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 March 31, 1998
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 (I.R.S. Employer Identification No.)
incorporation or organization)
27700B SW Parkway Avenue, Wilsonville, Oregon 97070
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 503-685-8888
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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
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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 22,197,341
(Class) (Outstanding at April 29, 1998)
IN FOCUS SYSTEMS, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998 and
December 31, 1997 2
Consolidated Statements of Operations - Three Months
Ended March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 9
PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
1
IN FOCUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
1998 1997
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ASSETS
Current Assets:
Cash and cash equivalents $ 18,528 $ 37,950
Marketable securities - held to maturity 10,521 7,220
Accounts receivable, net of allowances of $4,674 76,245 87,845
and $4,835
Inventories, net 50,518 32,120
Income taxes receivable 2,703 310
Deferred income taxes 1,247 1,247
Other current assets 2,964 2,589
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Total Current Assets 162,726 169,281
Marketable securities - held to maturity 6,505 3,500
Property and equipment, net of accumulated
depreciation of $24,435 and $21,769 15,099 15,507
Deferred income taxes 516 516
Other assets, net 2,134 1,104
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Total Assets $ 186,980 $ 189,908
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 46,474 $ 47,818
Payroll and related benefits payable 2,043 3,493
Marketing cooperative payable 1,543 1,176
Other current liabilities 4,301 4,392
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Total Current Liabilities 54,361 56,879
Shareholders' Equity:
Common stock, 30,000,000 shares authorized;
shares issued and outstanding: 22,186,693
and 21,931,728 53,677 51,733
Additional paid-in capital 12,320 11,278
Retained earnings 66,622 70,018
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Total Shareholders' Equity 132,619 133,029
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Total Liabilities and Shareholders' Equity $ 186,980 $ 189,908
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The accompanying notes are an integral part of these balance sheets.
2
IN FOCUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share amounts)
Three months ended March 31,
1998 1997
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Revenue $ 70,474 $ 64,764
Cost of sales 56,368 45,997
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Gross profit 14,106 18,767
Operating expenses:
Marketing and sales 11,202 6,964
Engineering 5,940 3,998
General and administrative 2,160 1,766
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19,302 12,728
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Income (loss) from operations (5,196) 6,039
Other income (expense):
Interest expense - (17)
Interest income 311 515
Other, net 41 32
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352 530
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Income (loss) before (provision for) benefit
from income taxes (4,844) 6,569
(Provision for) benefit from income taxes 1,448 (2,169)
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Net income (loss) (3,396) 4,400
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Basic net income (loss) per share $ (0.15) $ 0.21
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Diluted net income (loss) per share $ (0.15) $ 0.20
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The accompanying notes are an integral part of these statements.
3
IN FOCUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share amounts)
Three months ended March 31,
1998 1997
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Cash flows from operating activities:
Net income (loss) $ (3,396) $ 4,400
Adjustments to reconcile net income (loss) to
net cash flows provided by (used in)
operating activities:
Depreciation and amortization 2,672 2,108
Other non-cash (income) expense (18) 4
(Increase) decrease in:
Accounts receivable, net 11,600 (573)
Inventories, net (18,398) (6,009)
Income taxes receivable (2,393) 1,305
Other current assets (375) (1,279)
Increase (decrease) in:
Income taxes payable - 656
Accounts payable (1,344) 7,350
Payroll and related benefits payable (1,450) (303)
Marketing cooperative payable 367 (810)
Other current liabilities (91) (419)
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Net cash provided by (used in)
operating activities (12,826) 6,430
Cash flows from investing activities:
Purchase of marketable securities-held to maturity (7,806) (2,498)
Maturity of marketable securities-held to maturity 1,500 2,261
Payments for purchase of property and equipment (2,257) (2,023)
Other assets, net (1,019) 279
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Net cash used in investing activities (9,582) (1,981)
Cash flows from financing activities:
Proceeds from sale of common stock 1,944 942
Income tax benefit of non-qualified stock option
exercises and disqualifying dispositions 1,042 353
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Net cash provided by financing
activities 2,986 1,295
Increase (decrease) in cash and cash equivalents (19,422) 5,744
Cash and cash equivalents:
Beginning of period 37,950 33,935
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End of period $ 18,528 $ 39,679
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The accompanying notes are an integral part of these statements.
4
IN FOCUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The financial information included herein for the three-month periods ended
March 31, 1998 and 1997 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, 1997 is derived from In Focus Systems,
Inc.'s (the Company's) 1997 Annual Report on Form 10-K. The interim consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's 1997 Annual
Report on Form 10-K.
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.
March 31, 1998 December 31, 1997
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Raw materials and components $11,818 $11,774
Work-in-process 1,408 2,240
Finished goods 37,292 18,106
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$50,518 $32,120
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NOTE 3. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
Three Months Ended March 31,
1998 1997
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Cash paid during the period for income taxes $154 $86
Cash paid during the period for interest - 16
NOTE 4. EARNINGS PER SHARE
Beginning December 31, 1997, basic earnings per share (EPS) and diluted EPS are
computed using the methods prescribed by Statement of Financial Accounting
Standard No. 128, EARNINGS PER SHARE (SFAS 128). Basic EPS is calculated using
the weighted average number of common shares outstanding for the period and
diluted EPS is computed using the weighted average number of common shares and
dilutive common equivalent shares outstanding. Prior period amounts have been
restated to conform with the presentation requirements of SFAS 128.
5
Following is a reconciliation of basic EPS and diluted EPS:
Three Months Ended March 31, 1998 1997
- ---------------------------- ----------------------------------- -------------------------------
Per Per
BASIC EPS Share Share
Income Shares Amount Income Shares Amount
Income (loss) available to Common
Shareholders $ (3,396) 22,041 $ (0.15) $4,400 21,487 $ 0.21
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DILUTED EPS
Effect of dilutive stock options - - - 626
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Income (loss) available to Common
Shareholders $ (3,396) 22,041 $ (0.15) $4,400 22,113 $ 0.20
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Statements in this Form 10-Q which the Company considers to be forward-looking
are denoted with an *, and the following cautionary language applies to all such
statements, as well as any other statements in this Form 10-Q which the reader
may consider to be forward-looking in nature. 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. The Company, from time to time, may make
forward-looking statements relating to anticipated gross margins, availability
of products manufactured on behalf of the Company, backlog, new product
introductions and future capital expenditures. The following factors, among
others, could cause actual results to differ from those indicated in the
forward-looking statements: 1) in regard to gross margins, uncertainties
associated with market acceptance of and demand for the Company's products,
impact of competitive products and their pricing and dependence on third party
suppliers; 2) in regard to product availability and backlog, uncertainties
associated with manufacturing capabilities and dependence on third party
suppliers; 3) in regard 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; and 4) in regard to future capital expenditures, uncertainties
associated with new product introductions.
RESULTS OF OPERATIONS
Revenue increased to $70.4 million in the first quarter of 1998 compared to
$64.8 million in the first quarter of 1997, but decreased from $96.8 million in
the fourth quarter of 1997. The Company's revenue in the first quarter of 1998
was derived virtually 100 percent from products manufactured in-house, 69
percent of which were products that were introduced within the last six months.
The Company's revenues, and financial performance, were adversely affected in
the first quarter of 1998 by the following factors: 1) quarter end order rates
in the North American audio visual dealer and two tier wholesale channels fell
significantly from historical quarter ending order rates; 2) inventory levels
increased in the reseller channels due to slower sell through; and 3) extremely
aggressive competitive pricing in the conference room and personal projector
market segments.
6
The Company introduced and began shipping three new products in the first
quarter of 1998: 1) the LP225, a low cost SVGA amorphous TFT projector aimed at
the education and low end business markets; 2) the LP725, a high bright 750
lumen, 12 pound SVGA polysilicon projector aimed at the conference room
environment; and 3) the LP740, the industry's first reflective silicon based
SXGA projector aimed at super high-resolution business applications.
During the first quarter of 1998, International sales represented 57 percent of
total revenue, including 13 percent from Asia Pacific countries, compared to 46
percent international revenue in the first quarter of 1997.
The Asian market grew at the same rate as the industry as a whole during 1997
and it is now the third largest market in the Company's industry. The Company
has historically had very little market share in the Asian market and sees the
growth in the Asian market as an opportunity to expand its revenue base in Japan
and China.* Sales to most Asian companies have been, and continue to be,
prepaid or guaranteed by letters of credit, thereby reducing receivables risk.
The Company has a sales, service and support branch office in Singapore, but no
operating subsidiaries in Asian countries.
The data video projector industry has experienced 20 to 25 percent average sales
price (ASP) reductions per year over the last two years. Many of the Company's
competitors are headquartered in Japan. The Company expects similar ASP
reductions to occur in the industry in 1998.* Late in the first quarter of
1998, a series of increasingly competitive price reductions from a number of its
competitors caused the Company to adjust its pricing downward, beyond original
expectations for the first quarter, in order to stimulate orders.
The Company's parts contracts with Asian companies are denoted in U.S. dollars
and contain clauses for price adjustments when there are significant
fluctuations in currency rates. Accordingly, for purchases beginning the first
day of the next quarter, parts costs are adjusted based upon changes in local
currencies relative to the U.S. dollar.
Because there are multiple competitive products for the Company's resellers to
choose from, the Company does not operate with a large backlog. Instead, the
Company's customers generally order products for immediate delivery and the
Company must respond to competitive prices and ship the product quickly or risk
losing the order. However, as a result of orders from customers on credit hold
and orders for newly introduced products, at March 31, 1998, the Company had
backlog of approximately $24.0 million, compared to approximately $8.6 million
at March 31, 1997 and $14.9 million at December 31, 1997. Given current supply
and demand estimates, it is anticipated that a majority of the current backlog
will turn over by the end of the second quarter of 1998.* 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.
The Company achieved gross margins of 20.0 percent in the first quarter of 1998
compared to 29.0 percent in the first quarter of 1997 and 27.6 percent in the
fourth quarter of 1997. The decreases are primarily attributable to: 1) an
aggressive competitive pricing environment; 2) lower product mix of higher
margin products; 3) accelerated price
7
reductions to end of life the LP720 and LP730; 4) price protection to help
product sell through in the channel; and 5) reduced product shipments
contributing to higher fixed costs per unit. The Company expects the
competitive pricing environment will continue for the foreseeable future.*
Accordingly, the Company is continuing its ongoing efforts to reduce
manufacturing costs by working closely with its suppliers to reduce direct
material costs, designing products with extensible platforms that use new and
lower cost technologies and manufacturing higher volume products offshore. In
addition, the Company continues to focus on adding value to projectors that use
its own engine designs in order to become less reliant on more expensive
out-sourced engines.
Marketing and sales expense increased to $11.2 million (15.6 percent of revenue)
in the first quarter of 1998 compared to $7.0 million (10.8 percent of revenue)
in the first quarter of 1997. The increase is primarily a result of
expenditures in the first quarter of 1998 to build demand for the LP420 in
two-tier wholesale distribution and adding sales and service infrastructure
around the world, particularly in Europe and Japan.
Engineering expense increased to $5.9 million (8.4 percent of revenue) in the
first quarter of 1998 from $4.0 million (6.2 percent of revenue) in the first
quarter of 1997. This increase is primarily a result of timing for new product
releases under development as well as a restructuring charge in the first
quarter of 1998 in order to create a more efficient organization.
General and administrative expense increased to $2.2 million (3.1 percent of
revenue) in the first quarter of 1998 from $1.8 million (2.7 percent of revenue)
in the first quarter of 1997. The increase is primarily attributable to a
restructuring charge taken during the first quarter of 1998.
The total restructuring charge in the first quarter of 1998 was approximately
$1.1 million.
Loss from operations was $5.2 million in the first quarter of 1998 compared to
income from operations of $6.0 million (9.3 percent of revenue) in the first
quarter of 1997, as a result of decreased sales and gross margins and the
increased operating expenses as indicated above.
Income taxes are based on an estimated rate of 29.9 percent compared to 32.9
percent in the first quarter of 1997 and 29.1 percent for the year ended
December 31, 1997. The decrease from the first quarter of 1997 is primarily a
result of a larger benefit related to the Company's foreign sales corporation.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 working capital was $108.4 million, including $18.5 million of
cash and cash equivalents and $10.5 million of marketable securities. In the
first quarter of 1998, working capital decreased by $4.0 million and the current
ratio remained constant at 3.0:1 at March 31, 1998 and December 31, 1997. Cash
and cash equivalents decreased $19.4 million primarily due to cash used in
operations of $12.8 million, the net purchase of $6.3 million of marketable
securities and $2.3 million for purchases of property and equipment, offset by
$1.9 million provided by the sale of common stock through the exercise of
8
employee stock options and $1.0 million provided by the income tax benefit of
non-qualified stock option exercises and disqualifying dispositions.
Accounts receivable decreased $11.6 million to $76.2 million at March 31, 1998
compared to $87.8 million at December 31, 1997 primarily as a result of lower
than expected shipments in March 1998; accordingly cash receipts exceeded
revenues for the quarter and receivables decreased. The Company's day's sales
outstanding increased to 98 days at March 31, 1998 compared to 81 days at
December 31, 1997 as a result of lower average sales per day in the first
quarter of 1998 combined with slower than expected cash receipts from the
Company's channel partners. At March 31, 1998, 77 percent of the Company's
accounts receivable were current, 9 percent were 30 days or less past due and 14
percent were beyond 30 days past due.
Inventories increased $18.4 million to $50.5 million at March 31, 1998 from
$32.1 million at December 31, 1997 primarily due to an increase in finished
goods as a result of lower than anticipated shipments in March 1998 and, to a
lesser degree, new product introduction delays late in the quarter. As a result
of the above, annualized inventory turns were approximately 5.5 times for the
quarter ended March 31, 1998 compared to approximately 10.4 times for the fourth
quarter of 1997 on an annualized basis.
The $2.3 million of purchases of property, plant and equipment were primarily
for new product tooling, engineering design and test equipment and information
systems infrastructure. Total expenditures for property and equipment in 1998
are expected to total approximately $10.0 million, primarily for new product
tooling, operations and quality test equipment and information systems
infrastructure.*
FACTORS THAT MAY EFFECT FUTURE RESULTS OF OPERATIONS
The Company has begun the process of making organizational changes that
include a 10 percent executive pay cut, a closing of the slides manufacturing
portion of the Genigraphics business and several other cost containment
measures. These actions resulted in the Company laying off 12 percent of its
workforce, thereby reducing annual compensation by approximately $2.8 million
and reducing operating expenses by approximately $2.5 million per quarter
going forward.*
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits filed as a part of this report are listed below and this list is
intended to constitute the exhibit index.
EXHIBIT NO.
3 1990 Restated Articles of Incorporation
10 In Focus Systems, Inc. 1998 Stock Incentive Plan
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March 31, 1998.
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: April 29, 1998 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,
Chief Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
10