10-Q 1 a06-9431_210q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2006

 

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.)

or organization)

 

 

 

 

 

27700B SW Parkway Avenue, Wilsonville, Oregon

 

97070

(Address of principal executive offices)

 

(Zip Code)

Registrant’s 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  x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o   Accelerated filer x   Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o  No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock without par value

 

39,799,378

(Class)

 

(Outstanding at June 9, 2006)

 

 

 

 

 




 

INFOCUS CORPORATION

FORM 10-Q

INDEX

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets - March 31, 2006 and December 31, 2005 (unaudited)

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations - Three Months Ended March 31, 2006 and 2005 (unaudited)

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows - Three Months Ended March 31, 2006 and 2005 (unaudited)

 

 

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

 

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

 

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

 

 

 

 

 

 

 

 

Signatures

 

 

 

 

 

 

1




 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

INFOCUS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

52,131

 

$

53,105

 

Marketable securities

 

226

 

1,199

 

Restricted cash, cash equivalents, and marketable securities

 

25,864

 

25,813

 

Accounts receivable, net of allowances of $8,009 and $8,198

 

69,187

 

70,883

 

Related party accounts receivable

 

431

 

 

Inventories

 

44,352

 

58,427

 

Consigned inventories

 

5,512

 

8,027

 

Income taxes receivable

 

1,347

 

1,393

 

Deferred income taxes

 

944

 

919

 

Land held for sale

 

4,469

 

4,469

 

Other current assets

 

22,768

 

21,782

 

Total Current Assets

 

227,231

 

246,017

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $18,347 and $20,414

 

4,278

 

2,747

 

Deferred income taxes

 

189

 

193

 

Other assets, net

 

6,512

 

14,931

 

Total Assets

 

$

238,210

 

$

263,888

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

64,719

 

$

69,968

 

Related party accounts payable

 

1,565

 

4,706

 

Payroll and related benefits payable

 

2,436

 

2,241

 

Marketing incentives payable

 

6,754

 

6,541

 

Accrued warranty

 

10,986

 

10,986

 

Other current liabilities

 

8,696

 

11,217

 

Total Current Liabilities

 

95,156

 

105,659

 

 

 

 

 

 

 

Long-Term Liabilities

 

3,045

 

3,038

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

Common stock, 150,000,000 shares authorized; shares issued and outstanding: 39,768,178 and 39,711,578

 

90,796

 

90,037

 

Additional paid-in capital

 

75,758

 

76,133

 

Accumulated other comprehensive income:

 

 

 

 

 

Cumulative currency translation adjustment

 

25,895

 

24,200

 

Unrealized gain (loss) on equity securities

 

(159

)

745

 

Accumulated deficit

 

(52,281

)

(35,924

)

Total Shareholders’ Equity

 

140,009

 

155,191

 

Total Liabilities and Shareholders’ Equity

 

$

238,210

 

$

263,888

 

 

The accompanying notes are an integral part of these statements.

 

2




 

INFOCUS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)

 

 

 

For the Three
Months Ended
March 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

112,019

 

$

137,016

 

Cost of revenues(1)

 

95,276

 

127,067

 

Gross margin

 

16,743

 

9,949

 

 

 

 

 

 

 

Operating expenses(1):

 

 

 

 

 

Marketing and sales

 

14,565

 

16,937

 

Research and development

 

4,832

 

6,131

 

General and administrative

 

5,493

 

5,711

 

Restructuring costs

 

1,075

 

4,700

 

 

 

25,965

 

33,479

 

 

 

 

 

 

 

Loss from operations

 

(9,222

)

(23,530

)

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest expense

 

(107

)

(146

)

Interest income

 

516

 

267

 

Other, net

 

(7,412

)

9,698

 

 

 

(7,003

)

9,819

 

Loss before income taxes

 

(16,225

)

(13,711

)

Provision for income taxes

 

132

 

268

 

Net loss

 

$

(16,357

)

$

(13,979

)

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.41

)

$

(0.35

)

 

 

 

 

 

 

Shares used in basic and diluted per share calculations

 

39,605

 

39,578

 


(1)             Cost of revenues and operating expenses for the three months ended March 31, 2006 include SFAS 123(R) stock-based compensation expense. See Note 5 to the Consolidated Condensed Financial Statements for  additional information.

The accompanying notes are an integral part of these statements.

 

3




 

INFOCUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)

 

 

 

For the Three
Months Ended
March 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(16,357

)

$

(13,979

)

Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

589

 

2,866

 

Stock-based compensation

 

374

 

47

 

Gain on sale of property and equipment

 

(33

)

(43

)

Gain on sale of marketable securities

 

(809

)

(9,218

)

Deferred income taxes

 

(3

)

107

 

Non-cash write-down of cost based investments

 

7,454

 

 

Other non-cash (income) expense

 

355

 

(323

)

(Increase) decrease in:

 

 

 

 

 

Restricted cash

 

(7,217

)

2,297

 

Accounts receivable

 

2,225

 

18,744

 

Related party accounts receivable

 

(431

)

(1,775

)

Inventories

 

14,096

 

24,499

 

Consigned inventories

 

2,515

 

1,078

 

Income taxes receivable

 

76

 

(38

)

Other current assets

 

(886

)

(389

)

Increase (decrease) in:

 

 

 

 

 

Accounts payable

 

(5,089

)

2,720

 

Related party accounts payable

 

(3,141

)

 

Payroll and related benefits payable

 

213

 

(2,032

)

Marketing incentives payable, accrued warranty and other current liabilities

 

(2,267

)

3,584

 

Other long-term liabilities

 

11

 

159

 

Net cash provided by (used in) operating activities

 

(8,325

)

28,304

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of marketable securities

 

 

(5,918

)

Maturities of marketable securities

 

7,166

 

3,700

 

Proceeds on sale of marketable securities

 

878

 

9,700

 

Payments for purchase of property and equipment

 

(2,009

)

(2,139

)

Proceeds from sale of property and equipment

 

33

 

43

 

Cash paid for investments in joint ventures

 

 

(1,500

)

Cash paid for cost based technology investments

 

 

(2,000

)

Other assets, net

 

545

 

(531

)

Net cash provided by investing activities

 

6,613

 

1,355

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Repayments on short term borrowings

 

 

(16,198

)

Proceeds from sale of common stock

 

7

 

62

 

Net cash provided by (used in) financing activities

 

7

 

(16,136

)

 

 

 

 

 

 

Effect of exchange rate on cash

 

731

 

(374

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(974

)

13,149

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

53,105

 

17,032

 

End of period

 

$

52,131

 

$

30,181

 

 

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, 2005 is derived from our 2005 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 2005 Annual Report on Form 10-K. Results of operations for the interim period 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. For finished goods inventory, the average purchase costs include overhead items, such as inbound freight and other logistics costs. Following is a detail of our inventory (in thousands):

 

 

 

March 31,
2006

 

December 31,
2005

 

Lamps and accessories

 

$

3,306

 

$

4,606

 

Service inventories

 

15,512

 

19,543

 

Finished goods

 

25,534

 

34,278

 

Total non-consigned inventories

 

$

44,352

 

$

58,427

 

 

 

 

 

 

 

Consigned finished good inventories

 

$

5,512

 

$

8,027

 

 

 

 

 

 

 

Total inventories

 

$

49,864

 

$

66,454

 

 

We classify our inventory in four categories: finished goods, lamps and accessories, service inventories and consigned finished goods inventories. Finished goods inventory consists of new projectors in our logistics centers and new projectors in transit from our contract manufacturers where title transfers at shipment. Lamps and accessories consist of replacement lamps and other new accessory products such as screens, remotes and ceiling mounts. These items can be either sold as new or used in service repair activities. Service inventories consist of service parts held for warranty or customer repair activities, remanufactured projectors and projectors in the process of being repaired. Consigned finished goods inventories consist of new projectors held by certain retailers on consignment until sold. Inventories are reported on the consolidated balance sheets net of reserve for obsolete and excess inventories of $16.5 million and $20.9 million, respectively, as of March 31, 2006 and December 31, 2005.

Note 3. Earnings Per Share

Since we were in a loss position for both periods presented, there was no difference between the number of shares used to calculate basic and diluted loss per share for either period. Potentially dilutive securities that are not included in the diluted loss per share calculations because they would be anti-dilutive included the following (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2006

 

2005

 

Stock options

 

5,143

 

5,651

 

Restricted Stock

 

161

 

126

 

Total securities

 

5,304

 

5,777

 

 

5




 

Note 4. Comprehensive Income (Loss)

Comprehensive income (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 income (loss) for the periods indicated (in thousands):

 

 

Three Months Ended
 March 31,

 

 

 

2006

 

2005

 

Net loss

 

$

(16,357

)

$

(13,979

)

Foreign currency translation gain (loss)

 

1,695

 

(4,362

)

Net unrealized gain (loss) on equity securities

 

(95

)

444

 

Unrealized gain realized during period

 

(809

)

(9,218

)

Total comprehensive loss

 

$

(15,566

)

$

(27,115

)

 

Note 5. Stock-Based Compensation

Adoption of SFAS No. 123R

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.” We elected to use the modified prospective transition method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing stock-based compensation. Under this method, the provisions of SFAS No. 123R apply to all awards granted or modified after the date of adoption. Our deferred compensation balance of $535,000 as of December 31, 2005, which was accounted for under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees, was reclassified into additional paid in capital upon the adoption of SFAS No. 123R. In addition, the unrecognized expense of awards not yet vested at the date of adoption is recognized in net income in the periods after the date of adoption using the Black-Scholes valuation method over the remaining requisite service period of each grant.

Prior to January 1, 2006, we accounted for stock options using the intrinsic value method as prescribed by APB 25. We provided disclosures of net loss and net loss per share for these prior periods prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” as follows (in thousands, except per share amounts):

 

Three Months Ended March 31,

 

2005

 

Net loss, as reported

 

$

(13,979

)

Add - stock-based employee compensation expense included in reported net loss

 

339

 

Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards

 

(1,089

)

Net loss, pro forma

 

$

(14,729

)

Basic and diluted net loss per share:

 

 

 

As reported

 

$

(0.35

)

Pro forma

 

$

(0.37

)

 

Certain information regarding our stock-based compensation was as follows (in thousands, except per share amounts):

Three Months Ended March 31,

 

2006

 

2005

 

Weighted average grant-date fair value of each option share granted

 

$

1.78

 

$

3.92

 

Total intrinsic value of share options exercised

 

$

1

 

$

28

 

Total fair value of shares vested

 

$

81

 

$

 

Stock-based compensation recognized in results of operations

 

$

374

 

$

339

 

Cash received from options exercised and shares purchased under all share-based arrangements

 

$

7

 

$

62

 

 

6




 

There was no tax benefit related to stock options recognized in our statements of operations, no stock-based compensation capitalized to fixed assets, inventory, or other assets, nor tax deductions realized related to stock options exercised in the three month periods ended March 31, 2006 or 2005.

Our stock-based compensation was included in our statements of operations as follows (in thousands):

Three Months Ended March 31,

 

2006

 

2005

 

Cost of revenues

 

$

41

 

$

 

Marketing and sales

 

142

 

29

 

Research and development

 

45

 

 

General and administrative

 

146

 

17

 

Restructuring

 

 

293

 

 

 

$

374

 

$

339

 

 

The $0.3 million of stock-based compensation, included in our statement of operations in restructuring, for the three month period ended March 31, 2005 was related to non-cash stock-based compensation charge for employees who transferred to SMT.

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 Months Ended March 31,

 

2006

 

2005

 

Risk-free interest rate

 

4.82–4.83

%

4.18

%

Expected dividend yield

 

0.00

%

0.00

%

Expected lives (years)

 

2.9–3.9

 

3.9

 

Expected volatility

 

62.3–71.1

%

78.6

%

Discount for post vesting restrictions

 

0.00

%

0.00

%

 

The risk-free rate used is based on the U.S. Treasury yield over the estimated term of the options granted. Our option pricing model utilizes the simplified method accepted under Staff Accounting Bulletin No. 107 to estimate the expected term. The expected volatility for options granted pursuant to our stock incentive plans is calculated based on our historical volatility. We have not paid dividends in the past and we do not expect to pay dividends in the future resulting in the dividend rate assumption above.

We amortize stock-based compensation on a straight-line basis over the vesting period of the individual award with estimated forfeitures considered. Shares to be issued upon the exercise of stock options will come from newly issued shares.

The following indicates what certain operating results would have been without the effects of applying SFAS No. 123R in the first quarter of 2006 (in thousands, except per share amounts):

 

 

As reported

 

Pro Forma
without effects of
applying
SFAS No. 123R

 

Loss before income taxes

 

$

(16,225

)

$

(15,935

)

Net loss

 

(16,357

)

(16,067

)

Cash flow from operating activities

 

(8,325

)

(8,325

)

Cash flow from financing activities

 

7

 

7

 

Basic and diluted loss per share

 

(0.41

)

(0.40

)

 

1988 Combination Stock Option Plan and 1998 Stock Incentive Plan

Our 1988 Combination Stock Option Plan, as amended (the “1988 Plan”) expired in December 1998. Our 1998 Stock Incentive Plan (the “1998 Plan” together with the 1988 Plan, the “Plans”) was approved by the Shareholders in April 1998. The 1998 Plan provides for the issuance of incentive stock options to our employees and restricted stock and non-statutory stock options to our employees, officers, directors and consultants. Under the Plans, the exercise price of all stock options cannot be less than the fair market

7




 

value of our common stock at the date of grant. Options granted generally vest over a three or four-year period and expire either five or ten years from the date of grant. Options canceled under the 1988 Plan are not added back to the pool of shares available for grant. At March 31, 2006, we had 6.4 million shares of common stock reserved for issuance under the Plans. Stock option activity under the Plans for the three-month period ended March 31, 2006 was as follows (shares in thousands):

 

 

 

Options
Outstanding

 

Weighted
Average
Exercise Price

 

Outstanding at December 31, 2005

 

4,935

 

$

11.13

 

Granted

 

1,920

 

3.95

 

Exercised

 

(2

)

4.31

 

Forfeited

 

(1,901

)

12.75

 

Outstanding at March 31, 2006

 

4,952

 

7.72

 

 

Restricted stock activity under the 1998 Plan for the three-month period ended March 31, 2006 was as follows (shares in thousands):

 

 

Restricted
Stock
Outstanding

 

Weighted Average
Grant Date Fair
Value

 

Unvested at December 31, 2005

 

126

 

$

4.31

 

Granted

 

55

 

3.95

 

Vested

 

(20

)

4.80

 

Forfeited

 

 

 

Unvested at March 31, 2006

 

161

 

4.12

 

 

In the first quarter of 2006, we issued performance stock options to certain employees under the 1998 Stock Incentive Plan. Performance stock options are a form of option award in which the number of options that ultimately vest depends on performance against specified performance targets. The performance period for the options issued in the first quarter of 2006 is January 1, 2006 through December 31, 2006. At the end of the performance period, if the performance targets are met, the options will begin to vest and will continue to vest into the first quarter of 2009. At March 31, 2006, the total performance-based options outstanding were 451,800, with a weighted average exercise price of $3.95.

Directors’ Stock Option Plan

Our Directors’ Stock Option Plan, as amended (the “Directors’ Plan”) provided for the issuance of stock options covering a total of 400,000 shares of our common stock to members of our board of directors who were not employees at any time during the preceding year (“Eligible Directors”). The Directors’ Plan expired August 22, 2002 and, therefore, no options will be granted under this plan in the future. All Eligible Director Options vest six months after the date of grant. At March 31, 2006 we had reserved 190,794 shares of common stock for issuance under the Directors’ Plan. Stock option activity under the Directors’ Plan for the three-month period ended March 31, 2006 was as follows (shares in thousands):

 

 

Options
Outstanding

 

Weighted
Average
Exercise Price

 

Outstanding at December 31, 2005

 

192

 

$

15.74

 

Granted

 

 

 

Exercised

 

 

 

Forfeited

 

(1

)

14.90

 

Outstanding at March 31, 2006

 

191

 

15.75

 

 

8




 

Certain information regarding all options outstanding as of March 31, 2006 was as follows (shares in thousands):

 

 

Options
Outstanding

 

Options
Exercisable

 

Number

 

5,143

 

3,018

 

Weighted average exercise price

 

$

8.02

 

$

10.89

 

Aggregate intrinsic value

 

$

1.8 million

 

$

0.2 million

 

Weighted average remaining contractual term

 

4.26 years

 

3.91 years

 

 

As of March 31, 2006, unrecognized stock-based compensation related to outstanding, but unvested options and restricted stock was $3.8 million, which will be recognized over the weighted average remaining vesting period of 1.44 years.

Note 6. Product Warranties

We evaluate our obligations related to product warranties on a quarterly basis. We offer a standard one-year or two-year warranty. Our standard one-year warranty is offered on our higher volume value platforms, while our standard two-year warranty is offered on our lower volume, higher priced product platforms. In addition, for certain customers, products, and regions, the standard warranty period offered may cover a 3 or 4 year period. 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 projector, 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, as well as any cost recoveries of defective parts and material, which may be repaired at a factory repair center or through a third party. This data is then used to calculate the accrual based on actual sales for each projector 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 platform projectors. 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 $2.4 million and $2.2 million, respectively, at March 31, 2006 and December 31, 2005 and is included in other current liabilities on our consolidated balance sheets. Our warranty accrual at March 31, 2006 and December 31, 2005 totaled $13.8 million, of which $11.0 million was classified as a component of current liabilities and $2.8 million was classified as other long-term liabilities on our consolidated balances sheets.

The following is a reconciliation of the changes in the aggregate warranty liability for the three-month periods ended March 31, 2006 and 2005 (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2006

 

2005

 

Warranty accrual, beginning of period

 

$

13,767

 

$

13,767

 

Reductions for warranty payments made

 

(5,704

)

(4,852

)

Warranties issued

 

3,539

 

3,121

 

Adjustments and changes in estimates

 

2,165

 

1,731

 

Warranty accrual, end of period

 

$

13,767

 

$

13,767

 

 

Note 7. Letter of Credit and Restricted Cash, Cash Equivalents and Marketable Securities

At March 31, 2006 we had one outstanding letter of credit totaling $20 million, which expired on May 2, 2006 and was subsequently renewed with a new expiration date of August 2, 2006. 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 $23.6 million of cash and marketable securities, and, as such, is reported as restricted on the consolidated balance sheets. The remainder of the restricted cash, totaling $2.3 million, primarily related to value added tax and other deposits with foreign jurisdictions.

9




 

Note 8. Restructuring

In the first quarter of 2006, we incurred restructuring charges totaling $1.1 million, primarily related to international facility consolidation activities that were completed during the period.

At March 31, 2006, we had $3.7 million of restructuring costs accrued on our consolidated balance sheet classified as other current liabilities. We expect the majority of the remaining severance and related costs to be paid by the end of the fourth quarter of 2006 and the lease loss to be paid over the related lease terms through 2011, net of estimated sub-lease rentals. The following table displays a roll-forward of the accruals established for restructuring (in thousands):

 

 

 

Accrual at
December 31,
2005

 

2006
Charges

 

2006
Amounts
Paid

 

Accrual
at
March 31,
2006

 

Severance and related costs

 

$

2,313

 

$

 

$

(1,496

)

$

817

 

Lease loss reserve

 

2,286

 

808

 

(707

)

2,387

 

Other

 

412

 

267

 

(190

)

489

 

Total

 

$

5,011

 

$

1,075

 

$

(2,393

)

$

3,693

 

 

Total restructuring charges in the first quarters of 2006 and 2005 were as follows (in thousands):

Three Months Ended March 31,

 

2006

 

2005

 

Severance and related costs

 

$

 

$

648

 

Lease loss reserve

 

808

 

3,146

 

Stock-based compensation

 

 

293

 

Other

 

267

 

613

 

Total

 

$

1,075

 

$

4,700

 

 

Note 9. Write-Down of Cost Method Investments

Based on changes in financing alternatives and strategic shifts that occurred during the first quarter of 2006, we recorded a charge of $7.5 million against other assets, net related to the write-down of two separate cost-based investments, Reflectivity and VST International, both start-up technology companies. The write-down is included in our consolidated statements of operations under Other, net. Both companies are in the process of raising additional capital to fund future activities at significantly reduced valuations. It is not likely that we will participate in these future funding activities, which will lead to a significant dilution in our ownership interests, thus impairing our current investment. The write-down of $7.5 million in the first quarter of 2006 effectively reduced the carrying value of these cost based investments to zero at March 31, 2006.

Note 10. Other Income (Expense)

Other income (expense) included the following (in thousands):

 

Three Months Ended March 31,

 

2006

 

2005

 

Realized gain on the sale of equity securities

 

$

809

 

$

9,218

 

Income related to the profits of Motif, 50-50 joint venture

 

1,125

 

1,132

 

Expense related to losses of SMT, 50-50 joint venture

 

(1,562

)

(473

)

Losses related to foreign currency transactions

 

(348

)

(168

)

Write-down of cost-based investments in technology companies

 

(7,474

)

 

Other

 

38

 

(11

)

 

 

$

(7,412

)

$

9,698

 

 

Included in expense related to losses of our SMT joint venture is the elimination of our portion of unrealized intercompany profit in inventory at March 31, 2006 of $0.1 million. The elimination results in a reduction of our inventory and an increase in the loss recognized.

10




 

Note 11. 2005 10-K Filing and Audit Committee Investigations

On March 9, 2006 we announced a delay in filing our fiscal 2005 Annual Report on Form 10-K to allow for the completion of internal investigations initiated by our audit committee and completion of related audit procedures by our registered independent auditors.

In July 2005, we self disclosed possible infractions of U.S. export law to the Office of Foreign Assets Control (“OFAC”) related to shipments into restricted countries by one of our foreign subsidiaries. Our Audit Committee commenced an investigation and engaged independent counsel to assist with this process. The results of the independent investigation were submitted to OFAC and the Bureau of Industry and Security (“BIS”) in March 2006 for their review. Upon completion of the investigation, it was apparent that the severity of the situation was significantly less than initially thought. In June 2006, OFAC notified us that it was closing the matter by issuing a cautionary letter in lieu of any further enforcement action. BIS is currently in the process of conducting their review of our findings. We originally accrued an estimated charge of $1.6 million for potential regulatory assessments during the second quarter of 2005 and will make any adjustments as needed upon completion of the BIS review and final resolution of this matter.

In February 2006, as part of the document review related to the OFAC investigation described above, written communications were reviewed that raised potential concerns regarding the effectiveness of our financial controls and policies regarding revenue recognition. After consultation with our independent registered auditors, our Audit Committee commenced an investigation and engaged independent counsel and accounting experts to assist with the investigation into this matter. In June 2006, after an extensive document review and interviewing relevant current and former employees, independent counsel issued a report to the Audit Committee concluding that we employ sound and appropriate revenue recognition practices and procedures. The investigation did not identify any situation that would require restatement of financial statements for any prior periods nor any material weaknesses in internal controls. After reviewing the report, our Audit Committee adopted these findings and closed the investigation.

In January 2006, we received an unsubstantiated anonymous communication alleging that certain persons employed by our Chinese subsidiary had engaged in improper business practices. Again, after consultation with our independent registered auditors, our Audit Committee commenced an investigation and engaged independent counsel to assist in an investigation into this matter. In June 2006, after an extensive document review and interviewing relevant current and former employees, independent counsel issued a report to the Audit Committee concluding that there was no basis for these allegations. The investigation did not identify any situation that would require restatement of financial statements of any prior periods nor any material weaknesses in internal controls. After reviewing the report, our Audit Committee adopted these findings and closed the investigation.

On March 20, 2006, we received a Staff Determination notice from the Nasdaq Stock Market stating that we were not in compliance with Nasdaq’s Marketplace Rule 4310(c)(14) because we had not yet filed our annual report on Form 10-K for the fiscal year ended December 31, 2005. In April 2006, we participated in an oral hearing with a Nasdaq listing qualifications panel in which we presented our plan for filing both the 2005 Form 10-K and our Form 10-Q for the quarterly period ended March 31, 2006. On April 26, 2006, we received notice that the panel determined to continue the listing of our shares on the Nasdaq National Market, subject to certain conditions, including the filing of the Form 10-K on or before July 7, 2006 and the filing of the Form 10-Q on or before July 17, 2006. With the filing of this Form 10-Q, we have met the filing dates required for continued listing on the Nasdaq Stock Market.

In addition, we negotiated an extension for providing Wells Fargo Foothill with audited financial statements for fiscal year 2005. The extension was to July 7, 2006 and allowed us to maintain compliance with our line of credit agreement. We provided Wells Fargo Foothill with our audited financial statements for 2005 by the July 7, 2006 deadline.

 

11




 

Note 12. New Accounting Pronouncements

SFAS No. 156

In March 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140.” SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” with respect to accounting for separately recognized servicing assets and servicing liabilities.  SFAS No. 156 is effective for fiscal years that begin after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year. We do not have any servicing assets or servicing liabilities and, accordingly, the adoption of SFAS No. 156 will not have any effect on our results of operations, financial condition or cash flows.

SFAS No. 155

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No 133 and 140.”  SFAS No. 155 resolves implementation issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 is effective for fiscal years that begin after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year. We do not have any beneficial interests in securitized financial assets and, accordingly, the adoption of SFAS No. 155 will not have any effect on our results of operations, financial condition or cash flows.

SFAS No. 154

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections: a replacement of APB Opinion No. 20 and FASB Statement No. 3,” which requires companies to apply most voluntary accounting changes retrospectively to prior financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We adopted SFAS No. 154 on January 1, 2006 and, accordingly, any future voluntary accounting changes made by us will be accounted for under SFAS No. 154 and will be applied retrospectively.

Note 13. Subsequent Events

Land Sale

On June 5, 2006, we sold two plots of undeveloped land adjacent to our headquarters building in Wilsonville, Oregon receiving net proceeds of $5.1 million and recognizing a gain on the sale of approximately $0.6 million in the second quarter of 2006.

Line of Credit

In connection with the land sale noted above, in June 2006, we amended our line of credit with Wells Fargo, removing the requirement to reduce the maximum amount that can be advanced under the line by the greater of $5 million or the net proceeds on the sale of land. Thus, the maximum that can be advanced under the line of credit remains at $25 million after completion of the land sale.

Restructuring

SMT reduced its headcount during the second quarter of 2006 in order to lower its expense run rates until a longer term financing source is secured. To the extent SMT headcount reductions involve former InFocus employees, we are contractually responsible for severance costs for their past service with InFocus. As a result, we will record a restructuring charge during the second quarter of 2006 related to this activity and could incur restructuring charges in future periods if further headcount reductions are required by SMT.

 

12




 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Forward Looking Statements and Factors Affecting Our Business and Prospects

Some of the statements in this quarterly report on Form 10-Q are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, or the PSLRA. Forward-looking statements in this Form 10-Q are being made pursuant to the PSLRA and with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words like “intend,” “plan,” “believe,” “anticipate,” “project,” “may,” “will,” “could,” “continue,” “expect” and variations of these words or comparable words or phrases of similar meaning. They may relate to, among other things:

·                                        our ability to operate profitably;

·                                        our ability to successfully introduce new products;

·                                        expectations related to the operations, product shipments, and profitability of South Mountain Technologies, our 50-50 joint venture with TCL Corporation;

·                                        the supply of components, subassemblies, and projectors manufactured for us;

·                                        our financial risks;

·                                        fluctuations in our revenues and results of operations;

·                                        estimated impact of regulatory actions by authorities in the markets we serve;

·                                        anticipated outcome of legal disputes;

·                                        uncertainties associated with the activities of our contract manufacturing partners;

·                                        expectations regarding results and charges associated with restructuring our business and other changes to reduce or simplify the cost structure of the business;

·                                        our ability to grow the business; and

·                                        our various expenses and expenditures, including marketing and sales expenses, research and development expenses, general and administrative expenses and expenditures for property and equipment.

These forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control, which may cause actual results to differ materially from trends, plans or expectations set forth in the forward-looking statements. The forward-looking statements contained in this quarterly report speak only as of the date on which they are made and we do not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of this filing. See Item 1A. Risk Factors for further discussion of factors that could cause actual results to differ from these forward-looking statements.

Company Profile

InFocus Corporation is a worldwide leader in digital projection technology and services. Our products include projectors and related accessories and solutions for business, education, government and home users.

Overview

During the first quarter of 2006, we made progress towards our financial, operational and strategic goals. Financially, gross margins improved to 14.9% in the first quarter of 2006 on revenues of $112.0 million, reflecting improvement from the 12.0% gross margins achieved in the fourth quarter of 2005. We believe that the gross margin improvement of 2.9 percentage points in the first quarter of 2006 compared to the fourth quarter of 2005 puts us on a path to achieve our goal of 16% to 18% gross margins in the near future. Operating expenses in the first quarter of 2006, excluding the impact of restructuring charges and stock-based compensation, were flat compared to the fourth quarter of 2005 as efficiencies gained from our prior restructuring efforts were offset by investments in additional marketing activities to launch our new products and our new branding campaign and costs incurred associated with the audit committee investigations.

 

13




 

Operationally, we achieved three important successes in the first quarter of 2006. First, we participated in a successful Consumer Electronics Show early in the first quarter. Second, we launched our new Play Big projector line-up and began volume shipments of the Play Big Projector line-up late in the first quarter of 2006. Third, we announced, and began shipping in May 2006, our new Work Big IN24 and IN26 projectors, which are the follow-on products to our industry-leading X family of projectors.

As of the date of this report, our current expectation is that revenues for the second quarter of 2006 will be down from first quarter 2006 revenues of $112 million due to later than expected volume shipments of our new commercial products and weaker than planned sales of our new entry level consumer product, the IN72, especially through the retail channel in both the U.S. and Europe. Lower than anticipated revenues will also subdue gross margin improvement for the second quarter of 2006 as fixed costs become a higher percentage of total cost of revenues. In addition, the total cost to complete our audit committee investigations was approximately $2 million with approximately half of this total being incurred during the second quarter of 2006. As a result of all of the above, we do not expect to achieve operating profitability in our core business for the second quarter of 2006.

Results of Operations 

 

 

Three Months Ended March 31,(1)

 

Three Months Ended

 

 

 

2006

 

2005

 

December 31, 2005(1)

 

(Dollars in thousands)

 

Dollars

 

% of
revenues

 

Dollars

 

% of
revenues

 

Dollars

 

% of
revenues

 

Revenues

 

$

112,019

 

100.0

%

$

137,016

 

100.0

%

$

128,930

 

100.0

%

Cost of revenues

 

95,276

 

85.1

 

127,067

 

92.7

 

113,446

 

88.0

 

Gross margin

 

16,743

 

14.9

 

9,949

 

7.3

 

15,484

 

12.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing and sales

 

14,565

 

13.0

 

16,937

 

12.4

 

14,529

 

11.3

 

Research and development

 

4,832

 

4.3

 

6,131

 

4.5

 

4,568

 

3.5

 

General and administrative

 

5,493

 

4.9

 

5,711

 

4.2

 

5,572

 

4.3

 

Restructuring costs

 

1,075

 

1.0

 

4,700

 

3.4

 

(950

)

(0.7

)

 

 

25,965

 

23.2

 

33,479

 

24.4

 

23,719

 

18.4

 

Loss from operations

 

(9,222

)

(8.2

)

(23,530

)

(17.2

)

(8,235

)

(6.4

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(107

)

(0.1

)

(146

)

(0.1

)

(187

)

(0.1

)

Interest income

 

516

 

0.5

 

267

 

0.2

 

493

 

0.4

 

Other, net

 

(7,412

)

(6.6

)

9,698

 

7.1

 

(741

)

(0.6

)

Loss before income taxes

 

(16,225

)

(14.5

)

(13,711

)

(10.0

)

(8,670

)

(6.7

)

Provision (benefit) for income taxes

 

132

 

0.1

 

268

 

0.2

 

(755

)

(0.6

)

Net loss

 

$

(16,357

)

(14.6

)%

$

(13,979

)

(10.2

)%

$

(7,915

)

(6.1

)%


(1)             Percentages may not add due to rounding.

Revenues

Revenues decreased $25.0 million, or 18%, in the three months ended March 31, 2006 compared to the three months ended March 31, 2005.

The decrease in revenue as compared to the first quarter of 2005 was due to the following:

·                                        a $6.0 million decrease in engine and display revenues in the first quarter of 2006 compared to the first quarter of 2005 as we completely exited those markets during 2005 and transitioned such business to our 50/50 joint venture, South Mountain Technologies (“SMT”);

·                                        a 55% decrease in OEM sales in the first quarter of 2006 compared to the first quarter of 2005 as we continue to deemphasize our OEM business;

·                                        an 8,000 unit decrease in total units sold to 94,000 units in the first quarter of 2006 compared to 102,000 units in the first quarter of 2005; and

·                                        a 13% decrease in average projector selling prices (“ASPs”), due to both lower overall pricing and a shift in mix.

 

14




 

We also experienced a $16.9 million decrease in revenue in the first quarter of 2006 compared to the fourth quarter of 2005 primarily due to a 2,000 unit decrease in total projector units sold combined with a 7% decrease in ASPs, which was primarily driven by a shift in mix.

Geographic Revenues

Revenue by geographic area and as a percentage of total revenue was as follows (dollars in thousands):

 

 

Three Months Ended March 31,

 

Three Months Ended

 

 

 

2006

 

2005

 

December 31, 2005

 

United States

 

$

63,688

 

56.8

%

$

77,056

 

56.2

%

$

77,761

 

60.3

%

Europe

 

26,389

 

23.6

%

40,409

 

29.5

%

28,642

 

22.2

%

Asia

 

9,367

 

8.4

%

12,433

 

9.1

%

9,256

 

7.2

%

Other

 

12,575

 

11.2

%

7,118

 

5.2

%

13,271

 

10.3

%

 

 

$

112,019

 

 

 

$

137,016

 

 

 

$

128,930

 

 

 

 

United States revenues in the first quarter of 2006 were down 17% compared to the first quarter of 2005. This decrease was primarily due to the lack of engine and display revenues in first quarter of 2006, as well as the decrease in units and ASPs, as discussed above.

European revenues in the first quarter of 2006 were down 35% from revenues in the first quarter of 2005. This decrease was primarily due to our transition away from our OEM projector business, as well as the decrease in units and ASPs, as discussed above.

Asian revenues in the first quarter of 2006 were down 25% from revenues in the first quarter of 2005. This decrease was primarily due to a decrease in units and ASPs.

Backlog

At March 31, 2006, we had backlog of approximately $16.3 million, compared to approximately $17.6 million at December 31, 2005. Given current supply and demand estimates, it is anticipated that a majority of the current backlog will turn over by the end of the second quarter of 2006. 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 Margin

We achieved gross margins of 14.9% in the first quarter of 2006, compared to 7.3% in the first quarter of 2005 and 12.0% in the fourth quarter of 2005.

The improvements in gross margins were due to the following:

·              efficiencies achieved within our supply chain, including the reduction of inventory in order to better match the timing of revenues with costs;

·              fixed overhead costs for activities such as logistics centers, tooling amortization and inventory planning and procurement were a lower percentage of revenues as a result of efficiencies gained in the last three quarters;

·              a $1.6 million charge for inventory write-downs during the first quarter of 2006 compared to a charge of $3.6 million in the first quarter of 2005 and a charge of $1.9 million in the fourth quarter of 2005; and

·              reductions in our overall cost to serve customers, including reductions in customer program costs.

We anticipate achieving gross margins in our targeted range of between 16% and 18% in the second quarter of 2006, primarily as a result of additional operational efficiencies expected to be achieved, as well as the introduction and shipment of new products which carry higher gross margins than the products they are replacing. Where gross margins end up in any particular quarter depends primarily on revenue levels, product mix, the competitive pricing environment, the level of warranty costs and inventory write-downs during the particular quarter and the level of royalty revenue.

 

15




 

Marketing and Sales Expense

Marketing and sales expense decreased $2.3 million, or 14%, to $14.6 million in the first quarter of 2006 compared to $16.9 million in the first quarter of 2005. The decrease in marketing and sales expense was primarily due to efficiencies gained related to our previous restructuring activities, as well as decreases in certain marketing programs, such as cooperative advertising, which directly correlate with trends in revenue. These decreases were partially offset by advertising expenses incurred in the first quarter of 2006 related to the launch of several new products and a new branding campaign.

Ongoing cost reduction initiatives contributed to the reductions in overall marketing and sales expense in the first quarter of 2006 compared to the first quarter of 2005. One of the major components of our ongoing cost reduction initiatives is to reduce our cost to serve customers. Accordingly, we have implemented, or are implementing, the following actions:

·              focusing our sales and marketing activities on selected geographies in our international regions, enabling us to reduce our sales and marketing investment in these regions while improving focus in an attempt to grow our largest and most profitable revenue streams. In Europe, our focus will be the European Union, with priority given to larger markets such as the United Kingdom, France, Germany and the Nordics. In Asia, our focus will be larger markets such as Singapore, Australia, India and China;

·              in the Americas, we are concentrating our sales and marketing efforts on our most profitable channels and maximizing efficiencies in the highest growth channels. We anticipate continued focus on growing the retail sector, PC distribution and our direct fulfilled business; and

·              we consolidated our worldwide marketing efforts under our Chief Marketing Officer. This worldwide consolidation resulted in synergies among previously dispersed marketing resources. We plan to reinvest a portion of these savings to create highly targeted demand generation in our key channels and to strengthen the range and reach of the InFocus brand.

 

Research and Development Expense

Research and development expense decreased $1.3 million, or 21%, to $4.8 million in the first quarter of 2006 compared to $6.1 million in the first quarter of 2005. This decrease was primarily due to efficiencies gained related to our previous restructuring activities.

General and Administrative Expense

General and administrative expense decreased $0.2 million, or 4%, to $5.5 million in the first quarter of 2006 compared to $5.7 million in the first quarter of 2005. This decrease was primarily due to efficiencies gained related to our previous restructuring activities, partially offset by increased legal costs of $0.6 million associated with the investigations conducted by our Audit Committee.

Restructuring

In the first quarter of 2006, we incurred restructuring charges totaling $1.1 million primarily related to international facility consolidation activities that were completed during the quarter.

Restructuring charges of $4.7 million in the first quarter of 2005 were primarily related to our December 14, 2004 plan of restructuring associated with streamlining our operations in Fredrikstad, Norway. The restructuring charge of $4.7 million consisted of costs to vacate space under long-term lease arrangements, additional severance charges in the U.S. and Europe, other associated costs and a non-cash stock based compensation charge related to employees that were transferred to SMT as part of the Norway restructuring.

At March 31, 2006, we had $3.7 million of restructuring costs accrued on our consolidated balance sheet classified as other current liabilities. See further detail in Note 8 of Notes to Consolidated Financial Statements.

 

16




 

Other Income (Expense)

Interest income increased $0.2 million to $0.5 million in the first quarter of 2006 compared to $0.3 million in the first quarter of 2005 primarily due to increased interest rates during the first quarter of 2006 compared to the first quarter of 2005.

Other income (expense), net consisted of the following:

Three Months Ended March 31,

 

2006

 

2005

 

Realized gain on the sale of equity securities

 

$

809

 

$

9,218

 

Income related to the profits of Motif, 50-50 joint venture

 

1,125

 

1,132

 

Expense related to losses of SMT, 50-50 joint venture

 

(1,562

)

(473

)

Losses related to foreign currency transactions

 

(348

)

(168

)

Write-down of cost-based investments in technology companies

 

(7,474

)

 

Other

 

38

 

(11

)

 

 

$

(7,412

)

$

9,698

 

 

See Note 9. Write-Down of Cost Method Investments for further discussion of the $7.5 million other expense in the first quarter of 2006.

Income Taxes

Income tax expense was $132,000 and $268,000 in the first quarter of 2006 and 2005, respectively, and primarily related to income tax expense in certain foreign tax jurisdictions.

Liquidity and Capital Resources

Total cash, cash equivalents, marketable securities and restricted cash, cash equivalents and marketable securities were $78.2 million at March 31, 2006. At March 31, 2006, we had working capital of $132.1 million, which included $52.1 million of unrestricted cash and cash equivalents and $14.4 million of assets held as a deposit by Chinese officials pending resolution of the ongoing customs investigation in China. The current ratio at March 31, 2006 and December 31, 2005 was 2.4 to 1 and 2.3 to 1, respectively.

We sustained an operating loss of $9.2 million in the first quarter of 2006, contributing to a decrease in net working capital of $8.3 million for the quarter. If we continue to experience significant operating losses and reductions in net working capital, we may need to obtain additional debt or equity financing to continue current business operations. There is no guarantee that we will be able to raise additional funds on favorable terms, if at all.

We have a $25 million line of credit facility with Wells Fargo Foothill, Inc. (“Wells Fargo”) to finance future working capital requirements. The line of credit expires in October 2006. Pursuant to the terms of the credit agreement, we may borrow against the line subject to a borrowing base determined on eligible accounts receivable. The line of credit requires us to achieve a minimum level of earnings before interest, taxes, depreciation and amortization as defined in the agreement. At March 31, 2006, we were in compliance with the financial covenants and no amounts were outstanding under the line of credit.

We anticipate that our current cash and marketable securities, along with cash we anticipate generating from operations and our ability to borrow against our line of credit, will be sufficient to fund our known operating and capital requirements for at least the next 12 months. However, to the extent our operating results fall below our expectations, we may need to raise additional capital through debt or equity financings. We may also need additional capital if we pursue acquisitions or other strategic growth opportunities. There is no guarantee that we will be able to raise additional funds on favorable terms, if at all.

At March 31, 2006 we had one outstanding letter of credit totaling $20 million, which expired on May 2, 2006 and was subsequently renewed with a new expiration date of August 2, 2006. 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 $23.6 million of cash and marketable securities that is reported as restricted on the consolidated balance sheets.

 

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The remainder of the restricted cash, totaling $2.3 million, primarily relates to building deposits and value added tax deposits with foreign jurisdictions.

Accounts receivable decreased $1.7 million to $69.2 million at March 31, 2006 compared to $70.9 million at December 31, 2005. The decrease in the accounts receivable balance was primarily due to lower sales in the first quarter of 2006 compared to the fourth quarter of 2005. Offsetting the reduction in accounts receivable due to lower sales was an increase in days sales outstanding to 56 days at March 31, 2006 compared to 49 days at December 31, 2005. The increase in days sales outstanding was primarily due to revenues being less linear during the first quarter of 2006 compared to the fourth quarter of 2005.

Total inventories, including consigned inventories, decreased $16.6 million to $49.9 million at March 31, 2006 compared to $66.5 million at December 31, 2005. See Note 2 of Notes to Consolidated Financial Statements for a summary of the components of inventory as of these dates. During the first quarter of 2006, we continued to work closely with our contract manufacturers to modify and reduce incoming product and better align incoming product levels with expected sales needs in order to allow us to reduce finished goods inventory.

At March 31, 2006, we had approximately three weeks of inventory in the Americas channel compared to approximately five weeks at December 31, 2005. Annualized inventory turns were approximately 7 times for the quarter ended March 31, 2006 compared to approximately 4 times for the quarter ended March 31, 2005 and 6 times for the quarter ended December 31, 2005. Velocity in our supply chain allows us to better match current costs against current sales prices, maximizing our gross margin opportunity, reducing our total investment in working capital and reducing exposure to excess and obsolete inventory.

Land held for sale of $4.5 million as of March 31, 2006 and December 31, 2005 related to two plots of undeveloped land adjacent to our headquarters building in Wilsonville, Oregon. On June 5, 2006, we sold the land, receiving net proceeds of $5.1 million and recognizing a gain on the sale of approximately $0.6 million in the second quarter of 2006.

Other current assets at March 31, 2006 and December 31, 2005 included a $14.4 million deposit made to Chinese customs officials in connection with their investigation of our import duties.

Expenditures for property and equipment, totaling $2.0 million in the first quarter of 2006, were primarily for purchases of tooling, software upgrades, tradeshow equipment and office equipment. Total expenditures for property and equipment are expected to be between $5.0 million and $7.0 million in 2006.

Other assets decreased $8.4 million to $6.5 million at March 31, 2006 compared to $14.9 million at December 31, 2005. The decrease primarily related to a $7.5 million charge for the write-down of two of our cost-based investments, Reflectivity and VST International, both technology start-up companies. Both companies are in the process of raising additional capital to fund future activities at significantly reduced valuations. It is not likely that we will participate in these future funding activities, which will lead to a significant dilution in our ownership interests, thus impairing our current investment.

Accounts payable decreased $5.3 million to $64.7 million at March 31, 2006 compared to $70.0 million at December 31, 2005, primarily due to reductions in outstanding accounts payable related to lower purchases of inventory. Related party accounts payable at March 31, 2006 were $1.6 million compared to $4.7 million at December 31, 2005 and represent outstanding payables to SMT for the purchase of projectors.

Other current liabilities decreased $2.5 million to $8.7 million at March 31, 2006 compared to $11.2 million at December 31, 2005, primarily due to a $1.3 million decrease in our accruals related to payments made for our restructuring activities, a $0.3 million reduction in value added tax payable related to our European entities. Included in other current liabilities at March 31, 2006 and December 31, 2005 was $3.7 million and $5.0 million, respectively, related to restructuring.

 

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Seasonality

Given the buying patterns of various geographies and market segments, our revenues are subject to certain elements of seasonality during various portions of the year. Historically, between 20% and 30% of our revenues have come from Europe and, as such, we typically experience a seasonal downturn due to the vacation season in mid-summer, which results in decreased revenues from that region in the third quarter compared to the second quarter. Conversely, we typically experience a strong resurgence of revenue from Europe in the fourth quarter. This, coupled with a strong business and retail holiday buying season in the fourth quarter by larger wholesale distribution partners and retailers, typically leads to our strongest revenues being in the fourth quarter of each year. In addition, we sell our products into the education and government markets that typically see seasonal peaks in the United States in the third quarter of each year. The first quarter of each year is typically down from the immediately preceding fourth quarter due to corporate buying trends and typical aggressive competition from our Asian competitors with March 31 fiscal year ends.

Critical Accounting Policies and Estimates

Except for the addition of the Stock-Based Compensation information below, we reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2005, which was filed with the Securities and Exchange Commission on June 26, 2006.

Stock-Based Compensation

On January 1, 2006, we adopted SFAS No. 123R which requires the measurement and recognition of compensation expense for all share based payment awards granted to our employees and directors, including employee stock options and non-vested stock based on the estimated fair value of the award on the grant date. Upon the adoption of SFAS No. 123R, we maintained our method of valuation for stock option awards using the Black-Scholes valuation model, which has historically been used for the purpose of providing pro-forma financial disclosures in accordance with SFAS No. 123.

The use of the Black-Scholes valuation model to estimate the fair value of stock option awards requires us to make judgments on assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of expense could be materially different in the future.

Compensation expense is only recognized on awards that ultimately vest. Therefore, we have reduced the compensation expense to be recognized over the vesting period for anticipated future forfeitures. Forfeiture estimates are based on historical forfeiture patterns. We update our forfeiture estimates quarterly and recognize any changes to accumulated compensation expense in the period of change. If actual forfeitures differ significantly from our estimates, our results of operations could be materially impacted.

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 2005 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on June 26, 2006.

Item 4. Controls and Procedures

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 control over financial reporting.

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

 

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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.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we become involved in ordinary, routine or regulatory legal proceedings incidental to the business. When a loss is deemed probable and reasonably estimable an amount is recorded in our financial statements. While the ultimate results of these matters cannot presently be determined, management does not expect that they will have a material adverse effect on our results of operations or financial position. Therefore, no adjustments have been made to the accompanying financial statements relative to these matters.

China Customs Investigation

During the second quarter of 2003, our Chinese subsidiary became the subject of an investigation by Chinese authorities. In mid-May 2003, Chinese officials took actions that effectively shut down our Chinese subsidiary’s importation and sales operations. The Chinese authorities are questioning the classification of our products upon importation into China. When we established operations in China in late 2000, our Chinese subsidiary imported data projectors. The distinction between a data projector and a video projector is important because the duty rates on a video projector are much higher than on a data projector. If the video projector duty rate were to be applied to all the projectors imported by our Chinese subsidiary, the potential additional duty that could be assessed against our Chinese subsidiary is approximately $12 million.

We continue to work closely with the Chinese customs officials to resolve this matter. During the second quarter of 2004, we received formal notification that our case is 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 begin selling previously impounded inventory and transferring agreed upon amounts per unit directly into a Shanghai Customs controlled bank account representing an additional deposit pending final resolution of the case. As of March 31, 2006, all inventory previously impounded has been released by Shanghai Customs. We have made deposits with Shanghai Customs for the release of inventory totaling $14.4 million as of March 31, 2006. This deposit is recorded in other current assets on our consolidated balance sheets.

The release of any or all of the cash deposit 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.

U.S. Export Infractions Self-Disclosure

In July 2005, we self-disclosed possible infractions of U.S. export law to the Office of Foreign Assets Control (“OFAC”) related to shipments into restricted countries by one of our foreign subsidiaries. Our Audit Committee commenced an investigation and engaged independent counsel to assist with this process. The results of the independent investigation were submitted to OFAC and the Bureau of Industry and Security (“BIS”) in March 2006 for their review. Upon completion of the investigation, it was apparent that the severity of the situation was significantly less that initially thought. In June 2006, OFAC notified us that it was closing the matter by issuing a cautionary letter in lieu of any further enforcement action. BIS is currently in the process of conducting their review of our findings. We originally accrued an estimated

 

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charge of $1.6 million for potential regulatory assessments during the second quarter of 2005 and will make adjustments as needed upon completion of the BIS review and final resolution of this matter.

Item 1A. Risk Factors

A restated description of the risk factors associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2005.

Because of the following factors, as well as other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

We will need to raise additional financing if our financial results do not improve.

We sustained an operating loss of $98.2 million during 2005 and $9.2 million in the first quarter of 2006, contributing to a decrease in net working capital of $99.8 million and $8.3 million during the respective time periods. If we continue to experience significant operating losses and reductions in net working capital, we may need to obtain additional debt or equity financing to continue current business operations. There is no guarantee that we will be able to raise additional funds on favorable terms, if at all.

Our restructuring plan may not be successful.

In September 2005, we announced a comprehensive restructuring plan with the goal of simplifying the business and returning the company to profitability. As part of the restructuring, we implemented actions to reduce our cost to serve customers, improve our supply chain efficiency to reduce our product costs, and reduce our operating expenses. Our goal as a result of these actions is to improve gross margins to 16% to 18% and reduce our operating expenses to a level that will allow us to achieve breakeven or better results in our most seasonally challenged quarters. We face a number of challenges related to our restructuring plan including uncertainties associated with the impact on revenues and gross margins of our plans to focus efforts on certain geographies and sales channels and our ability to execute the transitions planned in the desired time frames based on the scale of the actions planned. As a result of these risks and others, there is no guarantee that our restructuring plan will achieve our stated goals.

Through the date of this report, our restructuring plan has not been as successful as expected, primarily a result of lower than anticipated revenues. We must continue to focus on increasing revenues, increasing gross margins and further reducing operating expenses to return the company to profitability.

If our contract manufacturers experience any delay, disruption or quality control problems in their operations, we could lose market share and revenues, and our reputation may be harmed.

We have outsourced the manufacturing of our products to third party manufacturers. We rely on our contract manufacturers to procure components, provide spare parts in support of our warranty and customer service obligations, and in some cases, subcontract engineering work. We generally commit the manufacturing of each product platform to a single contract manufacturer. Our reliance on contract manufacturers exposes us to the following risks over which we have limited control:

·     Unexpected increases in manufacturing and repair costs;

·     Interruptions in shipments if our contract manufacturer is unable to complete production;

·     Inability to completely control the quality of finished products;

·     Inability to completely control delivery schedules;

·     Unpredictability of manufacturing yields;

·     Potential lack of adequate capacity to manufacture all or a part of the products we require; and

·     Reduced control over the availability of our products.

Our contract manufacturers are primarily located in Asia and may be subject to disruption by earthquakes, typhoons and other natural disasters, as well as political, social or economic instability. The temporary or

 

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permanent loss of the services of any of our primary contract manufacturers could cause a significant disruption in our product supply chain and operations and delays in product shipments. In addition, we do not have long-term contracts with any of our third-party contract manufacturers and these contracts are terminable by either party on relatively short notice. Lastly, both South Mountain Technologies (“SMT”) and Foxconn are new contract manufacturers for us, beginning production during the second half of 2005, heightening the level of potential risk related to the items mentioned above. We are working closely with these two new contract manufacturers to monitor and mitigate risks, but we can’t guarantee that either or both of these new contract manufacturers will not experience difficulties as they increase volume production.

Our competitors may have greater resources and technology, and we may be unable to compete with them effectively.

The markets for our products are highly competitive and we expect aggressive price competition in our industry, especially from Asian manufacturers, 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 consumer products also face competition from alternate technologies such as plasma and LCD televisions. 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, our channel sales models and our operating expenses in order to offset declining selling prices for our products, while at the same time drive our products into new markets. There is no assurance we will be able to compete successfully with respect to these factors.

If we are unable to manage the cost of older products or successfully introduce new products with higher gross margins, our revenues may decrease or our gross margins may decline.

The market in which we compete is subject to technological advances with continual new product releases and aggressive price competition. As a result, the price at which we can sell our products typically declines over the life of the product. The price at which a product is sold is generally referred to as the average selling price. In order to sell products that have a declining average selling price and still maintain our gross margins, we need to continually reduce our product costs. To manage product-sourcing costs, we must collaborate with our contract manufacturers to engineer the most cost-effective design for our products. In addition, we must carefully monitor the price paid by our contract manufacturers for the significant components used in our products. We must also successfully manage our freight and inventory holding costs to reduce overall product costs. We also need to continually introduce new products with improved features and increased performance at lower costs in order to maintain our overall gross margins. Our inability to successfully manage these factors could reduce revenues or result in declining gross margins.

Our revenues and profitability can fluctuate from period to period and are often difficult to predict for particular periods due to factors beyond our control.

Our results of operations for any quarter or year are not necessarily indicative of results to be expected in future periods. Our operating results have historically been, and are expected to continue to be, subject to quarterly and yearly fluctuations as a result of a number of factors, including:

·              The introduction and market acceptance of new technologies, products and services;

·              Variations in product selling prices and costs and the mix of products sold;

·              The size and timing of customer orders, which, in turn, often depend upon the success of our customers’ business or specific products or services;

·              Changes in the conditions in the markets for projectors and alternative technologies;

·              The size and timing of capital expenditures by our customers;

·              Conditions in the broader markets for information technology and communications equipment;

·              The timing and availability of products coming from our offshore contract manufacturing partners;

·              Changes in the supply of components;

 

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·                  The impact of acquired businesses and technologies; and

·                  Seasonality of markets such as education, government and consumer retail, which vary quarter to quarter and are influenced by outside factors such as overall consumer confidence, budgets and political party changes.

These trends and factors could harm our business, operating results and financial condition in any particular period.

Our operating expenses and portions of our costs of revenues are relatively fixed and we may have limited ability to reduce expenses quickly in response to any revenue shortfalls.

Our operating expenses, warranty costs, inbound freight and inventory handling costs are relatively fixed. Because we typically recognize a significant portion of our revenues in the last month of each quarter, we may not be able to adjust our operating expenses or other costs sufficiently enough to adequately respond to any revenue shortfalls. If we are unable to reduce operating expenses or other costs quickly in response to any revenue shortfall, it could negatively impact our financial results.

If we do not effectively manage our sales channel inventory and product mix, we may incur costs associated with excess inventory or experience declining gross margins.

If we are unable to properly monitor, control and manage our sales channel inventory and maintain an appropriate level and mix of products with our customers within our sales channels, we may incur increased and unexpected costs associated with this inventory. We generally allow distributors, dealers and retailers to return a limited amount of our products in exchange for other new products. In addition, under our price protection policy, subject to certain conditions which vary around the globe, if we reduce the list price of a product, we may issue a credit in an amount equal to the price reduction for each of the products held in inventory by our distributors, dealers and retailers. If these customers are unable to sell their inventory in a timely manner, under our policy, we may lower the price of the products or these products may be exchanged for newer products. If these events occur, we could incur increased expenses associated with rotating and reselling product, or inventory reserves associated with writing down returned inventory, or suffer declining gross margins.

If we cannot continually develop new and innovative products and integrate them into our business, we may be unable to compete effectively in the marketplace.

Our 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 digital projector and display markets. Demand for our products and the profitability of our operations may be adversely affected if we fail to effectively manage product transitions.

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.

If we are unable to provide our third-party contract manufacturers with an accurate forecast of our product requirements, we may experience delays in the manufacturing of our products and the costs of our products may increase.

We provide our third-party contract manufacturers with a rolling forecast of demand which they use to determine their material and component requirements. Lead times for ordering materials and components vary significantly and depend on various factors, such as the specific supplier, contract terms and supply and demand for a component at a given time. Some of our components have long lead times measuring as much as 4 to 6 months from the point of order.

If our forecasts are less than our actual requirements, our contract manufacturers may be unable to manufacture sufficient products to meet actual demand in a timely manner. If our forecasts are too high, our contract manufacturers may be unable to use the components they have purchased. The cost of the components used in our products tends to decline as the product platform and technologies mature.

 

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Therefore, if our contract manufacturers are unable to promptly use components purchased on our behalf, our cost of producing products may be higher than our competitors due to an over-supply of higher-priced components. Moreover, if they are unable to use certain components, we may be required to reimburse them for any potential inventory exposure they incur within lead time.

Our failure to anticipate changes in the supply of product components or customer demand may result in excess or obsolete inventory that could adversely affect our gross margins.

Substantially all of our products are made for immediate delivery on the basis of purchase orders rather than long-term agreements. As a result, contract manufacturing activities are scheduled according to a monthly sales and production forecast rather than on the receipt of product orders or purchase commitments. From time to time in the past, we have experienced significant variations between actual orders and our forecasts.

If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing prices of product components, rapidly changing technology and customer requirements or an increase in the supply of products in the marketplace, we could be required to write-down our inventory and our gross margins could be adversely affected.

Our contract manufacturers may be unable to obtain critical components from suppliers, which could disrupt or delay our ability to procure our products.

We rely on a limited number of third party manufacturers for the product components used by our contract manufacturers. 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. Manufacturing efficiencies and our profitability can be adversely affected by each of these risks.

Certain components used in our products are now available only from single sources. Most importantly, the Digital Light Processing® (DLP®) devices only available from Texas Instruments. We have recently announced that we will focus all future development on DLP® technology, which will make the continued availability of DLP® devices increasingly important.

Our contract manufacturers 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. We have worked to improve the availability of lamps and other key components to meet our future needs, 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.

Product defects resulting in a large-scale product recall or successful product liability claims against us could result in significant costs or negatively impact our reputation and could adversely affect our business results and financial condition.

As with any high tech manufacturing company, we are sometimes exposed to warranty and potential product liability claims in the normal course of business. There can be no assurance that we will not experience material product liability losses arising from such potential claims in the future and that these will not have a negative impact on our reputation and, consequently, our revenues. We generally maintain insurance against most product liability risks and record warranty provisions based on historical defect rates, but there can be no assurance that this coverage and these warranty provisions will be adequate for any potential liability ultimately incurred. In addition, there is no assurance that insurance will continue to be available on terms acceptable to us. A successful claim that exceeds our available insurance coverage

 

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or a significant product recall could have a material adverse impact on our financial condition and results of operations.

During the first quarter of 2006, we announced a voluntary limited product recall in conjunction with the U.S. Consumer Product Safety Commission related to our LP120 projector and related lamp modules. In this specific instance, the number of products impacted was minimal and to date there have been no injuries reported as a result of the product defect. We did however incur costs associated with the product recall and offered free repair of products for impacted customers.

SMT, our joint venture with TCL Corporation, faces a number of uncertainties and may ultimately be unsuccessful in implementing its business plan.

SMT faces a number of hurdles in executing its business plan, including:

·     developing an effective research and development capability;

·     maintaining a low cost supply chain;

·     implementing a low cost, high quality manufacturing capability;

·     developing new products;

·     securing bank or other sources of financing to fund business growth; and

·     securing OEM customers.

 

We are currently working with SMT management and TCL to identify alternatives for funding the expected continued start-up losses and future working capital requirements for SMT. Some of these funding solutions may involve a dilution of our ownership interest in SMT including reductions in our presence on the SMT Board of Directors, reductions in recognition of our share of future operating income and losses of SMT and potential impairment of the remaining balance of our investment in SMT. There is no guarantee that we will be successful in securing additional funding for SMT from these efforts which may require us to make additional cash contributions and continue to incur losses associated with our investment in SMT. In the interim, SMT has reduced headcount in order to lower its expense run rates until a longer term financing source is secured. To the extent SMT headcount reductions involve former InFocus employees, we are contractually responsible for severance costs for their past service with InFocus. As a result, we will record a restructuring charge during the second quarter of 2006 related to this activity and could incur restructuring charges in future periods if further headcount reductions are expected.

If SMT is unable to fully execute its business plan as a result of delays in introducing new products, securing OEM customers, or for other reasons, we may not experience the expected benefits of the joint venture. Furthermore, SMT’s shortfalls may result in greater than expected operating losses, resulting in larger than expected charges to other expense for our portion of the joint venture’s start up losses. If this were to occur, we may need to make additional debt or equity investments in SMT, which, in turn, would reduce our available cash for other strategic opportunities or require us to borrow additional funds or raise additional capital. There is no guarantee that we will be able to raise additional funds on favorable terms, if at all.

Our strategic investment and partnership strategy poses risks and uncertainties typical of such arrangements.

Our strategy depends in part on our ability to identify suitable strategic investments or prospective partners, finance these transactions, and obtain the required regulatory and other approvals. As a result of these transactions, we may face an increase in our debt and interest expense. Also, the failure to obtain such regulatory and other approvals may harm our results or prospects.

In addition, some of our activities are, and will be, conducted through affiliated entities that we do not entirely control or in which we have a minority interest. For example, in December 2004, we agreed to contribute to SMT, among other things, cash and a non-exclusive license to much of our proprietary technology in exchange for a 50% interest in the joint venture. The governing documents for partnerships and joint ventures, including SMT, generally require that certain key matters require the agreement of both

 

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partners and the approval of the Chinese government. However, in some cases, decisions regarding these matters may be made without our approval.

There is also a risk of disagreement or deadlock among the stakeholders of jointly controlled entities and decisions contrary to our interests may be made. These factors could affect our ability to pursue our stated strategies with respect to those entities or have a material adverse effect on our results or financial condition. We are currently working with SMT management and TCL to identify alternatives for funding the expected continued start-up losses and future working capital requirements for SMT including bank financing, another strategic partner, and venture capital financing. Some of these financing solutions may require a dilution of our ownership interest in SMT including reductions in our presence on the SMT Board of Directors. There is no guarantee that we will be successful in securing additional funding for SMT from these efforts which may require us to make additional cash contributions.

The importation investigation of our Chinese subsidiary may not be resolved favorably and may result in a charge to our statement of operations.

During the second quarter of 2003, our Chinese subsidiary became the subject of an investigation by Chinese authorities. The Chinese authorities are questioning the classification of our products upon importation into China. When we established operations in China in late 2000, our Chinese subsidiary imported data projectors. The distinction between a data projector and a video projector is important because the duty rates on a video projector have been much higher than on a data projector. If the video projector duty rate were to be retroactively applied to all the projectors imported by our Chinese subsidiary, the potential additional duty that could be assessed against our Chinese subsidiary is approximately $12 million.

During the second quarter of 2004, we were allowed to begin selling previously impounded inventory and transferring agreed upon amounts per unit directly into a Shanghai Customs controlled bank account representing an additional deposit pending final resolution of the case. As of March 31, 2006, approximately $14.4 million is being held in that account. The release of any or all of the cash deposit is dependent on final case resolution. The amount of any potential duties or penalties imposed upon us at resolution of this case would result in a charge to our statement of operations and could have a significant impact on our financial results.

Customs or other issues involving product delivery from our contract manufacturers could prevent us from timely delivering our products to our customers.

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, increased freight volumes and work stoppages at west coast ports have, in the past, and may, in the future, cause delay in freight traffic. Each 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 of in-transit (unavailable for sale) inventory, or an increase in administrative and shipping costs.

A deterioration in general global economic condition could adversely affect demand for our products.

Our business is subject to the overall health of the global economy. Purchase decisions for our products are made by corporations, governments, educational institutions, and consumers based on their overall available budget for information technology products. Any number of factors impacting the global economy including geopolitical issues, balance of trade concerns, inflation, interest rates, currency fluctuations and consumer confidence can impact the overall spending climate, both positively and negatively, in one or more geographies for our products. Deterioration in any one or combination of these factors could change overall industry dynamics and demand for discretionary products like ours and negatively impact our results of operations. During 2005, for example, we experienced a slowdown in the European economy that affected demand for our products resulting in a downturn of our financial results for that region.

 

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We are subject to risks associated with exporting products outside the United States.

To the extent we export products outside the United States, we are subject to United States laws and regulations governing international trade and exports, including, but not limited to, the International Traffic in Arms Regulations, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury. A determination that we have failed to comply with one or more of these export controls could result in civil and/or criminal sanctions, including the imposition of fines upon us, the denial of export privileges, and debarment from participation in United States government contracts. Any one or more of such sanctions could have a material adverse effect on our business, financial condition and results of operations.

We are exposed to risks associated with our international operations.

Revenues outside the United States accounted for approximately 43% of our revenues in the first quarter of 2006, 37% of our revenues in 2005 and 43% of our revenues in 2004. The success and profitability of our international operations are subject to numerous risks and uncertainties, including:

·                      local economic and labor conditions;

·                      political instability;

·                      terrorist acts;

·                      unexpected changes in the regulatory environment;

·                      trade protection measures;

·                      tax laws; and

·                      foreign currency exchange rates.

 

Currency exchange rate fluctuations may lead to decreases in our financial results.

To the extent that we incur costs in one currency and make our sales in another, our gross margins may be affected by changes in the exchange rates between the two currencies. Although our general policy is to hedge against these currency transaction risks on a monthly basis, given the volatility of currency exchange rates, we cannot provide assurance that we will be able to effectively manage these risks. Volatility in currency exchange rates may generate foreign exchange losses, which could have an adverse effect on our financial condition or results of operations.

In addition, we have moved much of our manufacturing and supply chain activities to emerging markets, particularly China, to take advantage of their lower cost structures. In July 2005, China announced a change to their monetary policy allowing the Yuan to begin to appreciate vis a vis the U.S. dollar. We view change in monetary policy in China as a net positive for our business as a controlled appreciation in the Yuan will allow for continued strong economic growth in China while alleviating foreign political pressures and reducing the risk of trade restrictions against Chinese exporters. In addition, since a number of the major components used in our products are imported by our Chinese manufacturers, a stronger Yuan will reduce the cost of our products manufactured there. We also expect other Asian currencies to strengthen relative to the dollar, making their exports into the U.S., our largest market, more expensive, primarily for our polysilicon based competitors. While we view the changes positively at the moment, any number of factors may emerge which may reduce or reverse these benefits and adversely affect our operating results.

Our reliance on third party logistics providers may result in customer dissatisfaction or increased costs.

We have outsourced all of our logistics and service repair functions worldwide. We are reliant on our third party providers to effectively and accurately manage our inventory, service repair, and logistics functions. This reliance includes timely and accurate shipment of our products to our customers and quality service repair work. Reliance on third parties requires proper training of employees, creating and maintaining proper controls and procedures surrounding both forward and reverse logistics functions, and timely and accurate inventory reporting. In addition, reliance on third parties requires adherence to product specifications in order to ensure quality and reliability of our products. Failure of our third parties to deliver in any one of these areas could have an adverse effect on our results of operations.

 

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We may be unsuccessful in protecting our intellectual property rights.

Our ability to compete effectively against other companies in our industry depends, in part, on our ability to protect our current and future proprietary technology under patent, copyright, trademark, trade secret and other intellectual property laws. We utilize contract manufacturers in China and Taiwan, and anticipate doing increased business in these markets and elsewhere around the world including other emerging markets. These emerging markets may not have the same protections for intellectual property that are available in the U.S. We cannot assure you that our means of protecting our intellectual property rights in the U.S. or abroad will be adequate, or that others will not develop technologies similar or superior to our trade secrets or design around our patents. In addition, management may be distracted by, and we may incur substantial costs in, attempting to protect our intellectual property.

Also, despite the steps taken by us to protect our intellectual property rights, it may be possible for unauthorized third parties to copy or reverse-engineer trade secret aspects of our products, develop similar technology independently or otherwise obtain and use information that we regard as our trade secrets, and we may be unable to successfully identify or prosecute unauthorized uses of our intellectual property rights. Further, with respect to our issued patents and patent applications, we cannot provide assurance that pending patent applications (or any future patent applications) will be issued, that the scope of any patent protection will exclude competitors or provide competitive advantages to us, that any of our patents will be held valid if subsequently challenged, or that others will not claim rights in or ownership of the patents (and patent applications) and other intellectual property rights held by us.

If we become subject to intellectual property infringement claims, we could incur significant expenses and could be prevented from selling specific products.

We are periodically subject to claims that we infringe the intellectual property rights of others. We cannot provide assurance that, if and when made, these claims will not be successful. Intellectual property litigation is, by its nature, expensive and unpredictable. Any claim of infringement could cause us to incur substantial costs defending against the claim even if the claim is invalid, and could distract management from other business. Any potential judgment against us could require substantial payment in damages and also could include an injunction or other court order that could prevent us from offering certain products.

As an example, during the second quarter of 2005, we settled our lawsuit with 3M in which 3M claimed that configuration of our light engine technology violated one of their patents. In connection with the settlement of this case, we agreed to make payments for past royalties and entered into a cross licensing agreement with 3M regarding this technology and certain of our technology.

We rely on large distributors, national retailers and other large customers for a significant portion of our revenues, and changes in price or purchasing patterns could lower our revenues or gross margins.

We sell our products through large distributors such as Ingram Micro, Tech Data and CDW, national retailers such as Best Buy and Circuit City and through a number of other customers and channels. We rely on our larger distributors, national retailers, and other large customers for a significant portion of our total revenues in any particular period. We have no minimum purchase commitments or long-term contracts with any of these customers. Our customers, including our largest customers, could decide at any time to discontinue, decrease or delay their purchases of our products. In addition, the prices that our distributors and retailers pay for our products are subject to competitive pressures and change frequently.

If any of our major customers change their purchasing patterns or refuse to pay the prices that we set for our products, our net revenues and operating results could be negatively impacted. If our large distributors and retailers increase the size of their product orders without sufficient lead-time for us to process the order, our ability to fulfill product demand could be compromised. In addition, because our accounts receivable are concentrated within our largest customers, the failure of any of them to pay on a timely basis, or at all, could reduce our cash flow or result in a significant bad debt expense.

 

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In order to compete, we must attract, retain and motivate key employees, and our failure to do so could have an adverse effect on our results of operations.

In order to compete, we must attract, retain and motivate key employees, including those in managerial, operations, engineering, service, sales, marketing, and support positions. Hiring and retaining qualified employees in all areas of the company is critical to our business. Each of our employees is an “at will employee” and may terminate their employment without notice and without cause or good reason.

We depend on our officers, and, if we are not able to retain them, our business may suffer.

Due to the specialized knowledge each of our officers possess with respect to our business and our operations, the loss of service of any of our officers could adversely affect our business. We do not carry key person life insurance on our officers. Each of our officers is an “at will employee” and may terminate their employment without notice and without cause or good reason.

Our results of operations could vary as a result of the methods, estimates and judgments we use in applying our accounting policies.

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates” in Part I, Item 2 above). Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that leads us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations. In particular, beginning in our first quarter of 2006, the calculation of stock-based compensation expense under SFAS No. 123R requires us to use valuation methodologies and a number of assumptions, estimates and conclusions regarding matters such as expected forfeitures, expected volatility of our share price, the expected dividend rate with respect to our common stock and the exercise behavior of our employees. Changes in forecasted share-based compensation expense could impact our gross margin percentage; research and development expenses; sales and marketing expenses, and general and administrative expenses.

Item 5. Other Information

Due to the delay in filing our 2005 annual report on Form 10-K and this quarterly report on Form 10-Q, we also delayed our annual meeting of shareholders, generally held in April or May of each year. Our Board of Directors has tentatively scheduled the 2006 annual meeting of shareholders for August 22, 2006. The official notice of the meeting and proxy materials are expected to be sent to shareholders on or about July 20, 2006.

Board Nominations

A shareholder who wishes to make a nomination for election to our Board of Directors must give written notice, by personal delivery or mail, to our Secretary at our principal executive office. In the case of an annual meeting of shareholders, the notice must generally be received at our principal executive office not less than 60 days and not more than 90 days prior to the first anniversary of the preceding year’s annual meeting. However, due to the delay in the meeting date, in connection with our 2006 annual meeting, this notice must be received by us no later than July 6, 2006.

The 2007 annual meeting is expected to be held on May 3, 2007. As such, notice of a nomination related to the 2007 annual meeting must be received by us no later than March 5, 2007. Additional information as to the form and content of the notice will be set forth in the proxy statement for the 2006 annual meeting.

Shareholder Proposals

Due to the delay in the 2006 annual meeting, proposals by shareholders intended to be included in our proxy statement for our 2006 annual meeting or intended to be presented at the 2006 annual meeting must be received by us at our principal executive office no later than July 6, 2006.

Because the 2007 annual meeting is expected to be held in May 2007, proposals by shareholders intended to be included in our proxy statement for our 2007 annual meeting must be received by us at our

 

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principal executive office no later than December 3, 2006. Proposals by shareholders intended to be presented at our 2007 annual meeting must be received by us at our principal executive office no later than March 5, 2007 and no earlier than February 2, 2007.

Item 6. Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

 

10.1

Amendment to InFocus Corporation 1998 Stock Incentive Plan — Incorporated by reference to Exhibit 10 to Form 8-K filed with the Securities and Exchange Commission on January 9, 2006.

 

10.2

Summary of 2006 Executive Incentive Compensation Grants — Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on January 9, 2006.

 

10.3

2006 Executive Bonus Plan — Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 8, 2006.

 

10.4

Summary of 2006 Executive Incentive Compensation Grants - Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on January 9, 2006.

 

31.1

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

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

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

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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SIGNATURES

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:  June 26, 2006

INFOCUS CORPORATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By:

/s/ C. Kyle Ranson

 

 

 

C. Kyle Ranson

 

 

Director, President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

By:

/s/ Roger Rowe

 

 

 

Roger Rowe

 

 

Vice President, Finance,

 

 

Chief Financial Officer and Secretary

 

 

(Principal Financial Officer)

 

 

 

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