| INFOCUS CORP Item 1A Risk Factors 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 |
| 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 16prca to 18prca 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 |
| 9 ______________________________________________________________________ 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 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 cannot 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 |
| 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 10 ______________________________________________________________________ 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 selling prices and product 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 product coming from our offshore contract manufacturing partners; · Changes in the supply of components; · 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 |
| 11 ______________________________________________________________________ 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 |
| 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 12 ______________________________________________________________________ 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 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 product recall in conjunction with the US Consumer Product Safety Commission related to a limited number of 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 13 ______________________________________________________________________ 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 50prca 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 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 |
| 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 dlra12 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 December 31, 2005, approximately dlra14dtta4 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 |
| 14 ______________________________________________________________________ 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, US 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 multiple 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 |
| 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 37prca of our revenues in 2005 and 43prca 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 |
| 15 ______________________________________________________________________ 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 US 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 US, 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 product 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 |
| Failure of our third parties to deliver in any one of these areas could have an adverse effect on our results of operations |
| 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 US We cannot guarantee that our means of protecting our intellectual property rights in the US 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 could include an injunction or other court order that could prevent us from offering certain products |
| 16 ______________________________________________________________________ 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 |
| 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 |
| 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 man 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 Estimates” in Part II, Item 5 of this annual report on Form 10-K) |
| Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead 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 Nodtta 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 |