established four projector product platforms, each supporting multiple individual products, intended to meet the diverse projection requirements of our customers. These platforms are i) mobile projectors, intended for mobile professionals who place a premium on reduced size and weight; ii) meeting room projectors, intended for conference, classroom, or training room environments; iii) installation and integration projectors, intended for large venues and auditorium environments; and iv) home entertainment projectors, intended for home theater, gaming and entertainment environments in the home.
We deliver innovative and reliable technological expertise resulting in products that are easy to use and integrate, include true multimedia capabilities, and are quick to setup and intuitive to operate. Users can connect to a variety of sources including digital and analog PCs, DVD players, HDTVs, S-video, VCRs, workstations, laser disc players and gaming devices.
We conduct and support research and development to expand the category, provide best-in-class projection technologies and communicate the value of projection to professionals, educators and consumers. We leverage multiple projection technologies, including polysilicon LCD and Digital Light Processing (DLP) technology from Texas Instruments and develop proprietary imaging technology that we have licensed to a number of other vendors.
We have devoted significant resources to developing and supporting a well-trained reseller network with the ability to demonstrate and sell our products to a wide range of end-users worldwide. We sell our InFocus and ASK Proxima brand products through wholesale distributors, which in turn sell to PC resellers, audiovisual resellers, online providers, catalogs, education resellers and government resellers. In addition, we have recently begun offering products through office product retailers and consumer electronics retailers. We expect retail to be a growing channel for us in the future. Further, we have private label OEM arrangements with a number of companies that resell our projectors under their own brands.
9
Our customer service organization supports customers through a call center and an Internet based support program. We also provide outsourced factory repair, authorized service center repair, accessories, service parts, remanufactured projectors, service contracts, and technical publications for our customers and end-users.
We also provide light engines for large rear screen projection televisions to certain television manufacturers, most notably Thomson RCA. By leveraging our investments in front projection technology and existing DLP technology, we are providing a new technology alternative for rear screen projection television manufacturers that reduces the size and weight of the television while improving its price performance.
In addition, we see a growing opportunity in the market for thin displays above 40 inches in diagonal for professional and consumer use. This market is expected to grow rapidly over the next several years and is projected to surpass the size of the front projection market in 2005. Over the course of the next year, we expect to offer a family of thin display products with display sizes ranging from 40 inches to 70 inches for both the consumer and commercial markets. As we extend our offerings to larger format thin displays, these products will incorporate the new InFocus Light Engine that integrates proprietary, patent-pending engine and screen technology with a micro-display device currently using Texas Instruments DLP technology. In late September 2004, we began shipping our 61-inch display products for both the home and commercial markets that are under seven inches thin and light enough to hang on a wall. We believe our large format thin profile micro displays should be a competitive price-performance alternative to other forms of large-area displays above 50 inches in diagonal. The design of the new InFocus Light Engine and screen display system provides device independence allowing us to incorporate various device level technologies as the price/performance of current and emerging micro-display technologies continues to improve. We also expect to be able to scale the diagonal size of the display from 50 inches to 70 inches without adding much incremental cost or depth to the display itself. We expect to offer the InFocus Light Engine to third parties, including Thomson RCA, as they extend their rear screen projection television products to take advantage of the new thin profile made possible by our innovative new InFocus Light Engine.
Forward Looking Statements and Factors Affecting Our Business and Prospects
This Form 10-Q contains forward-looking statements regarding our business and future prospects. These statements contain language such as believe, expect, anticipate, and other such language regarding various aspects of our business. Investors are cautioned that all forward-looking statements involve risks and uncertainties and several factors could cause actual results to differ materially from those in any forward-looking statements. The following is a description of some of the factors that may cause the actual results of operations in future periods to differ materially from those currently expected or desired.
New products and technological change
The technology industry is characterized by continuing improvements in technology and rapidly evolving industry standards. Consequently, short product life cycles and significant price fluctuations are common. Product transitions present challenges and risks for all companies involved in the data/video projector and display markets. Demand for our products and the profitability of our operations may be adversely affected if we fail to effectively manage a product transition. Advances in product technology require continued investment in research and development and product engineering to maintain our market position. There are no guarantees that such investment will result in the right products being introduced to the market at the right time.
Compliance with internal control attestation
Section 404 of the Sarbanes Oxley Act of 2002 requires that we evaluate and report on the effectiveness of our internal controls over financial reporting beginning with the Annual Report filed on Form 10-K for the reporting period ending December 31, 2004. In addition, our independent auditors must report on managements evaluation of internal controls. We are currently in the process of documenting and testing internal controls that will be used as the basis for the report included in the
10
Form 10-K. Effective internal controls are necessary for us to provide reliable financial reports and to prevent and detect fraud. Our evaluation of internal controls may conclude that enhancements or changes to internal controls are necessary to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could have implications on our operating results or could result in a reportable condition or material weakness that would be required to be reported in the Form 10-K.
Reliance on suppliers, contract manufacturers and outsourced logistics providers
We rely on third party manufacturers for a significant portion of our product components. Reliance on suppliers raises several risks, including the possibility of defective parts, reduced control over the availability and delivery schedule for parts, and the possibility of increases in component costs. Our manufacturing efficiencies and profitability can be adversely affected by each of these risks.
Certain components used in our products are now available only from single sources. The most important of these components are the digital micro devices (DMDs) manufactured by Texas Instruments and polysilicon manufactured by Epson. An extended interruption in the supply of DMDs or polysilicon would adversely affect our results of operations.
We also purchase other single or limited-source components for which we have no guaranteed alternative source of supply, and an extended interruption in the supply of any of these components could adversely affect our results of operations. During the first quarter, and to a lesser extent the second quarter of 2004, we were impacted by an industry wide shortage of lamps that caused a constraint on timely availability of finished products and a shortfall in revenues. We have worked hard to improve the availability of lamps to meet our future needs for both rear and front projection, but there is no guarantee that we will secure all the supply we need to meet demand for our products.
Furthermore, many of the components used in our products are purchased from suppliers located outside the United States. Trading policies adopted in the future by the United States or foreign governments could restrict the availability of components or increase the cost of obtaining components. Any significant increase in component prices or decrease in component availability could have an adverse effect on our results of operations.
We have also outsourced the majority of the manufacturing of our projectors to Flextronics in Malaysia and Funai Electric Company in China. The risks mentioned above related to reliance on suppliers also impact our contract manufacturers. In addition, we are reliant on our contract manufacturers ability to maintain suitable manufacturing facilities, train manufacturing employees, manage the supply chain effectively, manufacture a quality product and provide spare parts in support of our warranty and customer service obligations. Failure of our contract manufacturers to deliver in any one of these areas could have an adverse effect on our results of operations.
In addition, during the first quarter of 2004 we outsourced our U.S. logistics and service repair functions to UPS Supply Chain Solutions (UPS) in Louisville, Kentucky. We are reliant on UPS to effectively and accurately manage our inventory, service repair and logistics functions. Reliance on UPS requires training of UPS employees, creating and maintaining proper controls and procedures surrounding both forward and reverse logistics functions, and timely and accurate inventory reporting. Failure of UPS to deliver in any one of these areas could have an adverse effect on our results of operations or could result in a reportable condition or material weakness relating to Section 404 of the Sarbanes Oxley Act that would be required to be reported in Form 10-K. We have experienced a variety of process and control issues since making the transition to UPS resulting in a variety of customer satisfaction issues and the need to record inventory reserves during the first half of 2004. We continue to work with UPS to improve the effectiveness and efficiency of processes and controls to improve customer service and reduce our costs of logistics and service repair operations.
11
Delivery of product from our contract manufacturers
Our business depends on the free flow of products. Due to continuing threats of terrorist attacks, U.S. Customs has increased security measures for products being imported into the United States. In addition, freight traffic at various west coast ports of entry has increased dramatically recently resulting in delays in unloading and distributing inbound freight from Asia. Both of these situations could result in delay of receipt of products from our contract manufacturers and delay fulfillment of orders to our customers. Any significant disruption in the free flow of our products may result in a reduction of revenues, an increase in in-transit (unavailable for sale) inventory, or an increase in administrative and shipping costs.
China importation investigation
During the second quarter of 2003, our Chinese subsidiary became the subject of an investigation by Chinese authorities. This investigation continues and has negatively affected our revenues and gross margins since that time and is expected to negatively affect our revenues and margins until it is resolved. For a more complete description of this investigation, see Note 9 of Notes to Consolidated Financial Statements in this Form 10-Q and Item 3 in our 2003 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 10, 2004.
General economic and industry conditions
While business expansion around the globe is continuing at a healthy pace, record oil prices and continued terrorist activities from Iraq to Russia have muted consumer confidence. Increasing uncertainty over the U.S. expansion is driving a consensus view that 2005 will be a slower growth year than 2004 regardless of election outcome. Remedies for meager job growth, record budget deficits and increased energy prices will require policy changes not easily addressed in the short term.
On an international level, all regions continue to show a positive business investment climate, spurred by continued rapid growth in China and India and an apparent economic recovery in Europe. Developing nations from South America to Eastern Europe continue to drive regional expansion, adding to a balanced global outlook.
Deterioration in any number of global geopolitical or economic issues could change overall industry dynamics and demand for products like ours and negatively impact our results of operations.
Competition
The markets for our products are highly competitive, and we expect aggressive price competition to continue into the foreseeable future. Some of our current and prospective competitors have or may have significantly greater financial, technical, manufacturing, and marketing resources than we have. Our ability to compete depends on factors within and outside our control, including the success and timing of product introductions, product performance and price, product distribution, and customer support. In order to compete effectively, we must continue to reduce the cost of our products, our manufacturing and other overhead costs, and our operating expenses in order to offset pressured gross margins, while at the same time drive our products into new markets and extend our reach into large format thin display products to expand our revenue base. In addition, we are focusing more effort on turnkey solutions through the use of software, service and support to differentiate us. There is no assurance we will be able to compete successfully with respect to these factors.
Potential fluctuations in quarterly results
Our customers generally order products for immediate delivery and, therefore, contract manufacturing activities are scheduled according to a monthly sales and production forecast rather than on the receipt of product orders. From time to time in the past, we have experienced significant variations between actual orders and our forecasts. If anticipated sales and shipments in any quarter do not occur when expected, expenditures and inventory levels could be disproportionately high and our operating results for that quarter, and potentially for future quarters, would be adversely affected. In addition, certain of our products have lower gross margins, and a shift of product mix toward lower gross margin products could adversely affect our results of operations.
12
International activities
Sales outside the United States accounted for approximately 42% of our revenues in the first nine months of 2004 and 47% of our revenues in all of 2003. The success and profitability of our international operations are subject to numerous risks and uncertainties, including local economic and labor conditions, political instability, unexpected changes in the regulatory environment, trade protection measures, tax laws and foreign currency exchange rates.
Overview
The projection industry continued to expand at a five year record clip, with third quarter 2004 unit sales increasing an estimated 10% to 15% over the prior quarter. Regionally, industry unit shipments were strong in the Americas compared to the slower seasonal patterns of Europe and Asia Pacific. Our unit sales growth was approximately 7% compared to the second quarter of 2004 and approximately 31% from the same period a year ago. Our overall average selling prices (ASPs) during the third quarter of 2004 declined approximately 5% compared to the second quarter of 2004 and declined 13% during the second quarter of 2004 compared to the first quarter of 2004. As a result, revenues were flat in the third quarter of 2004 at $162.2 million compared to the second quarter of 2004. We achieved gross margins of 17.1% in the third quarter of 2004, which was within our expected target range of 16% to 18% for the third consecutive quarter. Operating expenses were up as expected from the second quarter of 2004, primarily due to increased sales and marketing expenses related to the launch of our new ultra-thin microdisplay products during the third quarter of 2004. While we posted a $4.0 million operating loss, other income of $5.7 million related to realized gains on the sale of marketable equity securities and profits associated with our joint venture, Motif, resulted in net income of $1.7 million for the quarter, or $0.04 per share.
Adequate supply of key components such as lamps, lenses, screens and display devices is an area we continue to monitor very closely. Demand for microdisplay rear-projection televisions and digital cameras has caused lamp, screen and lens vendors to place certain components on allocation and/or lengthen lead times. By working closely with our key suppliers, we have been able to improve component and product availability for the foreseeable future. However, the long lead times for certain components contributed to growth in inventories as we worked to secure adequate supply of product to support our first full holiday buying season in retail with our consumer products and what we expect to be a seasonally strong fourth quarter.
Results of Operations
|
|
Three Months Ended September 30, (1) |
|
||||||||
|
|
2004 |
|
2003 |
|
||||||
(Dollars in thousands) |
|
Dollars |
|
% of |
|
Dollars |
|
% of |
|
||
Revenues |
|
$ |
162,183 |
|
100.0 |
% |
$ |
139,310 |
|
100.0 |
% |
Cost of revenues |
|
134,406 |
|
82.9 |
|
126,696 |
|
90.9 |
|
||
Gross margin |
|
27,777 |
|
17.1 |
|
12,614 |
|
9.1 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Operating expenses: |
|
|
|
|
|
|
|
|
|
||
Marketing and sales |
|
18,663 |
|
11.5 |
|
17,476 |
|
12.5 |
|
||
Research and development |
|
6,929 |
|
4.3 |
|
7,746 |
|
5.6 |
|
||
General and administrative |
|
6,205 |
|
3.8 |
|
6,928 |
|
5.0 |
|
||
Long-lived asset impairment |
|
|
|
|
|
26,400 |
|
19.0 |
|
||
|
|
31,797 |
|
19.6 |
|
58,550 |
|
42.0 |
|
||
Loss from operations |
|
(4,020 |
) |
(2.5 |
) |
(45,936 |
) |
(33.0 |
) |
||
Other income (expense): |
|
|
|
|
|
|
|
|
|
||
Interest expense |
|
(2 |
) |
|
|
(127 |
) |
(0.1 |
) |
||
Interest income |
|
372 |
|
0.2 |
|
494 |
|
0.4 |
|
||
Other, net |
|
5,370 |
|
3.3 |
|
95 |
|
0.1 |
|
||
Income (loss) before income taxes |
|
1,720 |
|
1.1 |
|
(45,474 |
) |
(32.6 |
) |
||
Provision (benefit) for income taxes |
|
|
|
|
|
401 |
|
0.3 |
|
||
Net income (loss) |
|
$ |
1,720 |
|
1.1 |
% |
$ |
(45,875 |
) |
(32.9 |
)% |
13
|
|
Nine Months Ended September 30, (1) |
|
||||||||
|
|
2004 |
|
2003 |
|
||||||
(Dollars in thousands) |
|
Dollars |
|
% of |
|
Dollars |
|
% of |
|
||
Revenues |
|
$ |
469,861 |
|
100.0 |
% |
$ |
418,758 |
|
100.0 |
% |
Cost of revenues |
|
387,683 |
|
82.5 |
|
381,978 |
|
91.2 |
|
||
Gross margin |
|
82,178 |
|
17.5 |
|
36,780 |
|
8.8 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Operating expenses: |
|
|
|
|
|
|
|
|
|
||
Marketing and sales |
|
53,541 |
|
11.4 |
|
55,305 |
|
13.2 |
|
||
Research and development |
|
21,450 |
|
4.6 |
|
25,208 |
|
6.0 |
|
||
General and administrative |
|
17,079 |
|
3.6 |
|
22,347 |
|
5.3 |
|
||
Restructuring costs |
|
450 |
|
0.1 |
|
3,700 |
|
0.9 |
|
||
Long-lived asset impairment |
|
|
|
|
|
26,400 |
|
6.3 |
|
||
|
|
92,520 |
|
19.7 |
|
132,960 |
|
31.8 |
|
||
Loss from operations |
|
(10,342 |
) |
(2.2 |
) |
(96,180 |
) |
(23.0 |
) |
||
Other income (expense): |
|
|
|
|
|
|
|
|
|
||
Interest expense |
|
(3 |
) |
|
|
(237 |
) |
(0.1 |
) |
||
Interest income |
|
1,201 |
|
0.3 |
|
1,263 |
|
0.3 |
|
||
Other, net |
|
6,691 |
|
1.4 |
|
263 |
|
0.1 |
|
||
Loss before income taxes |
|
(2,453 |
) |
(0.5 |
) |
(94,891 |
) |
(22.7 |
) |
||
Provision (benefit) for income taxes |
|
(150 |
) |
|
|
3,599 |
|
0.9 |
|
||
Net loss |
|
$ |
(2,303 |
) |
(0.5 |
)% |
$ |
(98,490 |
) |
(23.5 |
)% |
(1) Percentages may not add due to rounding.
Revenues
Revenues increased $22.9 million, or 16.4%, and $51.1 million, or 12.2%, respectively, in the three and nine month periods ended September 30, 2004 compared to the same periods of 2003.
Projector unit shipments increased 30.5% and 25.7%, respectively, in the three and nine month periods ended September 30, 2004 compared to the same periods of 2003. The increases in revenue due to the increases in projector units sold were partially offset by a 20.7% and a 20.4% decrease, respectively, in projector average selling prices (ASPs) in the same periods. Growth in revenues related to rear screen projection television engines and royalties also contributed to the overall growth in revenue in both periods.
Unit shipments were constrained during the first quarter of 2004 due to a limited supply of key components, primarily lamps. While these constraints eased during the second quarter of 2004, they still negatively affected our revenue for the period due to outages of certain products relative to demand. In the third quarter of 2004, we had more reliable sources, although they required longer lead times than typical.
The declines in ASPs of 5% during the third quarter of 2004 compared to the second quarter of 2004 were in line with our quarterly expectations and were primarily due to the continued pressure on pricing related to the ongoing competitive nature of the projection industry.
The fourth quarter is historically a seasonally strong one for us and our industry. We enter the fourth quarter of 2004 with what we believe to be a strong backlog, ample finished goods inventory, a robust lineup of commercial and consumer projectors, new ultra-thin microdisplay products and strong retail partners to reach consumers as we head into the holiday buying season. However, recent economic and geopolitical developments have increased the levels of uncertainty potentially impacting consumer confidence and business spending over the next several quarters. Weighing these factors, we expect revenues in the fourth quarter of 2004 to increase to between $175 and $190 million.
14
Geographic Revenues
Revenue by geographic area and as a percentage of total revenue was as follows (dollars in thousands):
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||||||||||
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||||||||||
United States |
|
$ |
90,079 |
|
55.5 |
% |
$ |
81,452 |
|
58.5 |
% |
$ |
273,346 |
|
58.2 |
% |
$ |
228,892 |
|
54.7 |
% |
Europe |
|
51,005 |
|
31.5 |
% |
37,382 |
|
26.8 |
% |
135,771 |
|
28.9 |
% |
127,383 |
|
30.4 |
% |
||||
Asia |
|
13,597 |
|
8.4 |
% |
13,996 |
|
10.0 |
% |
40,818 |
|
8.7 |
% |
44,139 |
|
10.5 |
% |
||||
Other |
|
7,502 |
|
4.6 |
% |
6,480 |
|
4.7 |
% |
19,926 |
|
4.2 |
% |
18,344 |
|
4.4 |
% |
||||
|
|
$ |
162,183 |
|
|
|
$ |
139,310 |
|
|
|
$ |
469,861 |
|
|
|
$ |
418,758 |
|
|
|
U.S. revenues increased 10.6% in the third quarter of 2004 compared to the third quarter of 2003 and increased 19.4% for the first nine months of 2004 compared to the first nine months of 2003, reflecting improvements in the economy stimulating demand for projectors and growth of our rear projection television engine revenues and royalty revenues.
European revenues increased 36.4% in the third quarter of 2004 compared to the third quarter of 2003 and increased 6.6% in the first nine months of 2004 compared to the first nine months of 2003. The improvement in the third quarter of 2004 primarily resulted from an improving Euro region economy during that period.
Asian revenues decreased 2.9% in the third quarter of 2004 compared to the third quarter of 2003 and 7.5% in the nine month period ended September 30, 2004 compared to the nine month period ended September 30, 2003, primarily as a result of overall softness in the Asian markets as well as a slowdown due to our limited ability to sell in the China market until our China customs investigation is fully resolved.
Backlog
At September 30, 2004, we had backlog of approximately $27.6 million, compared to approximately $33.0 million at December 31, 2003. Given current supply and demand estimates, it is anticipated that a majority of the current backlog will turn over by the end of the fourth quarter of 2004. The stated backlog is not necessarily indicative of sales for any future period nor is a backlog any assurance that we will realize a profit from filling the orders.
Gross Margins
We achieved gross margins of 17.1% and 17.5%, respectively, in the three and nine month periods ended September 30, 2004, compared to 9.1% and 8.8%, respectively, in the same periods of 2003. The increases in gross margins in the three and nine month periods ended September 30, 2004 are due to the following:
release of several new product platforms for both the commercial and consumer markets during the first half of 2004 resulting in a new product line-up that has a greater price/performance value for our customers relative to our production cost;
lower infrastructure costs associated with our restructured business model;
a growing royalty revenue stream related to our patent portfolio;
lower warranty costs due to improving product quality, higher reclaim of defective materials and improved throughput of repairs at UPS;
lower depreciation expense in the first three quarters of 2004 compared to the first three quarters of 2003, primarily due to the long-lived asset impairment charge we took in the third quarter of 2003; and
$0.3 million and $4.7 million, respectively, of inventory write-downs in the three and nine month periods ended September 30, 2004 compared to $1.7 million and $13.7 million, respectively, in the same periods of 2003.
The inventory write-downs in 2004 relate primarily to end-of-life for various product platforms, a decline in market value of the inventory held by customs in China and process and control issues associated with the transition of our U.S. logistics and factory repair activity to UPS.
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We achieved our target gross margins of between 16% and 18% during the three and nine month periods ended September 30, 2004 and expect them to remain in that range through the remainder of 2004. Where we end up within that range in any particular quarter will depend primarily on product mix and the competitive pricing environment during that particular quarter. For example, the improving supply picture could lead to increased competitive pricing pressure in a given quarter or we could see growth in the value-priced segment of the market, either of which could move us to the lower end of the range. Counterbalancing these factors is the level of royalty revenues we record in any period as royalty related revenues have little to no related costs.
Marketing and Sales Expense
Marketing and sales expense increased $1.2 million, or 6.8%, and decreased $1.8 million, or 3.2%, respectively, in the three and nine month periods ended September 30, 2004 compared to the same periods of 2003. The increase in the three month period resulted primarily from sales and marketing activities surrounding demand generation activities for our products and the launch of our new large-format ultra-thin microdisplay business. The decrease in the nine-month period was primarily due to efficiencies related to our restructuring actions taken during 2003 and lower depreciation expense due to the long-lived asset impairment charge taken in the third quarter of 2003. This decrease was partially offset by increases in allocation of shared service expenses to marketing and sales expense, as well as the increase due to the launch of our new microdisplay business mentioned above. Our cost structure in 2004 no longer has in-house manufacturing or logistics and therefore increases the amounts of shared service expenses allocated to operating expenses versus cost of goods sold. We expect marketing and sales expense to increase slightly over the remainder of 2004 as we continue to invest in revenue generation initiatives.
Research and Development Expense
Research and development expense decreased $0.8 million, or 10.5%, and $3.8 million, or 14.9%, respectively, in the three and nine month periods ended September 30, 2004 compared to the same periods of 2003. The reductions in the year over year periods in research and development expense were primarily related to the increase in our co-development efforts with our manufacturing partners, reimbursement from our customer partners related to engine prototype development, overall lower prototype expenses and lower depreciation expense due to the long lived asset impairment charge taken in the third quarter of 2003. In addition, in the nine-month period ended September 30, 2004, we recognized a $0.6 million reduction in expense related to repayment of non-recurring engineering expenses by one of our customers upon contract termination. These decreases were partially offset by increases in allocation of shared service expenses to research and development expense. In 2004, our research and development efforts will continue to be focused on development of new and improved products, including ultra-thin large displays for the home and commercial use and front projector products for all segments of the market.
General and Administrative Expense
General and administrative expense decreased $0.7 million, or 10.4%, and $5.3 million, or 23.6%, respectively, in the three and nine month periods ended September 30, 2004 compared to the same periods of 2003. The reduction in general and administrative expense in the year over year periods were primarily due to a decrease in depreciation expense due to the long-lived asset impairment charge we took in the third quarter of 2003, efficiencies gained as a result of our restructuring activities during 2003 and 2004 and a $0.6 million and a $3.6 million decrease, respectively, in bad debt expense. These decreases were partially offset by increases in legal costs due to our Chinese customs investigation and 3Ms patent infringement lawsuit, increased consulting and audit fees related to the Sarbanes-Oxley internal control certification requirements, and increases in allocated shared service expenses to general and administrative expense.
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Restructuring
Restructuring charges of $0.5 million in the nine-month period ended September 30, 2004 were primarily for costs related to our facilities consolidation at our Wilsonville, Oregon headquarters.
At September 30, 2004, we have a remaining accrual for all of our past restructuring activities of $1.3 million. See further detail in Note 8 of Notes to Consolidated Financial Statements.
Other Income (Expense)
Interest income in the three and nine-month periods ended September 30, 2004 was $0.4 million and $1.2 million, respectively, compared to $0.5 million and $1.3 million, respectively, in the same periods of 2003.
Other income in the three and nine-month periods ended September 30, 2004 was $5.4 million and $6.7 million respectively. Included in other income in the three and nine-month periods ended September 30, 2004 are a $3.6 million and $4.3 million gain, respectively, on the sale of equity securities and $1.5 million and $2.4 million, respectively, of income related to profitability of Motif, our 50/50 joint venture with Motorola, compared to $0.3 million and $0.4 million, respectively, for the same periods of 2003. Motif license fees are recognized when licensees report sales and resultant royalties, which are currently only contractually required on a semi-annual basis and primarily fall in the first and third quarters of each year. The increase in other income related to our Motif joint venture is due to increased usage of Motif technology by the licensees. The remainder of other income in the three and nine-month periods primarily relates to foreign currency transaction gains and losses recorded in each period.
Income Taxes
Income tax benefit of $150,000 in the nine-month period ended September 30, 2004 primarily relates to a tax refund resulting from the filing of our 2003 tax return, offset by anticipated 2004 tax expense in certain foreign tax jurisdictions.
Income tax expense of $0.4 million and $3.6 million, respectively, in the three and nine-month periods ended September 30, 2003, relates to income tax expense in certain foreign tax jurisdictions. In addition, in the second quarter of 2003, we increased our valuation allowance for foreign deferred tax assets due to larger than anticipated operating losses in other foreign tax jurisdictions.
Liquidity and Capital Resources
Total cash, cash equivalents, marketable securities and restricted cash were $79.3 million at September 30, 2004. At September 30, 2004, we had working capital of $221.6 million, which included $24.0 million of unrestricted cash and cash equivalents, $30.0 million of short-term marketable securities, and $9.2 million of assets held in China. The current ratio at September 30, 2004 and December 31, 2003 was 2.5 to 1 and 2.7 to 1, respectively.
In October 2004, we entered into a two-year $40 million line of credit facility with Wells Fargo Foothill, Inc. to finance future working capital requirements in support of revenue growth. Pursuant to the terms of the credit agreement, the company may borrow up to $40 million subject to a borrowing base determined on eligible accounts receivable. For additional details regarding the credit facility, see Note 11 in Notes to Consolidated Financial Statements.
Our investment in Phoenix Electric Co., a Japanese lamp manufacturing company, and various other investments are included as part of our short-term marketable securities balance. During the three and nine-month periods ended September 30, 2004, we recognized $3.6 million and $4.3 million, respectively, upon the sale of such securities. The total market value of the remaining investments increased by $16.7 million during the first nine months of 2004 and is recorded as an unrealized gain directly in shareholders equity. The total unrealized appreciation of these investments totaled $25.0 million as of September 30, 2004. As market conditions warrant, we may choose to sell more of our marketable securities resulting in additional realized gains.
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We anticipate that our current cash and marketable securities, along with cash we anticipate to generate from operations and the option of borrowing against our line of credit will be sufficient to fund our operating and capital requirements for at least the next 12 months.
At September 30, 2004, we had one outstanding letter of credit totaling $20.0 million, which expires February 2, 2005. This letter of credit collateralizes our obligations to a supplier for the purchase of finished goods inventory. The fair value of this letter of credit approximates its contract value. The letter of credit is collateralized by $24.0 million of cash and marketable securities that is reported as restricted on the consolidated balance sheet. The remainder of the restricted cash, totaling $1.2 million, relates to value added tax deposits with foreign jurisdictions.
Accounts receivable increased $3.2 million to $119.3 million at September 30, 2004 compared to $116.1 million at December 31, 2003. The increase in the accounts receivable balance was primarily due to an increase in days sales outstanding. Days sales outstanding increased to 66 days at September 30, 2004 compared to 56 days at December 31, 2003 due primarily to a larger portion of revenues being generated during the third month of the quarter.
Inventories increased $96.4 million to $158.7 million at September 30, 2004 compared to $62.3 million at December 31, 2003. See Note 2 of Notes to Consolidated Financial Statements for a summary of the components of inventory as of these dates. Inventory, net of related reserves, being held by the Chinese authorities in connection with their investigation totaled $2.8 million and $5.1 million as of September 30, 2004 and December 31, 2003, respectively. The increase in inventory is due to increases in finished goods inventory. The increase in finished goods is primarily due to an increased volume of finished goods that were in transit via ocean from our contract manufacturers, as well as a revenue shortfall in the quarter compared to expectations. In addition, we have agreed to consign inventory at certain retail customers until it is sold by the retailer, at which point, we recognize the revenue. At September 30, 2004 we had approximately $45.3 million of inventory either in transit or on consignment compared to approximately $18.1 million at December 31, 2003. The increase of in-transit inventory being shipped via ocean from our contract manufacturers allows us to take advantage of lower cost ocean freight costs. At September 30, 2004, we had approximately five weeks of inventory in the Americas channel compared to approximately three weeks at December 31, 2003. Annualized inventory turns were approximately 4.0 times for the quarter ended September 30, 2004, 4.9 times for the quarter ended September 30, 2003 and 8.3 times for the quarter ended December 31, 2003.
Outsourced manufacturer receivables decreased $3.8 million to $195,000 at September 30, 2004 compared to $3.9 million at December 31, 2003 due to our outsourced manufacturers directly procuring the majority of their components and collection of outstanding balances.
Other current assets decreased $2.5 million to $14.0 million at September 30, 2004 compared to $16.5 million at December 31, 2003. The decrease is mainly due to collections of value added tax receivables in Europe and lower prepaid expenses at September 30, 2004 compared to December 30, 2003. Other current assets at both September 30, 2004 and December 31, 2003 include our $6.4 million deposit with the Chinese authorities in connection with their investigation of our import duties.
Expenditures for property and equipment, totaling $8.4 million in the first nine months of 2004, were primarily for product tooling, information technology upgrades and furniture. Of the $8.4 million, $2.1 million was used to buy certain furniture and equipment that had previously been under operating leases. Total expenditures for property and equipment are expected to be between $10 and $12 million in 2004, primarily for product tooling and routine information technology upgrades.
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Other assets increased $5.4 million to $8.8 million at September 30, 2004 compared to $3.5 million at December 31, 2003 primarily due to strategic minority interest investments in companies as part of our advanced research and development efforts and growth in our investment in Motif. Included in other assets are net patents and trademarks, goodwill, deposits, venture capital investments and the investment in our joint venture with Motorola, Motif.
Accounts payable increased $27.4 million to $113.2 million at September 30, 2004 compared to $85.9 million at December 31, 2003, primarily due to increased payables to key suppliers related to increased inventory.
Payroll and related benefits payable decreased $2.1 million to $4.4 million at September 30, 2004 compared to $6.5 million at December 31, 2003, primarily due to lower accrued vacation balances and fewer numbers of days accrued at September 30, 2004 compared to December 31, 2003. In Europe, the lower accrued vacation balances are related to increased vacation time being taken during the summer months. In the U.S., in the beginning of 2004, we adopted a use it or lose it vacation policy and no longer accrue vacation earned but not used on our consolidated balance sheet. The balance that was remaining at December 31, 2003 is declining as employees take previously earned time off and per the new policy no new accruals are required.
Critical Accounting Policies and Estimates
We reaffirm the critical accounting policies and estimates as reported in our Form 10-K for the year ended December 31, 2003, which was filed with the Securities and Exchange Commission on March 10, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our reported market risks since the filing of our 2003 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 10, 2004.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a- 15(b) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal controls over financial reporting.
However, during the first quarter of 2004 we outsourced our U.S. logistics and service repair functions to UPS Supply Chain Solutions (UPS) in Louisville, Kentucky. We are reliant on UPS to effectively and accurately manage our U.S. inventory, service repair and logistics functions. Throughout the first three quarters of the year, we have continued to work through transitional issues associated with these activities primarily related to process and control issues between our systems and the UPS systems. As a result of these issues, we experienced a variety of customer satisfaction issues and
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recorded inventory reserves in each of the first two quarters of the year, but did not need to record additional reserves in the third quarter of this year. We continue to work with UPS to improve the effectiveness and efficiency of processes and controls to improve customer service and reduce our costs of logistics and service repair operations.
China Customs Investigation
During the second quarter of 2003, our Chinese subsidiary became the subject of an investigation by Chinese authorities. We continue to work closely with the Chinese customs officials. During the second quarter of 2004, we received formal notification that our case in now considered Administrative in nature, which indicates that the Chinese authorities have ruled out any potential of willful intent to underpay duties by our Chinese subsidiary. In addition, during the second quarter of 2004, we were allowed to start selling previously impounded inventory and transferring agreed upon amounts per unit directly to Shanghai Customs to represent an additional deposit pending final resolution of the case. Subsequent to the end of the third quarter of 2004, we secured the release of approximately 60 percent of the projectors being held by Shanghai Customs and have since sold those units to a customer in China. As a result, we have made an additional deposit with Shanghai Customs of approximately $5.9 million.
As of September 30, 2004, Chinese customs officials held a cash deposit of approximately $6.4 million which is recorded in other current assets on our consolidated balance sheet, and $2.8 million of inventory. The release of the cash deposit, now totaling $12.3 million, is dependent on final case resolution. At this time, we are not able to estimate when this case will ultimately be resolved or its financial impact on us and therefore have not recorded any expense in our statement of operations related to this matter. For a more complete description of this investigation, see Item 3. in our 2003 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 10, 2004.
3M
In January 2004, 3M filed a lawsuit in United States District Court in Minnesota, claiming that our light engine technology violated one of their patents. On April 22, 2004, 3M formally served InFocus with the lawsuit. We have reviewed the complaint and the relevant patent and believe we have meritorious defenses to the claims made in the lawsuit, and therefore, have not recorded any expense in our statement of operations related to this matter. During the second quarter of 2004, we filed for dismissal of the suit in Minnesota and for a declaratory judgment in Oregon, which, if successful, would dismiss the current case in Minnesota and narrow jurisdictional scope of the lawsuit to an Oregon court. No decisions have been reached on these legal actions.
In the second quarter of 2004, we filed a lawsuit against 3M in United States District Court in Oregon, claiming that 3M is selling products that incorporate our patented projection lamp safety interlock system. We are seeking monetary damages, as well as injunctive relief to prevent 3M from continuing to sell products to its customers that incorporate this technology.
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The following exhibits are filed herewith and this list is intended to constitute the exhibit index:
31.1 |
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. |
31.2 |
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. |
32.1 |
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Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
32.2 |
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Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
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Pursuant to the requirements 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: November 8, 2004 |
INFOCUS CORPORATION |
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By: |
/s/ C. Kyle Ranson |
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C. Kyle Ranson |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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By: |
/s/ Michael D. Yonker |
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Michael D. Yonker |
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Executive Vice President, Finance, |
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Chief Financial Officer and Secretary |
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(Principal Financial Officer) |
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