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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] 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
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IN FOCUS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0932102
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
27700B SW Parkway Avenue, Wilsonville, Oregon 97070
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 503-685-8888
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The index to exhibits appears on page 9 of this document.
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
----- -----
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 10,670,573
(Class) (Outstanding at November 1, 1996)
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IN FOCUS SYSTEMS, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Consolidated Balance Sheets -September 30, 1996 and
December 31, 1995 2
Consolidated Statements of Operations - Three Month and Nine
Month Periods Ended September 30, 1996 and 1995 3
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
1
PART II - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IN FOCUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,645 $ 30,165
Marketable securities - held to maturity 17,939 16,563
Accounts receivable, net of allowances of
$2,892 and $2,089 51,947 49,363
Inventories, net 27,147 10,767
Income taxes receivable 2,993 -
Deferred income taxes 3,230 1,624
Other current assets 2,010 2,167
--------- ---------
Total Current Assets 111,911 110,649
Restricted cash - 1,000
Marketable securities - held to maturity - 2,056
Property and equipment, net of accumulated
depreciation of $11,996 and $8,412 15,465 12,201
Other assets, net 1,711 1,397
--------- ---------
Total Assets $ 129,087 $ 127,303
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Income taxes payable $ - $ 2,128
Accounts payable 20,780 21,476
Payroll and related benefits payable 1,593 2,076
Marketing cooperative payable 1,495 1,596
Other current liabilities 1,796 1,959
--------- ---------
Total Current Liabilities 25,664 29,235
Note payable 352 -
Deferred income taxes 605 541
Shareholders' Equity:
Common stock, 30,000,000 shares authorized;
shares issued and outstanding: 10,647,554
and 10,925,474 47,421 46,405
Additional paid-in capital 9,990 7,727
Retained earnings 45,055 43,395
--------- ---------
Total Shareholders' Equity 102,466 97,527
--------- ---------
Total Liabilities and Shareholders' Equity $ 129,087 $ 127,303
--------- ---------
--------- ---------
The accompanying notes are an integral part of these balance sheets.
2
IN FOCUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, exept shares and per share amounts)
Three months ended September 30, Nine months ended September 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
Revenue $ 59,080 $ 54,448 $ 185,347 $ 141,791
Cost of sales 43,118 34,710 132,649 88,073
--------- ---------- ---------- ----------
Gross profit 15,962 19,738 52,698 53,718
Operating expenses:
Marketing and sales 7,190 6,038 22,167 17,789
Engineering 4,225 3,305 14,315 8,041
General and administrative 1,349 1,626 5,564 4,602
---------- ---------- ---------- ----------
12,764 10,969 42,046 30,432
---------- ---------- ---------- ----------
Income (loss) from operations 3,198 8,769 10,652 23,286
Other income (expense):
Interest expense (8) - (11) -
Interest income 330 422 1,273 1,394
Other, net 13 (75) 126 171
---------- ---------- ---------- ----------
335 347 1,388 1,565
---------- ---------- ---------- ----------
Income (loss) before equity in income (loss) of
joint venture and provision for income taxes 3,533 9,116 12,040 24,851
Provision for (benefit from) income taxes 1,148 3,134 4,168 8,500
---------- ---------- ---------- ----------
Income (loss) before equity in income (loss)
of joint venture 2,385 5,982 7,872 16,351
Equity in income (loss) of joint venture (7) - 349 (431)
---------- ---------- ---------- ----------
Net income (loss) $ 2,378 $ 5,982 $ 8,221 $ 15,920
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) per share $ 0.22 $ 0.53 $ 0.72 $ 1.39
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in per share calculations 10,816,854 11,236,689 11,378,168 11,457,801
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these statements.
3
IN FOCUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine months ended September 30,
1996 1995
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Cash flows from operating activities:
Net income $ 8,221 $ 9,938
Adjustments to reconcile net income to net cash flows
provided by (used in) operating activities:
Depreciation and amortization 3,651 1,656
Equity in (income) loss of joint venture (349) 431
(Increase) decrease in:
Accounts receivable, net (2,584) (7,918)
Inventories, net (16,380) (2,735)
Income taxes receivable (2,993) -
Deferred income taxes (1,542) 55
Other current assets 157 (847)
Increase (decrease) in:
Income taxes payable (2,128) (320)
Accounts payable (696) 8,173
Payroll and related benefits payable (483) (261)
Marketing cooperative payable (101)
Other current liabilities (163) 306
-------- --------
Net cash provided by (used in) operating activities (15,390) 8,478
Cash flows from investing activities:
Restricted cash 1,000 -
Purchase of marketable securities-held to maturity (10,742) (15,689)
Sale of marketable securities-held to maturity 11,422 29,289
Payments for purchase of property and equipment (6,496) (3,636)
Investment in joint venture 349 (431)
Other assets, net (381) (193)
-------- --------
Net cash provided by (used in) investing activities (4,848) 9,340
Cash flows from financing activities:
Payments on long-term debt -
Proceeds from sale of common stock 3,240 1,277
Income tax benefit of non-qualified stock option
exercises and disqualifying dispositions 2,263 819
Stock repurchase (8,785) (18,000)
-------- --------
Net cash provided by (used in) financing activities (3,282) (15,904)
Increase (decrease) in cash and cash equivalents (23,520) 1,914
Cash and cash equivalents:
Beginning of period 30,165 15,176
-------- --------
End of period $ 6,645 $ 17,090
-------- --------
-------- --------
The accompanying notes are an integral part of these statements.
4
IN FOCUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The financial information included herein for the three-month and nine month
periods ended September 30, 1996 and 1995 is unaudited; 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, 1995 is
derived from In Focus Systems, Inc.'s (the Company's) Annual Report to
Shareholders which is incorporated by reference into the Company's 1995 Form
10-K. The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's 1995 Annual Report to Shareholders.
The results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
NOTE 2: INVENTORIES
Inventories are valued at the lower of cost (using average costs, which
approximates the first in, first-out (FIFO) method), or market, and include
materials, labor and manufacturing overhead.
September 30, 1996 December 31, 1995
------------------ -----------------
Raw materials and components $ 12,405 $ 4,786
Work-in-process 2,437 1,166
Finished goods 12,305 4,815
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$ 27,147 $10,767
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NOTE 3: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
Nine months ended
September 30,
------------------
1996 1995
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Cash paid during the period for income taxes $ 8,571 $ 6,467
Cash paid during the period for interest 9 --
Property acquired through debt 352 --
Reclass of joint venture reserve to note payable
(a non-cash financing activity) -- 3,232
NOTE 4: LINE OF CREDIT
In September 1996, the Company entered into an unsecured $10.0 million line of
credit with a commercial bank. The line of credit bears interest, at the
Company's election, at one of the following: 1) the bank's prime rate, 2) LIBOR
plus .65 percent, or 3) at a fixed rate as quoted to the borrower by the bank on
the date of borrowing. The line of credit expires on April 30, 1997. The line
of credit agreement contains certain liquidity, tangible net worth and pre-tax
profit covenants. At September 30, 1996 the Company was in compliance with all
of the covenants and had no outstanding balance under the line of credit.
NOTE 5: RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-Q includes forward-looking statements which are denoted with an
"*". Investors are cautioned that all forward-looking statements involve risks
and uncertainties and several factors could cause actual results to differ
materially from those in the forward-looking statements. This Form 10-Q
includes forward-looking statements relating to anticipated gross margins,
availability of products manufactured on behalf of the Company, backlog and new
product introductions, and the following factors, among others, could cause
actual results to differ from those indicated in the forward-looking statements:
1) in regards to gross margins, uncertainties associated with market acceptance
of and demand for the Company's products, impact of competitive products and
pricing and dependence on third party suppliers; 2) in regards to product
availability and backlog, uncertainties associated with manufacturing
capabilities and dependence on third party suppliers; and 3) in regards to new
product introductions, uncertainties associated with the development of
technology and the establishment of full manufacturing capabilities, dependence
on third party suppliers and intellectual property rights. Investors are
directed to the Company's filings with the Securities and Exchange Commission,
including the Company's 1995 Form 10-K, which are available from the Company
without charge, for a more complete description of the risks and uncertainties
relating to the material in this Form 10-Q as well as to other aspects of the
Company's business.
RESULTS OF OPERATIONS
Revenue increased to $59.1 million in the third quarter of 1996 from $54.4
million in the third quarter of 1995, and to $185.3 million for the nine months
ended September 30, 1996 from $141.8 million for the comparable period of 1995.
The increase in revenue is mainly a result of growth in unit sales of the
Company's complete line of LitePro projection products, offset by a decrease in
projector average selling prices. International sales represented 39 percent of
total revenues in the first nine months of 1996 compared to 40 percent in the
first nine months of 1995.
The Company achieved gross margins of 28 percent in the first nine months of
1996, with 27 percent achieved in the third quarter of 1996, compared to 38
percent in the first nine months of 1995 and 36 percent in the third quarter of
1995. The decline in gross margins in 1996 resulted primarily from a) new
competition entering the market, resulting in additional pricing pressures
market wide, b) reserves established for price protection provided to customers
on sales of LitePro 580s during the second quarter of 1996, c) the Company
incurred higher than anticipated costs as a result of expediting parts to
support a steeper ramp up in production for the LitePro 210 and 620 and d) in
conjunction with new product launches in the second quarter, the Company
repositioned mature products in the market. This process included providing
additional discounts for volume purchases, price protection and stock rotation
coverage in certain situations, along with writing down slower moving inventory
to the lower of cost or market.
6
The Company expects the cost of projection technologies to continue to decrease
market wide, resulting in pricing pressures which are leading to decreased
average selling prices for the Company's products*. In an effort to protect its
gross margins, the Company has introduced new, internally developed and
manufactured products.
The Company's customers generally order products for immediate delivery with
product shipment within 30 days after receipt of an order. As a result of not
being able to procure adequate supplies of SVGA glass for the LitePro 220 and
orders on credit hold at the end of the quarter, backlog at September 30, 1996
was approximately $20.3 million. Backlog at December 31, 1995 was approximately
$33.1 million. Backlog at September 30, 1995 was approximately $15.7 million.
Given current supply and demand estimates, it is anticipated that most of the
current backlog will turn over by the end of 1996*. There is minimal seasonal
influence relating to the Company's order backlog. The stated backlog is not
necessarily indicative of Company sales for any future period nor is a backlog
any assurance that the Company will realize a profit from filling the orders.
Marketing and sales expense increased to $7.2 million and $22.2 million,
respectively (12 percent and 12 percent of revenue, respectively) for the three
month and nine month periods ended September 30, 1996 compared to $6.0 million
and $17.8 million, respectively (11 percent and 13 percent of revenue,
respectively) for the comparable periods of 1995. The increases are primarily a
result of growth in revenues, demand creation programs and brand recognition
efforts, offset by a reduction in the workforce at the beginning of the third
quarter and cost containment efforts during the third quarter that focused
resources on those areas that most directly contributed to revenue growth,
quality and customer satisfaction.
Engineering expense increased to $4.2 million and $14.3 million, respectively (7
percent and 8 percent of revenue, respectively) for the three month and nine
month periods ended September 30, 1996 compared to $3.3 million and $8.0
million, respectively (6 percent and 6 percent of revenue, respectively) for the
comparable periods of 1995. The increase is primarily a result of increased
research and development efforts to support the Company's product introduction
plans as well as investments in engineering and mechanical computer aided design
systems. In addition, the Company incurred additional costs associated with the
introduction of new products during the second quarter. The increases in
engineering expense were partially offset by a reduction in the workforce at the
beginning of the third quarter and cost containment efforts.
General and administrative expense was $1.3 million and $5.6 million,
respectively (2 percent and 3 percent of revenue, respectively) for the three
month and nine month periods ended September 30, 1996 compared to $1.6 million
and $4.6 million, respectively (3 percent and 3 percent of revenue,
respectively) for the comparable periods of 1995. The increase in the year to
date amount is primarily attributable to increased investment in training and
information systems and severance reserves recorded as part of the reduction in
force at the end of the second quarter. At the end of the second quarter, the
Company reevaluated workload requirements and reduced the workforce by 8
percent, implementing a flatter organization structure, which is intended to
significantly reduce operating expense for the second half of 1996*. The
decrease in the third quarter is a result of the workforce reduction mentioned
above, as well as the reversal of approximately $0.4 million in accrued
7
severance and incentive accruals no longer required in 1996. Without the
reversal of the accruals, general and administrative expense would have been 3
percent of revenue in the third quarter of 1996 and relatively flat in amount
with the prior year's third quarter.
Income from operations decreased to $3.2 million and $10.7 million, respectively
(5 percent and 6 percent of revenue, respectively) for the three month and nine
month periods ended September 30, 1996 from $8.8 million and $23.3 million (16
percent and 16 percent of revenue, respectively) for the comparable periods of
1995, primarily as a result of lower gross margins as discussed above.
The Company's effective tax rate in the third quarter of 1996 was 32.5 percent
and for the nine months ended September 30, 1996 was 34.6 percent, compared to
34 percent for the year ended December 31, 1995. The decrease in the third
quarter of 1996 is primarily a result of the reinstatement of the research and
development tax credit effective July 1, 1996 through May 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996 working capital was $86.2 million, including $6.6 million
of cash and cash equivalents and $17.9 million of marketable securities. In the
first nine months of 1996, working capital increased by $4.8 million and the
current ratio increased to 4.4:1 from 3.8:1.
Cash and cash equivalents decreased $23.5 million from December 31, 1995
primarily due to $15.4 million used in operations, $6.5 million used for
purchases of property and equipment and $8.8 million for the repurchase of the
Company's Common Stock, offset by $1.0 million release of restricted cash, the
net sale of $0.7 million of marketable securities, $3.2 million provided by the
sale of common stock through the exercise of employee stock options and $2.3
million provided by the income tax benefit of nonqualified stock option
exercises and disqualifying dispositions.
Accounts receivable increased to $51.9 million at September 30, 1996 from $49.4
million at the end of 1995. The growth in receivables is primarily attributable
to increased aging of receivables on sales of the LitePro 580. During the third
quarter, the Company focused collection efforts in order to collect on the sell
through of the LitePro 580s. Cash receipts associated with the sell through of
the LitePro 580 began late in the third quarter and are expected to completely
turn during the fourth quarter of 1996.* Accordingly, days sales outstanding
has increased to 80 days at September 30, 1996 from 74 days at December 31,
1995, but decreased from 90 days at June 30, 1996.
The Company expects to see working capital constrained in the channels for the
duration of 1996 as new competitors and products enter the market*. In addition
to providing alternative forms of financing, the Company is creating additional
channels of distribution for its products.
Inventories increased $16.4 million to $27.1 million at September 30, 1996 from
$10.8 million at December 31, 1995 due primarily to growth in parts stock and
finished goods to support the shift in production to products that the Company
manufactures, unfilled orders for certain customers on credit hold at the end of
the quarter and the shortage of a key
8
component which caused a slower than anticipated product introduction ramp and
fewer shipments of a new SVGA projector during the third quarter. Inventory
turns have decreased to approximately 6 in the first nine months of 1996 on an
annualized basis compared to approximately 11 times during 1995 when the Company
primarily distributed an OEM product.
Income taxes receivable increased to $3.0 million at September 30, 1996 from a
payable of $2.1 million at December 31, 1995 due to the prescribed calculation
methods and the timing of estimated federal and state tax payments.
The $3.3 million increase in property and equipment is primarily a result of
$6.8 million of expenditures primarily for new product tooling, information
systems and plant floor layout redesign to accommodate available to promise and
assemble to order production lines, offset by $3.6 million of depreciation.
Total expenditures for property and equipment in 1996 are expected to be
approximately $8.6 million, primarily for the projects mentioned above.*
In July 1996, the Company completed its repurchase of a total of 500,000 shares
of its Common Stock for at an average price of $17.60 for a total of $8,785,000,
which was paid out of existing cash balances.
In September 1996, the Company entered into an unsecured $10.0 million line of
credit with a commercial bank. The line of credit bears interest, at the
Company's election, at one of the following: 1) the bank's prime rate, 2) LIBOR
plus .65 percent, or 3) at a fixed rate as quoted to the borrower by the bank on
the date of borrowing. The line of credit expires on April 30, 1997. The line
of credit agreement contains certain liquidity, tangible net worth and pre-tax
profit covenants. At September 30, 1996 the Company was in compliance with all
of the covenants and had no outstanding balance under the line of credit.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
EXHIBIT NO. AND DESCRIPTION
10 Line of Credit Agreement between the Company and Wells Fargo Bank,
National Association, dated September 30, 1996.
11 Calculations of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. Form 8-K under Item 5., Other Events, dated July 31, 1996.
9
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: November 4, 1996 IN FOCUS SYSTEMS, INC.
By: /s/ JOHN V. HARKER
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John V. Harker
Chairman of the Board, President and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ MICHAEL D. YONKER
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Michael D. Yonker
Vice President, Information Services and
Chief Financial Officer
(Principal Financial and Accounting Officer)
10