1 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 June 29,1997 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 0-21034 -------------------- PROXIMA CORPORATION (Exact name of registrant as specified in its charter) Delaware 95-3740880 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 9440 Carroll Park Drive San Diego, California 92121 (address of principal executive offices) (zip code) Registrant's telephone number, including area code: (619) 457-5500 ----------------------------- 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, $.001 par value per share, 7,433,589 shares as of July 23, 1997. 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PROXIMA CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) --------- --------- June 30, March 31, 1997 1997 --------- --------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 9,642 $ 5,556 Short-term investments 14,392 12,455 Accounts receivable, net 25,859 32,701 Inventories (note 2) 18,648 22,359 Deferred income taxes 5,254 5,199 Income taxes receivable 945 -- Prepaid expenses and other 410 666 --------- --------- Total current assets 75,150 78,936 --------- --------- PROPERTY 4,860 5,756 --------- --------- OTHER ASSETS Investment in affiliate (note 3) 1,262 1,201 Deferred income taxes 744 714 Patents 358 378 Other 246 293 --------- --------- Total other assets 2,610 2,586 --------- --------- TOTAL $ 82,620 $ 87,278 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 12,167 $ 12,957 Accrued expenses 6,771 8,683 Income taxes payable -- 348 --------- --------- Total current liabilities 18,938 21,988 --------- --------- COMMITMENTS AND CONTINGENCIES (NOTE 4) STOCKHOLDERS' EQUITY Preferred stock, authorized--5,000,000 shares, par value $.001, no shares issued or outstanding -- -- Common stock, authorized--40,000,000 shares, par value $.001, issued and outstanding-- 7,434,000 and 7,418,000 shares, respectively 7 7 Paid-in capital 41,870 41,857 Treasury stock--281,000 shares held (2,548) (2,548) Retained earnings 24,353 25,974 --------- --------- Total stockholders' equity 63,682 65,290 --------- --------- TOTAL $ 82,620 $ 87,278 ========= ========= See notes to consolidated financial statements. 2 3 PROXIMA CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data) Three months ended June 30, ---------------------------- 1997 1996 ----------- ----------- (unaudited) (unaudited) SALES $ 29,043 $ 35,039 COST OF SALES 24,446 24,939 ----------- ----------- Gross profit 4,597 10,100 ----------- ----------- OPERATING EXPENSES Selling and marketing 4,281 6,669 Research and development 1,983 4,484 General and administrative 1,341 1,837 ----------- ----------- Total 7,605 12,990 ----------- ----------- LOSS FROM OPERATIONS (3,008) (2,890) ----------- ----------- OTHER INCOME (EXPENSE) Interest and other income 211 320 Equity in income (loss) of affiliate (note 3) 61 (283) Gain on sale of subsidiary's assets (note 6) -- 2,679 Write-down of investment in affiliate (note 3) -- (3,905) ----------- ----------- Total 272 (1,189) ----------- ----------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (2,736) (4,079) PROVISION (BENEFIT) FOR INCOME TAXES (1,112) 154 ----------- ----------- NET LOSS $ (1,624) $ (4,233) =========== =========== LOSS PER SHARE DATA (NOTE 1) Loss per share $ (0.23) $ (0.59) =========== =========== Weighted average common and common equivalent shares (note 1) 7,152 7,207 =========== =========== See notes to consolidated financial statements. 3 4 PROXIMA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three months ended June 30, ----------------------------- 1997 1996 ----------- ----------- (unaudited) (unaudited) OPERATING ACTIVITIES Net loss $ (1,624) $ (4,233) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 846 834 Provision for allowance for doubtful accounts 70 (210) Benefit from deferred income taxes (85) (160) Tax benefit from stock option exercises -- 206 Gain on sale of subsidiary's assets -- (2,679) Write-down of investment in affiliate -- 3,905 Changes in assets and liabilities, net of effects from sale of subsidiary's assets: Accounts receivable 6,772 5,714 Income taxes payable (1,293) (810) Inventories 3,711 (5,334) Prepaid expenses and other assets 332 (181) Accounts payable and accrued expenses (2,702) 5,426 ----------- ----------- Net cash provided by operating activities 6,027 2,478 ----------- ----------- INVESTING ACTIVITIES Proceeds from sale of subsidiary's assets -- 7,259 Acquisition of property (49) (1,785) Short-term investments (1,937) 282 Investment in affiliate -- (524) Other 28 28 ----------- ----------- Net cash provided by (Used for) investing activities (1,958) 5,260 ----------- ----------- FINANCING ACTIVITIES Sale of common stock 17 276 ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 4,086 8,014 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,556 2,389 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,642 $ 10,403 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income taxes paid $ -- $ 905 =========== =========== See notes to consolidated financial statements. 4 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying consolidated financial information has been prepared by Proxima Corporation (the "Company"), without audit, in accordance with the instructions to Form 10-Q and therefore does not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in accordance with generally accepted accounting principles. In the opinion of management, the unaudited consolidated financial statements for the interim periods presented reflect all adjustments (solely of a normal recurring nature) which are necessary for a fair presentation of the financial position and results of operations as of and for the periods indicated. These consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 1997. Loss per share is computed based on the weighted average number of common and common equivalent shares outstanding during each period using the treasury stock method, in which any shares that could have been purchased on the open market with the funds received from the exercise of options or warrants are not considered additional outstanding stock and have no dilutive effect on earnings per share. Stock options are considered to be common stock equivalents. For the three months ended June 30, 1996 and June 30, 1997, when the inclusion of common stock equivalents would be antidilutive, loss per share is computed based on the weighted average number of common shares outstanding excluding common stock equivalents. Primary loss per share is not significantly different from fully diluted loss per share for any of the periods indicated. In February of 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" (EPS). This statement requires the presentation of EPS to reflect both "Basic EPS" and "Diluted EPS" on the face of the statement of operations. In general, Basic EPS excludes dilution created by common stock equivalents and is a function of the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution created by common stock equivalents and is calculated in the same manner as fully diluted EPS illustrated in Accounting Principles Board Opinion No. 15, "Earnings Per Share" (APB No. 15). The Company will be required to adopt the new method of reporting for the year ending March 31, 1998. The Company's loss per share as reflected in this document includes Primary loss per share for the three months ended June 30, 1996 and 1997, under the rules of APB No. 15, and the use of common stock equivalents only when they are dilutive. Based on the Company's capital structure, the anticipated results of implementing SFAS No. 128 would reflect loss per share materially in the same manner as currently reported. For ease of presentation, the Company has indicated its fiscal year as ending on March 31 and its first fiscal quarter as ending on June 30, whereas the Company operates and reports on a 52-53 week fiscal year ending on the Sunday closest to March 31. Each fiscal quarter presented herein included 13 weeks. Results for the interim periods presented herein are not necessarily indicative of results which may be reported for any other interim period or for the entire fiscal year. 5 6 2. INVENTORIES: June 30, March 31, 1997 1997 ----------- ----------- (unaudited) Raw materials $ 1,967,000 $ 5,515,000 Work-in-process 8,502,000 9,501,000 Finished goods 8,179,000 7,343,000 ----------- ----------- Total $18,648,000 $22,359,000 =========== =========== 3. OTHER ASSETS--INVESTMENT IN AFFILIATE In May 1993, the Company purchased 125,000 shares of Laser Power Corporation ("LPC") common stock for $255,000 and has purchased, through June 30, 1997, 1,611,000 shares of LPC Series A Preferred Stock for $6,444,000 for a total investment of $6,669,000. In 1994, the Company entered into agreements providing for technology licenses between the Company and LPC and the cooperative development of new technologies. In June 1997 the Company converted its 1,611,000 shares of LPC Series A Preferred Stock and 125,000 shares of LPC common stock to a total of 1,277,000 shares of LPC common stock upon the completion of LPC's initial public offering and 1-for-1.5 reverse stock split. At June 30, 1997, the Company owned approximately 20% of the outstanding voting stock of LPC. The Company accounts for its investment under the equity method. The Company's share of the net income of LPC of $61,000 for the first three months of fiscal 1998 is presented as "Equity in income (loss) of affiliate" in the accompanying Consolidated Statements of Operations. The Company recorded a write-down of $3,905,000 against its investment in LPC during the quarter ended June 30, 1996. The remaining investment balance of $1,262,000 shown on the accompanying balance sheet as of June 30,1997 reflects the Company's equity in the net assets of LPC. The write-down and balance of the Company's investment in LPC was the result of an analysis of discounted and undiscounted estimated cash flows from the investment. The Company deemed it necessary to review its investment in LPC because of information obtained upon the completion of the first engineering model of a microlaser projector in July 1996. That engineering model demonstrated that the microlaser projector development would take more time and be more costly than anticipated, and that component costs would exceed earlier expectations. The Company now believes that microlaser technology will initially be suited for the higher-cost specialty projector market, which offers lower unit volumes than originally contemplated. The Company will continue to recognize its share of the net income or loss of LPC under the equity method. The Company has entered into an equipment line of credit agreement with LPC to provide up to $500,000 to LPC for the acquisition of equipment for projector development. The line of credit carries interest at 1.5% over the prime rate. The line of credit is secured by the equipment acquired and is guaranteed by a principal of LPC. At June 30, 1997, the total amount borrowed pursuant to the line of credit was $180,000. This amount is included in "Other" assets in the accompanying balance sheets. Subsequent to the end of the first quarter of fiscal 1998, LPC paid off all amounts outstanding under this line of credit. 6 7 4. COMMITMENTS AND CONTINGENCIES Litigation The Company has been named as a defendant in three stockholder class action lawsuits filed in the U.S. District Court for the Southern District of California on August 16, and on August 15 and August 27, 1996 in the California Superior Court for San Diego County. Certain current and former executive officers and directors of the Company are also named as defendants. In the case filed in federal court, the plaintiffs represent a class of all persons who purchased the Company's common stock between July 26, 1994 and August 17, 1995. In another case filed in state court, the plaintiffs purport to represent the same class. In the third case, the plaintiffs purport to represent a class of all persons who purchased the Company's common stock between October 21, 1995 and June 24, 1996. The complaints allege that the defendants violated various federal securities laws and California statutes through material misrepresentations and omissions during the class periods, and seek unspecified monetary damages. The Company maintains directors' and officers' insurance primarily to provide coverage for the type of lawsuits described above. The Company and its insurance carrier, Evanston Insurance Company ("Evanston"), have been involved in a dispute over such coverage. On June 11, 1997, Evanston filed an action for declaratory relief and breach of contract in the U.S. District Court for the Southern District of California against the Company and certain of its current and former executive officers and directors, alleging that any insurance claims arising from the foregoing stockholder class action lawsuits would not be covered. The Company and the individual defendants have not been served with the complaint. The outcome of the lawsuits cannot be determined. However, management believes that the suits are without merit and intends to defend them vigorously. No amounts have been recorded in the financial statements for any losses which may result from these lawsuits. 5. LINE OF CREDIT At June 30, 1997, the Company had available a line of credit arrangement providing for a $13.0 million revolving line of credit, secured by accounts receivable, inventories and equipment, at an interest rate equal to the bank's prime rate, with $3.0 million of the line available for the purchase of fixed assets, at an interest rate of one-half percent over the bank's prime rate. The line of credit arrangement contained standard covenants relating to financial ratios. The Company is in compliance with all such covenants. No borrowings were made under this or any previous credit arrangement during fiscal year 1997 or during the first three months of fiscal 1998. The Company renewed its line of credit arrangement in July 1997 under substantially similar terms. The new credit arrangement expires on July 31, 1998. 6. SALE OF SUBSIDIARY'S ASSETS On June 28, 1996, the Company sold the assets of its Newpoint Corporation power protection business. The power protection business accounted for less than 10% of the Company's sales, and an insignificant percentage of the Company's net income during fiscal 1997. The Company received approximately $7.3 million in cash in exchange for the net assets of Newpoint Corporation, which had a book value of approximately $3.7 million. The Company has recognized a gain on the sale of approximately $2.8 million during fiscal 1997. The selling agreement provides for potential adjustments to the sales price based on such factors as collectability of receivables and inventory obsolescence for up to one year after the date of the agreement. 7 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company offers data and video projection products, including multimedia projectors capable of supporting full-motion video, animation, and sound directly from a computer or VCR, as well as interactive command and control systems and meeting room tools. All of the Company's products are designed for interactivity and ease of use. RESULTS OF OPERATIONS The following table sets forth certain data as a percentage of sales: THREE MONTHS ENDED JUNE 30, --------------------- 1997 1996 ------- ------- Sales 100.0% 100.0% Cost of sales 84.2 71.2 ------- ------- Gross profit 15.8 28.8 ------- ------- Operating expenses Selling and marketing 14.8 19.0 Research and development 6.8 12.8 General and administrative 4.6 5.3 ------- ------- Total 26.2 37.1 ------- ------- Loss from operations (10.4) (8.3) ------- ------- Other income (expense) Interest and other income 0.8 0.9 Equity in income (loss) of affiliate 0.2 (0.8) Gain on sale of subsidiary's assets -- 7.6 Write-down of investment in affiliate -- (11.1) ------- ------- Total 1.0 (3.4) ------- ------- Loss before income taxes (9.4) (11.7) Provision (benefit) for income taxes (3.8) 0.4 ------- ------- Net loss (5.6)% (12.1)% ======= ======= NOTICE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements (denoted with an asterisk *) within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of the Risk Factors set forth below. 8 9 FIRST QUARTER FISCAL 1998 COMPARED TO FIRST QUARTER FISCAL 1997 Sales The Company's sales decreased 17% from $35.0 million in the first quarter of fiscal 1997 to $29.0 million in the first quarter of fiscal 1998. The decrease in sales was primarily attributable to a $3.8 million reduction in revenues from the Company's Newpoint power protection business, which was sold at the end of the first quarter of fiscal 1997. In addition, the Company's older product lines experienced lower average selling prices attributable to price reductions and promotional discounts. The Company has experienced increased pricing pressures as a result of the entry of new competitors into the projection market. In addition, the increase in the number of competitive new products available to the channels of distribution in which the Company competes has negatively impacted the Company's sales and market share. The increasing number of competitive products is due primarily to the growth in resources dedicated to product development by the Company's competitors. The Company believes that competition in the form of continued pricing pressures and the introduction of new product offerings will intensify in the future*. The Company also expects that its international sales as a percentage of total sales will be lower in the second quarter of fiscal 1998 versus the comparable period of fiscal 1997, primarily due to expected reduced sales to the Company's major private label customer*. See "Risk Factors." Gross Profit Gross profit declined from $10,100,000 in the first quarter of fiscal 1997 to $4,597,000 in the first quarter of fiscal 1998, primarily due to price reductions and reduced sales of older products, partially offset by increased sales of sourced products. Gross profit as a percentage of sales decreased from 28.8% in the first quarter of fiscal 1997 to 15.8% in the comparable quarter of fiscal 1998. The decrease in gross profit as a percentage of sales for the quarter ended June 30, 1997 was due primarily to price reductions on older products and promotional discounts offered by the Company. The increasing downward pressure on the average selling prices of the Company's products, discussed in "Sales" above, also serves to reduce gross profit margins*. See "Risk Factors." Operating Expenses Operating expenses include selling and marketing, research and development, and administrative expenses, which are individually discussed below. Actual operating expenses were $7,605,000 during the first quarter of fiscal 1998. The reduction in operating expenses in the first quarter of fiscal 1998 versus the fourth quarter of fiscal 1997 is primarily attributable to cost reduction measures undertaken at the end of fiscal 1997 and at the beginning of fiscal 1998, including a significant reduction in staffing. Selling and marketing expenses decreased from $6,669,000 in the first quarter of fiscal 1997 to $4,281,000 in the first quarter of fiscal 1998. As a percentage of sales, selling and marketing expenses decreased from 19.0% in the first quarter of fiscal 1997 to 14.8% in the first quarter of fiscal 1998. Selling and marketing expenses were lower both in dollar amount and as a percentage of sales primarily due to product promotion expenses incurred during the first quarter of fiscal 1997 related to the introduction of the Company's new line of integrated projectors. Research and development expenses decreased from $4,484,000 in the first quarter of fiscal 1997 to $1,983,000 in the first quarter of fiscal 1998. As a percentage of sales, research and development expenses were 12.8% in the first quarter of fiscal 1997 and 6.8% in the first quarter of fiscal 1998. The decrease in absolute dollars and as a percentage of sales for the first quarter of fiscal 1998 as compared to the first quarter of fiscal 1997 reflects the 9 10 wind-down of microlaser research during the second quarter of fiscal 1997 and the effects of cost reduction measures undertaken at the end of fiscal 1997. General and administrative expenses were $1,341,000 in the first quarter of fiscal 1998 versus $1,837,000 in the first quarter of fiscal 1997. As a percentage of sales, general and administrative expenses decreased from 5.3% in the first quarter of fiscal 1997 to 4.6% in the first quarter of fiscal 1998. The decrease in general and administrative expenses in absolute dollars and as a percentage of sales was due primarily to lower payroll related expenses including recruiting and relocation costs. The Company expects legal expenses to increase due to the defense of stockholder litigation*. See "Risk Factors." Interest Income Interest income decreased from $320,000 in the first quarter of fiscal 1997 to $211,000 in the first quarter of fiscal 1998. The decrease in interest income from the in the first quarter of fiscal 1998 compared to the same period a year ago is attributable primarily to lower average cash balances during the first three months of fiscal 1998. Income Taxes The Company's effective tax rate was a benefit of 40.6% in the first quarter of fiscal 1998 compared to a provision of $154,000 in the first quarter of fiscal 1997. The Company does not expect to benefit from the credit for increasing research expenditures during fiscal 1998 because research expenditures are expected to decline in absolute dollar amount in fiscal 1998 as compared to prior years *. See "Risk Factors." The Company has not recognized any tax effect from its equity in gain or loss of affiliate or from the write-down of its investment in affiliate. LIQUIDITY AND CAPITAL RESOURCES The Company has generally funded its operations through cash flow provided from operations. The net increase in cash and short-term investments was $6.0 million in the three months ended June 30, 1997. The net increase in cash and short-term investments in the first three months of fiscal 1998 was due primarily to a $6.8 million decrease in accounts receivable and a $3.7 million decrease in inventories, partially offset by a $2.7 million decrease in accounts payable and a $1.6 million net loss. Accounts receivable decreased during the three months ended June 30, 1997 primarily due to lower sales volume. Inventories were reduced during the first quarter of fiscal 1998 through the sale of older products in a specific effort to reduce inventory levels. Receivable days outstanding were 78 at March 31, 1997 and 81 at June 30, 1997. As of June 30, 1997, the Company had $24.0 million in cash and short-term investments and $56.2 million in working capital, compared to $18.0 million in cash and short-term investments and $56.9 million in working capital as of March 31, 1997. The Company had no debt at March 31 or June 30 of 1997. The Company has an arrangement, renewed in July 1997, for a $13.0 million revolving line of credit, secured by accounts receivable, inventories and equipment, at an interest rate equal to the bank's prime rate, with $3.0 10 11 million of the line available for the purchase of fixed assets, at an interest rate of one-half percent over the bank's prime rate. The line of credit arrangement contains standard covenants relating to financial ratios. The Company is in compliance with all such covenants. No borrowings were made under this or any previous credit arrangement during fiscal year 1997 or during the first three months of fiscal 1998. The credit arrangement expires on July 31, 1998. Company believes that existing cash resources, together with cash flow from operations and available lines of credit, will provide sufficient funding for operations for the foreseeable future*. See "Risk Factors". The effect of the three stockholder class action lawsuits on the Company's liquidity cannot be determined. The plaintiffs are seeking unspecified monetary damages (see note 4 to the Consolidated Financial Statements). To date, inflation has not had a significant impact on the Company's operating results. RISK FACTORS The following discussion of risk factors describes certain aspects of the business environment in which the Company operates. Users of this report should carefully consider these risk factors in addition to the other information in this report. The risks faced by the Company are illustrated by the volatility of the Company's reported sales and earnings per share over the last eight quarters: FY96 FY97 FY98 ------------------------------- --------------------------------------------- ---------- Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Sales ($millions) 35.0 44.2 47.6 35.0 36.2 47.4 36.0 29.0 EPS $0.20 $0.46 $0.47 ($0.59) $0.10 $0.25 ($1.10) ($0.23) The Company believes that this volatility has been influenced by the occurrence of one or more of the factors discussed below. FORECASTS The Company prepares annual budgets and other confidential internal projections that contain detailed forecasts of future sales and earnings for existing products as well as forecasts for products still in development. The Company believes that inaccuracies in its forecasting result from factors in the highly dynamic market in which it competes as described in certain of the risk factors below, including "Short Product Lives and Technological Change," "Competition," "Development Risk," "Sources of Supply," "Price Reductions" and "Variability of Quarterly or Annual Results." In the past eight quarters, for example, actual quarterly earnings results have varied from internal forecasts by amounts ranging from only a few percentage points to well over 100%. Actual results may differ materially from any estimates of the Company due to circumstances described in the risk factors below. Numerous independent stock analysts and market analysts prepare and publish their own financial forecasts and projections about the Company. The Company disclaims responsibility for all such forecasts and projections. The Company believes that forecasts and projections prepared by these independent stock analysts and market analysts have frequently been inaccurate in the past and are, therefore, highly speculative and should be used only with extreme caution. From time to time, the Company may announce one or more new products with a subsequent availability date. Any such availability dates are merely good faith estimates by the Company based on an assessment of all information available at the time of the estimate. In the past, the Company has suffered delays in the availability of new products. These delays have occurred either because the Company has been unable to resolve certain technical challenges and supplier issues that are normal in any development process prior to the 11 12 estimated availability date, or because of unforeseen technical and manufacturing challenges and supplier issues arising after the announcement of an availability date. See "Development Risk" and "Sources of Supply." The Company expects that it will continue to face such challenges and risks which may adversely impact the estimated availability dates and production ramp-up periods for its products. SHORT PRODUCT LIVES AND TECHNOLOGICAL CHANGE The market for multimedia projection products is characterized by rapidly evolving technology and short product lives, with new products frequently capturing significant market share. Anticipated product releases (and particularly products incorporating new technology) by the Company or its competitors often cause customers to delay purchases of existing products until such new products are available. Any delays in purchases can significantly impact the Company's results of operations. Any time significant new products are announced or introduced by the Company or others, the Company will likely deem it necessary to substantially reduce prices on certain models. Further, if such prices are reduced to less than the inventory carrying value, the Company would be required to record a write-off of the excess carrying value. In the fourth fiscal quarter of 1997, the Company recorded a substantial write-down for certain inventory and may record other write-downs of varying magnitudes from time to time in the future. The Company's future success depends on its ability to continue to develop and manufacture, or to distribute under private label arrangements, competitive products and services on a timely basis, particularly enhancements to and new generations of multimedia projectors. For example, in the last two quarters, the vast majority of the Company's sales were generated by products introduced within the preceding twelve months. Historically, many of the Company's products have achieved peak sales within a few months after their introduction with sales declining thereafter until the products are obsolete. The Company's product line must be frequently refreshed with improved products to maintain parity with competitors' products. The increasing number of large competitors in the multimedia projection industry has made it more difficult to foresee the successive waves of product introductions in the industry. See "Competition." Given that the Company does not have the internal resources to develop competitive products in every product segment in which it competes, the Company must increasingly rely on its evolving business alliances to source products manufactured by third parties. Notwithstanding the Company's prior success in distributing sourced products, the Company may not be able to continue to respond to the expected rapid product shifts with improved sourced products in the future. Although the Company continues to introduce enhanced versions and new generations of its projector products, the Company has continued to lose market share. See "Competition." The Company's new products released over the last twelve months are expected to continue to account for the majority of the Company's sales during the first half of fiscal 1998. Through the date of this filing, these new products continue to experience slowness in demand. See "Forecasts." In addition to the evolutionary changes in products and technologies described above, several new technologies are currently in production or under development by the Company or its competitors, including reflective silicon panels, higher resolution (XGA and EWS) controllers, and ultra-portable projectors weighing substantially less than current industry offerings. The Company or one or more of its competitors may introduce additional products based on new technologies from time to time. The Company believes that polysilicon LCD technology, which has been developed and is primarily controlled by two Japanese companies, and digital light processor technology, which has been developed and is owned by one U. S. company, will both continue to improve on a price/performance basis. See "Competition." Further, the Company believes 12 13 that there will be a shift from SVGA toward XGA products over the next twelve months. The Company may not be able to respond to these technological shifts in a timely manner potentially resulting in an adverse impact to financial results and inventory write-downs on obsolete products. DEVELOPMENT RISK The Company currently designs, manufactures and distributes its own products, and also distributes products designed and manufactured by others. The design, manufacture and marketing of multimedia projector products is complicated by rapidly evolving light valve technologies, lamp technologies, electronic control circuitry and optics. In developing its new products, the Company exposes itself to technical and financial risks. In the past, the Company has discontinued certain development efforts based on changing expectations of the respective products' marketability or producability and may do so again in the future. Many of the challenges faced by the Company in developing new products involve key components produced by vendors who themselves face engineering or procurement challenges that the Company has little or no ability to anticipate or resolve. The Company continues to face the development risks described above and expects to face other unforeseen development risks which may cause substantial delays in the development and introduction of new products. SOURCES OF SUPPLY Certain products and components which the Company resells or uses to manufacture its products are available only from single sources. Although the Company generally buys products and components under purchase orders and does not have long-term agreements with its suppliers, the Company expects that its suppliers will continue to attempt to meet the Company's requirements. For certain of these items, the process of qualifying a replacement supplier and receiving replacement supplies could take several months. For example, should a mold for plastic componentry break or become unusable, repair or replacement could take several months. The Company does not maintain sufficient inventory to allow it to fill customer orders without interruption for more than a few weeks. Therefore, an extended interruption in the supply of products or components would have a material adverse effect on the Company's results of operations. The Company is critically dependent on the availability of sourced products and/or key components such as LCD panels, light valves, power supplies and, as mentioned above, molded plastic. Two of the Company's major suppliers, Sanyo and Hitachi, also compete with the Company and, in the case of sourced products, the Company sells product substantially similar to that of the supplier. See "Competition." The Company purchases many of its products and components from suppliers located outside the United States. Policies adopted by the Company's suppliers, trading policies adopted by the United States (such as anti-dumping or other duties on imported components) or foreign governments, or fluctuations in foreign exchange rates may at any time restrict the availability of products or components or increase their cost. The Company has experienced product and component shortages in the past and expects that it could again experience product and component shortages in the future, particularly in the months immediately following the introduction of new products. See "Development Risk." 13 14 For the first fiscal quarter of 1998, the majority of the Company's sales were derived from sourced products, which are fully manufactured by third party suppliers. The Company expects this critical dependence on sourced products to continue throughout fiscal year 1998. The manufacturers of these sourced products face all of the same challenges described in this risk factor and in "Development Risk" above. Further, although the Company communicates regularly with its sourced product suppliers, the Company does not have the same visibility into any delays or pending development or supplier issues that it would have on its own development project. Any delay, discontinuance, constraint or reduction, for whatever reason, in the supply of any sourced products would have an immediate and severe adverse impact on the Company's financial results. COMPETITION The Company believes that new competitors may continue to enter the market and that new or existing competitors will introduce products which directly compete with the Company's existing products on a performance and price basis. The Company's insight into its competition and their development plans/dates is extremely limited and, therefore, it is generally unable to forecast the impact of new competitive products. Some of the Company's current or potential competitors have greater financial, technical, manufacturing and marketing resources than the Company and have lower cost and/or profit structures and may be in a position to introduce products incorporating advanced technologies ahead of the Company. Announcements by one or more large manufacturers can cause customers to delay or cease altogether purchases of the Company's products, which would have a material adverse effect on the Company's results of operations. For example, since the beginning of 1995, Epson, Fujitsu, Hitachi, 3M, IBM, Matsushita, Philips, NEC, Sanyo, Sony and Toshiba have each introduced or announced new products addressing the same markets as certain of the Company's products. Competition between the Company and its competitors in the market for multimedia projectors has been and is expected to continue to be intense. The Company has traditionally been a manufacturer of hardware products. As more and more competitors enter the market, the Company believes that non-hardware offerings, such as value-added service and support offerings, software, and a broad distribution capability, will become critical. The Company may invest significantly in one or more of these areas, or other complementary business areas. Any such investment may or may not be successful. PRICE REDUCTIONS The industry in which the Company competes is characterized by continually falling prices. The Company expects price competition to continue to be intense and, therefore, expects continued downward pressure on its gross margins. The Company believes that certain of its competitors have the financial resources to, and may, sell competitive products at cost or potentially below cost in an effort to gain market share. The Company provides price protection to its dealers and distributors such that, if the Company reduces the price of its products, dealers and distributors are entitled to a credit for the difference between the new, reduced price and the price of products purchased and still held in their inventory at the time of the price reduction. Each significant price reduction and the associated price protection will have a material adverse impact on sales and gross margins and therefore on the Company's results of operations for the period in which the price reduction occurs, unless such price reduction is offset by higher unit volume resulting from the price reduction. In order to meet competition, the Company is regularly reducing its prices on a product by product basis. To date, these reductions have not been offset by higher unit volumes. Future price reductions are expected and will likely have a similar adverse effect. 14 15 VARIABILITY OF QUARTERLY OR ANNUAL RESULTS A significant portion of the Company's shipments typically occur in the last month of a quarter. Although the Company attempts to ship products to its customers as promptly as practicable upon receipt of a purchase order, minor timing differences between the receipt of customer purchase orders and the Company's shipments to fill such orders can have a significant impact on the Company's quarterly or annual results. These timing differences may be caused by customers' ordering patterns or business cycles, or by the Company's production capacity, component availability or technical challenges. When, as often happens, significant variations occur between forecasts and actual orders (see "Forecasts"), the Company is often unable to reduce its fixed short-term expenses proportionately and in a timely manner, which at times has had an adverse effect on operating results and could have a similar effect in the future. Component availability, quality control, production yield, and technological factors are expected to cause further volatility in future periods. See "Development Risk" and "Sources of Supply." The Company does not expect to achieve in the future the rates of growth projected for the multimedia projection products industry as a whole. The Company believes that the projections by third parties of total unit demand growth in the multimedia projection products industry will be partially or entirely offset by continued price erosion in the industry. See "Price Reductions." VOLATILITY OF STOCK PRICE The trading price of the Company's stock has been and is expected to continue to be subject to immediate and wide fluctuations due to factors both within and outside the Company's control, including but not limited to one or more of the following: variations in operating results or financial position, new product introductions or price changes by the Company or its competitors, changes in product mix, product reviews by trade publications, estimates or statements made by analysts regarding the Company or its industry, perceptions formed at major trade shows regarding the Company or its industry, stock market price fluctuations, and litigation. As is the case with many other technology companies, fluctuations in the market price of the Company's stock have resulted in class action stockholder lawsuits against the Company. See "Stockholder Lawsuits." The defense of such lawsuits could have a material adverse effect on the Company's results of operations, whether or not any such lawsuits are meritorious. The Company believes that the variability of its quarterly and annual operating results contributes to the volatility of the price of the Company's common stock in the public market. As a result, investors should expect that market reactions to announcements of the Company's actual or expected results of operations for a particular quarter or annual period could be immediate and severe. STOCKHOLDER LAWSUITS Three class action securities lawsuits are pending against the Company. The lawsuits allege that the Company and certain of its officers and directors engaged in a scheme to defraud investors by making a series of positive statements about the Company that were allegedly known to be false and 15 16 misleading when made. The Company believes that the lawsuits are without merit, and the Company is defending the lawsuits. Alleged damages in the lawsuits are unspecified, but theoretically an adverse verdict could bankrupt the Company and result in a total loss of each stockholder's investment. The Company is expending significant financial and managerial resources in defense of the lawsuits to protect its business interests and the interests of its stockholders. Defense costs alone could have a material adverse effect on future results. The Company is subject to Generally Accepted Accounting Principles and to the rules of the Securities and Exchange Commission, which do not permit the provision for any loss that may result from the resolution of litigation whose outcome cannot presently be determined. The Company believes that the volatility of its business and of the market for stocks of high technology companies makes it inevitable that the Company's stock will continue to fluctuate substantially in price. In addition, most or all of the Company's officers and directors have, as part of their compensation packages, stock option arrangements with finite lives and which expire ninety days after the termination of employment. As a result, the Company expects that its directors, officers and other employees will from time to time exercise stock options and subsequently lawfully sell the stock thus acquired in the midst of continuing fluctuations in the price of the Company's stock. The Company believes that its stock price volatility and the occasional lawful sale of stock by its directors and officers may make it susceptible to meritless shareholder lawsuits in the future. CHANNELS OF DISTRIBUTION The Company sells its products primarily through independent presentation specialists, personal computer dealers and distributors. These presentation specialists, dealers and distributors ("resellers") may carry competing product lines and could reduce or discontinue sales of the Company's products at any time. These resellers may not devote the resources necessary to provide effective sales and marketing support to the Company. Any reduction in sales to presentation specialists, dealers and distributors, may have a material adverse effect. Shifts in pricing, end-user preferences or the entry of a major new competitor (see "Competition," above) may alter the relative importance of the channels of distribution discussed above or may create entirely new channels of distribution. For example, as market prices decline on the Company's products, it may become advantageous to promote and sell the products through new and alternative channels of distribution. The Company may incur significant costs in order to expand its presence in these new channels or to expand its presence in existing channels, which could have a material adverse effect on the Company's results of operations. Notwithstanding any investment to enter new channels or to expand existing distribution channels, such strategy may not be successful. KEY PERSONNEL The Company believes that it is critically important to fill certain key positions in its senior management team, and to maintain continuity at that level. For example, the Company is presently searching for a permanent chief executive officer and, due to the recent resignation of its vice president of marketing, a replacement for that position. Although the Company is devoting substantial effort to recruiting for these positions and others, it may not be successful in these efforts. CREDIT RISKS Many of the resellers discussed above are small organizations with limited capital. The Company continuously monitors and manages the credit it extends to its resellers; however, one or more of the resellers could become insolvent. In the event of such insolvency, the Company could experience disruptions in its distribution as well as a loss of some or all of any outstanding accounts receivable. The Company's objective is to increase international sales, including sales in emerging markets such as China and Latin America. The Company believes that the credit risks associated with resellers in emerging markets are materially greater than those associated with the U.S. and European markets. 16 17 INTELLECTUAL PROPERTY RIGHTS From time to time, certain companies have asserted patent, copyright and other intellectual property claims relevant to the Company's business and the Company expects that this will continue. The Company evaluates each claim relating to its products and, if appropriate, seeks a license. If any legal action were to arise in which the Company's products should be found to infringe upon intellectual property rights, the Company could be enjoined from further infringement and required to pay damages, which could have a material adverse effect on the Company's results of operations. DEPENDENCE ON EXPORT SALES For fiscal 1996, 1997 and the first quarter of fiscal 1998, sales outside the United States and Canada represented approximately 39%, 38% and 31%, respectively, of the Company's total sales. Sales outside the United States are subject to the normal risks of international business activities, such as protective tariffs, export and import controls, transportation delays and interruptions, and changes in demand resulting from fluctuations in exchange rates. With respect to exchange rates, virtually all of the Company's products sold in international markets are denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to foreign currencies could make the Company's products less price competitive in foreign markets. Any increase in international sales may subject the Company to greater currency fluctuation risk than it has faced in the past. ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW; THE COMPANY'S CHARTER DOCUMENTS Certain provisions of Delaware law and the charter documents of the Company may have the effect of delaying, deferring or preventing changes in control or management of the Company. The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law, which has the effect of restricting changes in control of a company. The Company's Board of Directors has authority to issue up to 5,000,000 shares of Preferred Stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of such shares without any further vote or action by the stockholders. 17 18 PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS See Note 4 of the Notes to Consolidated Financial Statements herein and also Item 3, Legal Proceedings, in Registrant's Form 10-K for the fiscal year ended March 30, 1997. ITEM 2: CHANGES IN SECURITIES Not applicable. ITEM 3: DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5: OTHER INFORMATION Not applicable. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: #27 - Financial Data Schedule (for EDGAR purposes only) b. No reports on Form 8-K were filed by the Company during the quarter ended June 30, 1997. 18 19 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROXIMA CORPORATION Dated: August 12, 1997 Kenneth E. Olson ------------------------------ KENNETH E. OLSON President and Chief Executive Officer Dated: August 12, 1997 Dennis Whittler ------------------------------ DENNIS A. WHITTLER Vice President, Finance 19 20 EXHIBIT INDEX Exhibit No. Description Page No. - ----------- ----------- -------- 27 Financial Data Schedule (for EDGAR use only) 21 20