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

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

Delaware	95-4120606
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
381 Brea Canyon Road Walnut, California 91789 (909) 869-7976
(Address, including Zip Code, of Registrant’s Principal Executive Offices and Registrant’s Telephone Number, including Area Code)

		Page
	PART I: FINANCIAL INFORMATION
Item 1.	Consolidated Condensed Financial Statements (unaudited)	3
	Consolidated Condensed Balance Sheets as of September 30, 2004 and December 31, 2003	3
	Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2004 and 2003	4
	Consolidated Condensed Statements of Cash Flows for the nine-months ended September 30, 2004 and 2003	5
	Notes to Consolidated Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	27
	PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 2.	Unregistered Sales of Equity Securities, and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Submission of Matters to a Vote of Securities Holders	28
Item 5.	Other Information	28
Item 6.	Exhibits	28
	Signatures	29

	September 30, 2004			December 31, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	45,618		$	87,760
Short-term investments		-			3,687
Trade receivables—net		129,774			131,805
Other receivables		5,753			5,765
Inventories		107,097			128,803
Deferred income taxes		15,677			11,592
Prepaids and other current assets		5,946			4,980
Income taxes receivable		238			123
Net assets of business held for sale		-			4,013
Total current assets		310,103			378,528
PROPERTY, PLANT AND EQUIPMENT—Net		15,318			15,909
LONG-TERM INVESTMENTS		7,121			13,704
GOODWILL		2,123			2,123
OTHER ASSETS—Net		4,233			2,869
TOTAL	$	338,898		$	413,133
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Bank borrowings	$	15,784		$	6,342
Accounts payable		160,559			237,269
Accrued promotional expenses		27,047			15,779
Accrued warranty expense		15,626			14,706
Other accrued expenses		16,278			18,684
Total current liabilities		235,294			292,780
SUBORDINATED NOTES PAYABLE—Related party		43,000			43,000
DEFERRED INCOME TAXES		-			590
CONVERTIBLE MANDATORILY REDEEMABLE PREFERRED STOCK		13,069			12,056
STOCKHOLDERS’ EQUITY:
Common stock, $.01 par value: Authorized—600,000,000 shares at September 30, 2004 and December 31, 2003 Outstanding—353,952,429 and 353,897,749 shares at September 30, 2004 and December 31, 2003, respectively		3,540			3,539
Additional paid-in capital		92,142			92,105
Accumulated deficit		(42,402)			(28,125)
Accumulated other comprehensive loss		(5,745)			(2,812)
Total stockholders’ equity		47,535			64,707
TOTAL	$	338,898		$	413,133

		Nine months ended September 30,
		2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss) Income from continuing operations		$	(15,944	)	$	12,147
Adjustments to reconcile (loss) income from continuing operations to net cash used in operating activities:
Depreciation and amortization			3,007			2,900
Minority interest in net loss of subsidiaries			-			(1,216)
Loss on disposal of property, plant and equipment			180			56
Provision for doubtful accounts			613			638
(Gain) loss on sale of long-term investments			(5,195	)		104
Deferred income taxes			(4,086	)		2,918
Other			47			(79)
Changes in operating assets and liabilities:
Trade receivables—net			1,417			(12,154)
Other receivables			13			2,688
Inventories			21,706			3,328
Prepaids and other current assets			(839	)		617
Accounts payable			(76,710	)		(17,543)
Accrued promotional and other expenses			10,922			1,408
Accrued warranty expense			920			626
Income taxes payable/receivable			(2,505	)		1,901
Net cash used in operating activities			(66,454	)		(1,661)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of property, plant and equipment			(2,553	)		(3,148)
Proceeds on sale of long-term investments			2,033			4,447
Sales (Purchases) of short-term investments			3,687			(2,969)
Discontinued operations			7,808			(308)
Gain on discontinued operations			3,485			-
Net cash provided by (used in) investing activities			14,460			(1,978)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings			20,729			28,901
Payments on bank borrowings			(11,287	)		(25,211)
Proceeds from issuance of common stock			38			8
Net cash provided by financing activities			9,480			3,698
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(42,514	)		59
CASH AND CASH EQUIVALENTS—Beginning of period			87,760			66,088
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			372			97
CASH AND CASH EQUIVALENTS—End of period		$	45,618		$	66,244

(1)

Basic and diluted earnings per share are net of continuing and discontinued operations.

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net (loss) income		$	(20,622	)	$	3,549		$	(13,264	)	$	11,910
Foreign currency translation			21			324			188			420
Unrealized holding gains/(losses) on marketable securities—less realized gains			(2,208	)		721			(3,121	)		(691)
Total comprehensive (loss) income		$	(22,809	)	$	4,594		$	(16,197	)	$	11,639

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Net Sales
Americas	$	145,718		$	169,941		$	459,002		$	497,065
Europe		49,639			38,815			159,216			116,908
Asia Pacific		56,038			66,437			192,109			167,821
Total	$	251,395		$	275,193		$	810,327		$	781,794
(Loss) income from operations:
Americas	$	(13,850	)	$	2,429		$	(6,359	)	$	8,569
Europe		(7,276	)		1,501			(2,093	)		4,942
Asia Pacific		(10,451	)		(567	)		(11,363	)		(1,279)
Total	$	(31,577	)	$	3,363		$	(19,815	)	$	12,232

Nine Months Ended	Beginning Accrued Warranty Reserve			Payments for Units Returned			Additional Warranty Expense for Units Sold			Warranty Reserve Adjustment			Ending Accrued  Warranty  Reserve
September 30, 2003	$	14,253		$	(8,576	)	$	8,058		$	1,142		$	14,877
September 30, 2004	$	14,706		$	(8,171	)	$	9,091		$	—		$	15,626

(1)	Prepared in accordance to EITF 03-06 “Participating Securities and the Two Class Method under FASB No. 128”. The EPS calculation allocated (loss) income from continuing operations between common stock and the convertible mandatorily redeemable preferred stock.

(2)

For the three and nine months ended September 30, 2004, 6,547,000 shares of common stock issuable upon the exercise of options and 3,270,000 shares of common stock issuable upon the exercise of outstanding warrants were excluded from the diluted earnings per share calculation for each such period because they were anti-dilutive. For the three months and nine months ended September 30, 2003, 2,664,000 shares of common stock issuable upon the exercise of options were excluded from the diluted earnings per share calculation for such periods because they were anti-dilutive.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Net Sales
ADO	$	180		$	518		$	1,024		$	1,617
(Loss) Income from discontinued operations
ADO	$	(117	)	$	(126	)	$	(805	)	$	(237)

	September 30, 2004			December 31, 2003
Current assets	$	-		$	362
Other assets	$	-		$	5,447
Total assets	$	-		$	5,809
Accounts payable and accrued expenses	$	-		$	355
Minority interest	$	-		$	1,441
Net assets of business held for sale	$	-		$	4,013

 

Results of Operations

 

The following table sets forth, for the periods indicated, our consolidated condensed statements of operations expressed as a percentage of net sales.

 

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Net sales	100.0%			100.0%			100.0%			100.0%
Cost of sales	99.6%			87.5%			90.4%			86.3%
Gross profit		0.4%			12.5%			9.6%			13.7%
Selling, general and administrative expenses		13.0%			11.3%			12.1%			12.1%
Income (loss) from operations		(12.6)%			1.2%			(2.5)%			1.6%
Other income (expense), net:		(0.1)%			0.7%			(0.1)%			0.5%
(Loss) income from continuing operations before income taxes		(12.7)%			1.9%			(2.6)%			2.1%
Provision for income taxes		(3.1)%			0.6%			0.6%			0.5%
(Loss) income from continuing operations		(9.6)%			1.3%			(2.0)%			1.6%
(Loss) from discontinued operations		0.0%			0.0%			(0.1)%			0.0%
Gain on discontinued operations		1.4%			0.0%			0.4%			0.0%
Net (loss) income		(8.2)%			1.3%			(1.7)%			1.6%
Preferred stock accretion		(0.1)%			(0.1)%			(0.1)%			(0.1)%
Net income available to common stockholders		(8.3)%			1.2%			(1.8)%			1.5%

 

 

	Three Months Ended September 30,									Nine Months Ended September 30,
	2004			Percentage Increases/ (Decreases)			2003			2004			Percentage Increases/ (Decreases)			2003
	(in thousands)
Net sales
Americas	$	145,718			(14.3)%		$	169,941		$	459,002			(7.7)%		$	497,065
Europe		49,639			27.9%			38,815			159,216			36.2%			116,908
Asia Pacific		56,038			(15.7)%			66,437			192,109			14.5%			167,821
Total	$	251,395			(8.7)%		$	275,193		$	810,327			3.7%		$	781,794
Income (loss) from continuing operations:
Americas	$	(13,850	)		(670.2)%		$	2,429		$	(6,359	)		(174.2)%		$	8,569
Europe		(7,276	)		(584.7)%			1,501			(2,093	)		(142.4)%			4,942
Asia Pacific		(10,451	)		(1743.2)%			(567	)		(11,363	)		(788.4)%			(1,279)
Total	$	(31,577	)		(1039.0)%		$	3,363		$	(19,815	)		(262.0)%		$	12,232

 

 

Consolidated Results of Operations—Three Months and Nine Months Ended September 30, 2004 and September 30, 2003

Net Sales

Our consolidated net sales decreased $23.8 million, or 8.7%, to $251.4 million for the three months ended September 30, 2004 compared to $275.2 million for the three months ended September 30, 2003. However, consolidated net sales increased $28.5 million, or 3.7%, to $810.3 million for the nine months ended September 30, 2004 compared to $781.8 million for the nine months ended September 30, 2003. Net sales outside of the Americas region accounted for 42.0% and 38.2% of total net sales for the three months ended September 30, 2004 and 2003, and 43.3% and 36.4% of total net sales for the nine months ended September 30, 2004 and 2003, respectively. The growth in net sales outside of the Americas was predominantly driven by higher net sales in China, Russia, France and the United Kingdom. The unit volume increase for the nine months ended September 30, 2004 was offset by a decline in the average selling price per unit of 10.6% and 5.1% for the three and nine months ended September 30, 2004 compared to the three and nine months ended September 30, 2003. Returns and sales incentive allowances charged against gross sales were $43.3 million and $29.6 million for the three months ended September 30, 2004 and 2003, and $89.5 million and $86.1 million for the nine months ended September 30, 2004 and 2003, respectively.

We sold approximately 1.1 million display products for the three months ended September 30, 2004. This was approximately the same number of units sold for the same period of 2003. Of the total product units sold for the three months ended September 30, 2004, CRT monitors accounted for 45.9%, LCD monitors accounted for 37.8%, and other products accounted for 16.3% as compared to 50.6%, 41.3%, and 8.1%, respectively, for the three months ended September 30, 2003. The unit sales were impacted by our stronger unit sales in Europe partially offset by our lower unit sales in the Americas.

Our unit sales increased approximately 300,000 units, or 9% to approximately 3.2 million display products for the nine months ended September 30, 2004 compared to approximately 2.9 million display products for the nine months ended September 30, 2003. Of the display product units sold for the nine months ended September 30, 2004, CRT monitors accounted for 49.8%, LCD monitors accounted for 36.7%, and other products accounted for 13.5% as compared to 49.7%, 41.7%, and 8.6%, respectively, for the nine months ended September 30, 2003. The increase in units sold was primarily due to continued expansion in China as well as stronger unit sales in Europe.

	13

Americas—In our Americas region, net sales decreased $24.2 million, or 14.3%, to $145.7 million for the three months ended September 30, 2004 compared to $169.9 million for the three months ended September 30, 2003. Net sales also decreased $38.1 million, or 7.7%, to $459.0 million for the nine months ended September 30, 2004 compared to $497.1 million for the nine months ended September 30, 2003. The decrease in net sales for the three months and nine months ended September 30, 2004 compared to the three months and nine months ended September 30, 2003 was primarily due to lower unit sales of LCD di splays and rapidly declining average selling prices of LCD displays as a result of the oversupply in the marketplace.

Europe—In our Europe region, net sales increased $10.8 million, or 27.9%, to $49.6 million for the three months ended September 30, 2004 compared to $38.8 million for the three months ended September 30, 2003. Net sales also increased $42.3 million, or 36.2%, to $159.2 million for the nine months ended September 30, 2004 compared to $116.9 million for the nine months ended September 30, 2003. The increase in net sales was primarily due to the region’s continued expansion in Russia, France, and the United Kingdom. Net sales in our Europe region also increased due to the shift in the ratio of sales fr om CRT to LCD displays.

Asia Pacific—In our Asia Pacific region, net sales decreased $10.4 million, or 15.7%, to $56.0 million for the three months ended September 30, 2004 compared to $66.4 million for the three months ended September 30, 2003. However, net sales increased $24.3 million, or 14.5%, to $192.1 million for the nine months ended September 30, 2004 compared to $167.8 million for the nine months ended September 30, 2003. The reason for the decrease in net sales for the three months ended September 30, 2004 compared to the three months ended September 30, 2003 was lower sales in our China and Taiwan markets due to rap idly declining average selling prices in those markets. The primary reason for the increase in net sales for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 was due to our continued year to date growth in the China market, largely as a result of increased unit shipments of CRT products. In addition, net sales also increased due to higher unit sales in existing markets such as Australia, New Zealand and Southeast Asia as a result of expanding our customer base. The increase in net sales was partially offset by rapidly declining average selling prices of LCD displays as a result of the oversupply in the marketplace.

Cost of Sales

Our consolidated cost of sales increased $9.6 million, or 4.0 %, to $250.4 million for the three months ended September 30, 2004 compared to $240.8 million for the three months ended September 30, 2003. Consolidated cost of sales increased $57.5 million, or 8.5%, to $732.4 million for the nine months ended September 30, 2004 compared to $674.9 million for the nine months ended September 30, 2003. As a percentage of net sales, cost of goods sold increased to 93.4 % for the three months ended September 30, 2004 from 84.2% for the three months ended September 30, 2003. For the nine months ended September 30, 2004 cost of goods sold increased to 85.7% as a percentage of net sales from 82.5% for the nine months ended September 30, 2003. Overall, gross margin declined to 0.4% for the three months ended September 30, 2004 compared to 12.5% for the three months ended September 30, 2003. Gross margin also declined to 9.6% for the nine months ended September 30, 2004 compared to 13.7% for the nine months ended September 30, 2003. The decrease in gross margins for the three and nine month ended September 30, 2004 compared to September 30, 2003 was primarily due to rapidly decreasing average selling prices as we sold our higher cost inventory of LCD panel displays in the third quarter of 2004. The lower gross margin was also due to higher inventory write-downs of $5.8 million and $8.1 million for the three and nine months ended September 30, 2004 compared to $908,000 and $1.1 million for the three and nine months ended September 30, 2003.

	14

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.5 million, or 5.0%, to $32.6 million for the three months ended September 30, 2004 compared to $31.1 million for the three months ended September 30, 2003. Selling, general and administrative expenses also increased $3.1 million, or 3.3%, to $97.8 million for the nine months ended September 30, 2004 compared to $94.7 million for the nine months ended September 30, 2003. The dollar increase was mainly attributable to higher personnel costs of $1.4 million and $5.5 million for the three and nine months ended September 30, 2004 to support regional expansion in our existing markets such as China, Russia and other key regional markets as well as to support expansion of our existing and new product categories such as LCD TVs, plasma displays and wireless products. In addition, we had higher advertising and marketing costs of $700,000 and $1.6 million for the three and nine months ended September 30, 2004 to support regional and product expansion and higher professional fees of $1.9 million and $2.8 million for the three and nine months ended September 30, 2004. The increase was partially offset by lower product development expenses of $1.8 million and $5.2 million for the three and nine months ended September 30, 2004. We also had lower other selling expenses of $23,000 and $929,000 for the three and nine months ended September 30, 2004 primarily due to the shortage of LCD panels during the first half of 2004 and an oversupply in the third quarter of 2004. As a percentage of net sales, selling, general and administrative expenses increased to 13.0% for the three months ended September 30, 2004 from 11.3% for the three months ended September 30, 2003. However, as a percentage of net sales, selling, general and administrative expenses remained the same at 12.1 % for the nine months ended September 30, 2004 and 2003.

(Loss) Income from Operations

Income from operations decreased $34.9 million, to a loss of $31.6 million for the three months ended September 30, 2004 compared to income of $3.4 million for the three months ended September 30, 2003. Income from operations decreased $32.0 million to a loss of $19.8 million for the nine months ended September 30, 2004 compared to income of $12.2 million for the nine months ended September 30, 2003. As a percentage of net sales, income from operations decreased to (12.6%) for the three months ended September 30, 2004 compared to 1.2% for the three months ended September 30, 2003. As a percentage of net sales, income from operations decreased to (2.5%) for the nine months ended September 30, 2004 compared to 1.6% for the nine months ended September 30, 2003.

Americas—In our Americas region, income from operations decreased $16.3 million to a loss of $13.9 million for the three months ended September 30, 2004 compared to income of $2.4 million for the three months ended September 30, 2003. Income from operations decreased $14.9 million to a loss of $6.4 million for the nine months ended September 30, 2004 compared to income of $8.6 million for the nine months ended September 30, 2003. The decrease for the three and nine months ended September 30, 2004 compared to the three and nine months ended September 30, 2003 was mainly due to rapidly declining average selling prices, higher inventory write downs, higher professional fees, and higher personnel co sts. These costs were partially offset by lower product development costs.

Europe—In our Europe region, income from operations decreased $8.8 million to a loss of $7.3 million for the three months ended September 30, 2004 compared to income of $1.5 million for the three months ended September 30, 2003. Also, income from operations decreased $7.0 million to a loss of $2.1 million for the nine months ended September 30, 2004 compared to income of $4.9 million for the nine months ended September 30, 2003. The decrease for the three months ended September 30, 2004 compared to the three months ended September 30, 2003 was mainly due to higher inventory write-downs, and higher person nel costs to support increased sales volume in existing markets. This decrease was partially offset by higher net sales compared to the three months ended September 30, 2003. The decrease for the nine months ended September 30, 2004 compared to nine months ended September 30, 2003 was primarily due to higher inventory write-downs, higher investments in advertising and marketing expenses and higher personnel related expenses to support increased sales volume in existing markets. Again, these costs were partially offset by an increase in net sales.

	15

Asia Pacific—In our Asia Pacific region, loss from operations increased $9.9 million, to a loss of $10.5 million for the three months ended September 30, 2004 compared to a loss of $567,000 for the three months ended September 30, 2003. Also, loss from operations increased $10.1 million, to a loss of $11.4 million for the nine months ended September 30, 2004 compared to a loss of $1.3 million for the nine months ended September 30, 2003. The increase in loss for the three and nine months ended September 30, 2004 was mainly due to rapidly declining average selling prices, higher inventory write-downs, higher investments in advertising, and marketing and personnel costs related to supporting the increa sing marketing efforts in China partially offset by an increase in net sales in the China market.

Other Income (Expense), Net

Other income (expense), net decreased $2.1 million, or 108.7%, to an expense of $170,000 for the three months ended September 30, 2004 compared to income of $1.9 million for the three months ended September 30, 2003. Net other income (expense) also decreased $4.4 million, or 116.3%, to an expense of $609,000 for the nine months ended September 30, 2004 compared to income $3.7 million for the nine months ended September 30, 2003. The decrease in other income (expense) was due to higher unrealized/realized losses on foreign exchange of $1.0 million and $3.3 million for the three and nine months ended September 30, 2004 compared to the three and nine months ended September 30, 2003. It was also due to lower minority interest of $(700,000) and $(1.2) million for the three and nine months ended September 3 0, 2004 compared to the three and nine months ended September 30, 2003. The decrease was also due to lower gains on sale of investments of $(500,000) for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. However, the decrease was partially offset by higher gains on sale of investments of $900,000 for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

(Benefit)/Provision for Income Taxes

The (benefit)/provision for income taxes was $(7.8) million, or (24.4)% on loss from continuing operations for the three months ended September 30, 2004 as compared to $1.6 million, or 30.8% on income from continuing operations for the three months ended September 30, 2003. The effective tax rate on net income (i.e., provision) decreased from 30.8% for the three months ended September 30, 2003 to an effective tax rate on net losses (i.e., benefit) of (24.4) % for the three months ended September 30, 2004 primarily due to greater losses that were sustained in jurisdictions where no tax benefit can be provided.

The (benefit)/provision for income taxes was $(4.5) million, or (21.9)%, on loss from continuing operations for the nine months ended September 30, 2004 as compared to $3.8 million, or 24.0%, on income from continuing operations for the nine months ended September 30, 2003. The effective tax rate decreased from 24.0% for the nine months ended September 30, 2003 to (21.9)% for the nine months ended September 30, 2004 primarily due to greater losses that were sustained in jurisdictions where no tax benefit can be provided.

(Loss) Income from Discontinued Operations and Gain on Sale of ADO

During the third quarter of 2004, we sold ADO, one of our majority-owned subsidiaries. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations of these businesses are reported as discontinued operations for the periods indicated. See Part I, Item 1, Note 10 to our consolidated condensed financial statements for more information on this transaction.

 

 

	16

Liquidity and Capital Resources

		Nine Months Ended September 30,
		2004			2003
Net cash used in operating activities		$	(66,454	)	$	(1,661)
Net cash provided by (used in) investing activities			14,460			(1,978)
Net cash provided by financing activities			9,480			3,698
Net (decrease)/increase in cash and cash equivalents		$	(42,514	)	$	59

As of September 30, 2004, we had cash and cash equivalents of $45.6 million. Our cash balances are held in numerous locations throughout the world. Most of the amounts held outside the United States could be repatriated to the United States, but, under current law, would be subject to United States federal income taxes, less applicable foreign tax credits. In certain countries, foreign exchange limitations limit the amount of cash that can be repatriated. We have accounted for the United States federal tax liability on these amounts for financial statement purposes except for foreign earnings that are considered indefinitely reinvested outside the United States. Repatriation could result in additional United States federal income tax payments in future years. Where local restrictions prevent an efficient inter-compa ny transfer of funds, our intent is that cash balances would remain in the foreign country and we would meet United States liquidity needs through ongoing cash flows from operations, external borrowings, or both. We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. We expect to meet expected and unexpected cash flow needs by accessing our credit lines in the Americas, Europe, and Asia Pacific.

In October 2004, the “American Jobs Creation Act of 2004” was passed.  We are currently assessing the impact of this law on our operations, particularly relative to provisions on repatriation of foreign earnings.  We do not expect this act to have a material impact on our financial position or results of operations.

 

Operating Activities

Cash flow used in operating activities was $66.5 million during the nine months ended September 30, 2004 compared to $1.7 million during the nine months ended September 30, 2003. The increase in net cash used in operating activities between the nine months ended September 30, 2004 and September 30, 2003 was primarily due to the losses incurred from continuing operations of $15.9 million in 2004 as well as additional net payments on working capital mainly related to higher product purchases of $705 million partially offset by lower spending on promotional expenses.

Accounts receivable decreased by $2.0 million to $129.8 million at September 30, 2004 from $131.8 million at December 31, 2003 primarily due to the timing of sales. Days sales outstanding remained relatively stable at 44 days at September 30, 2004 compared to 40 days at September 30, 2003. As of September 30, 2004 we had no major collection or billing problems that had not already been accounted for in our allowance for doubtful accounts. We have not materially changed our payment terms or delinquency policies between 2003 and 2004.

Inventories decreased by $21.7 million to $107.1 million at September 30, 2004 compared to $128.8 million at December 31, 2003. The decrease in inventory was primarily due to higher net sales and reduced inventory purchases in the third quarter of 2004. Our inventory turns have remained relatively stable at six times for the nine months ended September 30, 2004 and 2003.

Accounts payable decreased approximately $76.7 million to $160.6 million at September 30, 2004 compared to $237.3 million at December 31, 2003. The decrease was largely due to the reduction of product purchases and timing of our payments to our suppliers.

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Investing Activities

Cash flow provided by investing activities was $14.5 million during the nine months ended September 30, 2004 compared to cash flow used in investing activities of $2.0 million during the nine months ended September 30, 2003. The primary reason for the increase during the nine months ended September 30, 2004 was the proceeds of $7.8 million from the sale of ADO and the gain recorded for the sale of ADO of $3.5 million. It was also due to the sale of long and short-term investments of $5.7 million during the nine months ended September 30, 2004.

Financing Activities

Cash flow provided by financing activities was $9.5 million during the nine months ended September 30, 2004 compared to cash flow provided by financing activities of $3.7 million during the nine months ended September 30, 2003. The primary reason for the increase was a net increase of bank borrowings during the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 to fund operations in our Asia Pacific region.

Contractual Obligations and Commitments

 

At September 30, 2004, we had contractual obligations and commercial commitments of $86.8 million as shown in the table below. The table below excludes obligations related to accounts payable and accrued liabilities incurred in the ordinary course of business.

	Payments due by period
Contractual Obligations	Total			Less than 1 year			1-3 years			3-5 years			More than  5 years
	(in thousands)
Operating lease obligations	$	5,201		$	700		$	3,500		$	1,001		$	—
Licensing agreements		1,738			—			1,738			—			—
Bank borrowings		15,784			15,784			—			—			—
Subordinated notes payable (1)		49,049			430			3,414			45,205			—
Preferred stock mandatory redemption		15,000			—			15,000			—			—
Total	$	86,772		$	16,914		$	23,652		$	46,206		$	—

(1)

Includes interest payable of $430,000, $3,414,000, and $2,205,000 for the respective periods presented above.

Credit Facilities

 

As of September 30, 2004, we had no outstanding balance on our line of credit with CIT Group/Business Credit, Inc. As of September 30, 2004, the Asia Pacific region had outstanding cash advances of approximately $15.4 million and other term loans of approximately $368,000. In June 2004, ViewSonic Europe Limited entered into a $20.0 million line of credit facility with Burdale Financial Limited. This line of credit is secured by trade receivable and inventory of ViewSonic Europe Limited. Advances bear interest at Libor plus a margin cost. There were no borrowings against this facility as of September 30, 2004.

 

Off-Balance Sheet Arrangements

As of September 30, 2004 and 2003, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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Seasonality

 

The market for our products historically has experienced seasonal shifts in demand due to changes in buying patterns by our customers. Buying patterns vary geographically, and the impact on our operating results in a given period may vary depending on our actual or anticipated level of activity in the relevant region. We generally experience a decline in net sales from the first quarter to the second quarter of each year and we tend to experience the highest net sales in the fourth quarter of the year due to a strong buying season in the fourth quarter by large wholesale distribution partners and retailers due to the holiday season in the Americas. Our seasonality is moderated through slightly different seasonal variations in the three regions.

 

Operating Capital and Capital Expenditure Requirements

We believe that our existing cash balances, credit facilities and anticipated cash flows from operations will be sufficient to meet our operating, acquisition and capital requirements for at least the next 12 months. However, there is no assurance that we will not need to raise additional equity or debt financing within this time frame. We also may require additional capital for other purposes not presently contemplated. If we are unable to obtain sufficient capital, we could be required to curtail capital equipment purchases or research and development expenditures, which could harm our business. Factors that could affect our cash used or generated from operations and, as a result, our need to seek additional borrowings or capital include:

• Decreased demand and market acceptance for our products;
• Inability to successfully develop our next-generation products;
• Competitive pressures resulting in lower than expected average selling prices; and
• New product announcements or product introductions by our competitors.

Critical Accounting Policies and Estimates

Our critical accounting policies reflecting our estimates and judgments are described in Item 2 Financial Information of our registration statement on Form 10/A for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on August 27, 2004. We have not changed those policies since such date. Investors should therefore read this Item 2 in conjunction with such description.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial market risk arises from fluctuations in foreign currencies. A majority of our net sales, expense and capital purchasing activities are transacted in U.S. Dollars. However, we do enter into these transactions in other currencies, primarily the Euro and certain Asian currencies. Our net sales and purchasing transactions denominated in currencies other than the U.S. Dollar are subject to exchange rate fluctuations and could potentially negatively impact our financial results.

We have significant European net sales denominated in the Euro. Product shipping, and selling, general and administrative costs associated with a portion of these sales are U.S. Dollar-denominated. During the nine months ended September 30, 2004, the Euro-to-U.S. Dollar foreign currency exchange rate continued to strengthen against the U.S. Dollar increasing 1.0% compared to the year-end rate of 2003. During the nine months ended September 30, 2003, the Euro-to-U.S. Dollar increased by 9.6% compared to the year-end rate of 2002. The strengthening of the Euro positively impacted the three months ended September 30, 2004 net sales by $231,000 and loss from operations by $154,000, assuming all other factors remain constant. It also positively impacted the nine months ended September 30, 2004 net sales by $2.2 million and loss from operations by $1.6 million, assuming all other factors remain constant. We currently estimate that a 1.0% change in value of the Euro-to-U.S. Dollar exchange rates could impact net sales by $2.2 million. We cannot determine the ultimate impact of future changes to these and other currency exchange rates on our 2004 net sales, income from operations, net income, equity, and comprehensive income.

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We have a portfolio of investments that includes marketable securities classified as available-for-sale long-term investments. To the extent that these investments continue to have strategic value, we typically do not attempt to reduce or eliminate our market exposure. For those securities that are no longer considered strategic, management will evaluate market and economic factors in its decision on the timing of disposal. Our investments are generally in companies in the high-technology industry.

 

Factors that May Affect Our Business and Financial Results

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

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

• The introduction and market acceptance of new technologies, products, and services;
• Variations in product costs and the mix of products sold;
• The size and timing of customer orders, which, in turn, will often depend upon the success of our customers’ business or specific products or services;
• Adverse changes in the conditions in the markets for display products;
• The size and timing of capital expenditures by our customers;
• Inventory practices of our customers;
• Conditions in the broader markets for information technology and communications;
• Adverse changes in the credit quality of our customers and suppliers;
• Adverse changes in the supply of components such as LCD panels, including oversupply and undersupply; and
• The impact of acquired businesses and technologies.

These trends and factors could harm our business, operating results and financial condition.

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

 

As a percentage of net sales, selling, general and administrative expenses represents 12.9% and 11.3% for the three months ended September 30, 2004 and 2003. As a percentage of net sales, selling, general and administrative expenses represents 12.1 % for the nine months ended September 30, 2004 and 2003. We expect sales, general and administrative expenses to continue to increase in absolute dollars as we continue to support our operations, launch our new products and protect our business interests. Additionally, because we typically recognize a substantial portion of our revenues in the last month of each quarter, we may not be able to adjust our operating expenses in a timely manner in response to any revenue shortfalls. If we are unable to reduce operating expenses quickly in response to any revenue shortfal ls it would negatively impact our financial results.

 

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

 

Inventory purchases are based upon future demand forecasts. If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing prices of product components, rapidly changing technology and customer requirements or an increase in the supply of products in the marketplace, we could be required to write-down our inventory and our gross margins could be adversely affected. During the third quarter of 2004, the average selling prices for our LCD monitors declined significantl y due in large part to unexpected surplus of LCD panels in the market. As a result of the LCD monitor oversupply, we were required to reduce the average selling prices of some of our mainstream desktop products and our gross margins were adversely affected. If any of these events occur in the future, we could be forced to continue to reduce average selling prices or to write-down our inventory and our gross margins could be adversely affected.

We order materials in advance of anticipated customer demand. Therefore, we have limited ability to reduce our inventory purchase commitments quickly in response to any revenue shortfalls.

 

Substantially all of our sales are made on the basis of purchase orders rather than long-term agreements. As a result, we may commit to purchase products without having received advance purchase commitments from customers. Any inability to sell products to which we have devoted significant resources could harm our business. Additionally, because we typically need sufficient lead-time in purchasing our products, we may not be able to reduce our inventory purchase commitments in a timely manner in response to any revenue shortfalls. We could be subject to excess or obsolete inventories and be required to take corresponding inventory write-downs if growth slo ws or if we incorrectly forecast product demand. A reduction in demand could negatively impact our gross margins and financial results.

 

We are subject to risks associated with our international operations, which may harm our business.

 

We generated 42.0% of our total net sales to customers outside of the United States and other Americas for the three months ended September 30, 2004 and 43.3% for the nine months ended September 30, 2004. Sales to these customers outside of the United States and other Americas subjects us to a number of risks associated with conducting business outside of the United States and other Americas, including the following:

·    International economic and political conditions;

·    Unexpected changes in, or impositions of, legislative or regulatory requirements;

·    Increases in the U.S. dollar as compared to other currencies;

·    Inadequate local infrastructure;

·    Delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions;

·    Transportation delays;

·    Longer payment cycles;

·    Tax laws (including U.S. taxes on foreign operations);

·    Foreign currency exchange rates;

·    Imposition of additional taxes and penalties; and

·    The burdens of complying with a variety of foreign laws.

    Any one of the foregoing factors could cause our business, operating results and financial condition to suffer.

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If we fail to maintain and/or expand our sales channels, our revenue may decline.

 

To maintain and grow our market share, net sales and brand, we must maintain and expand our sales channels. We currently sell our products through distributors, retailers, VARs, system integrators, commercial or enterprise resellers, direct marketing/e-retailers, and ViewSonic online stores. These entities purchase our products directly from us or through our distributors. We have no minimum purchase commitments or long-term contracts with any of these third parties. Our agreements are generally non-exclusive and generally may be terminated by either party for any reason or no reason with 30 days notice.

Retailers have limited shelf space and promotional budgets, and competition is intense for these resources. A competitor with more extensive product lines and stronger brand identity may have greater bargaining power with these retailers. The competition for retail shelf space may increase, which would require us to increase our marketing expenditures to maintain current levels of retail shelf space.

We must also continuously monitor and evaluate emerging sales channels. If we fail to establish a presence in an important developing sales channel, our business could be harmed. If we are unable to establish relationships in emerging sales channels, our sales could decline and we would lose market share.

We rely on a limited number of wholesale distributors and national retailers for most of our sales, and changes in price or purchasing patterns could lower our revenue or gross margins.

 

We sell our products through wholesale distributors such as Ingram Micro, Tech Data Corporation and Synnex Corporation and national retailers such as Best Buy Co., Inc. and Comp USA, Inc. We expect that a majority of our net sales will continue to come from sales to a small number of wholesale distributors and national retailers for the foreseeable future. We have no minimum purchase commitments or long-term contracts with any of these customers. The wholesale distributors and retailers could decide at any time to discontinue, decrease or delay their purchases of our products. In addition, the prices that wholesale distributors and retailers pay for our products are subject to negotiation and could change frequently. If any of our major wholesale distributors or retailers change their purchasing patterns or ref use to pay the prices that we set for our products, our net sales and operating results could be negatively impacted. If our wholesale distributors and retailers increase the size of their product orders without sufficient lead-time for us to process the order, our ability to fulfill product demands would be compromised. In addition, because our accounts receivable are concentrated within a small group of wholesale distributors and retailers, the failure of any of them to pay on a timely basis, or at all, would reduce our cash flow.

If we do not effectively manage our sales channel inventory and product mix, we may incur costs associated with excess inventory or lose sales from having too few products or the wrong mix of products.

 

If we are unable to properly monitor, control and manage our sales channel inventory and maintain an appropriate level and mix of products with our customers and within our sales channels, we may incur increased and unexpected costs associated with this inventory. We generally allow wholesale distributors and retailers to return a limited amount of our products in exchange for other products. Under our price protection policy, subject to certain conditions, if we reduce the list price of a product, we issue a credit in an amount equal to the reduction for each of the products held in inventory by our wholesale distributors and retailers. If our wholesale distributors and retailers are unable to sell their inventory in a timely manner, we may under our policy lower the price of the products, or these parties may exchange the products for newer products. If we improperly forecast demand for our products we could end up with too many products and be unable to sell the excess inventory in a timely manner, if at all, or, alternatively we could end up with too few products and not be able to satisfy demand. If these events occur, we could incur increased expenses associated with writing off excessive or obsolete inventory or lose sales and therefore suffer declining gross margins.

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The average selling price of our products typically decreases rapidly over the life of the product, which negatively affects our gross margins.

 

The market in which we compete is subject to technological advances with yearly new product releases and price competition. As a result, the price at which we can sell our products typically declines over the life of the product. The price at which a product may be sold is generally referred to as the average selling price. For example, although the average selling price of our CRT monitors remained relatively constant from the second quarter of 2004 to the third quarter of 2004, the average selling price of our LCD monitors decreased approximately 18% from the three months end June 30, 2004 to the three months ended September 30, 2004. Of the total product units sold for the three months ended September 30, 2004, CRT monitors accounted for 45.9%, LCD monitors accounted for 37.8%, and other products accounted for 16 .3% as compared to 50.6%, 41.3%, and 8.1%, respectively, for the three months ended September 30, 2003. Of the display product units sold for the nine months ended September 30, 2004, CRT monitors accounted for 49.8%, LCD monitors accounted for 36.7%, and other products accounted for 13.5% as compared to 49.7%, 41.7%, and 8.6%, respectively, for the nine months ended September 30, 2003. In order to sell products that have a declining average selling price and still maintain our gross margins, we need to continually reduce our product costs. To manage product-sourcing costs, we must collaborate with our contract manufacturers to engineer the most cost-effective design for our products. In addition, we must carefully manage the price paid for components used in our products. We must also successfully manage our freight and inventory holding costs to reduce overall product costs. We also need to continually introduce new products with higher sales prices and gross margins in order to maintain our overall gross margins. If we are unable to manage the cost of older products or successfully introduce new products with higher gross margins, our net sales will decrease and our gross margins will decline.

We depend on third-party contract manufacturers to manufacture our products. If these contract manufacturers experience any delay, disruption or quality control problems in their operations, we could lose market share and revenues, and our reputation may be harmed.

 

All of our products are manufactured, assembled, tested and packaged by contract manufacturers. We rely on several contract manufacturers to procure components and, in some cases, subcontract engineering work. Some of our products are manufactured by a single contract manufacturer. Our contract manufacturers are primarily located in mainland China, Taiwan, Korea, Japan and Thailand and may be subject to disruption by earthquakes, typhoons and other natural disasters, as well as political, social or economic instability. We do not have any long-term contracts with any of our third-party contract manufacturers. All of our contracts with our contract manufacturers are terminable by either party with 90 days notice for any reason or no reason. Our four largest contract manufacturers for the three and nine months ended S eptember 30, 2004 were Delta Electronics, Inc, Techview International Technology Inc., Coretronic Corporation and Top Victory Technology. The loss of the services of any of our primary contract manufacturers could cause a significant disruption in operations and delays in product shipments. Qualifying a new contract manufacturer and commencing volume production is expensive and time consuming.

Our reliance on contract manufacturers also exposes us to the following risks over which we have limited control:

• Unexpected increases in manufacturing and repair costs;
• Interruptions in shipments if one of our manufacturers is unable to complete production;
• Inability to control the quality of finished products;
• Inability to control delivery schedules;
• Unpredictability of manufacturing yields; and
• Potential lack of adequate capacity to manufacture all or a part of the products we require.

 

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We rely upon third parties for technology that is critical to our products, and if we are unable to continue to license this technology and future technology, our ability to offer competitive products could be harmed and our costs of production could increase.

 

We rely on third parties to obtain non-exclusive software license rights to technologies that are incorporated into and necessary for the operation and functionality of our products. Because the intellectual property we license is available from third parties, barriers to entry for our competitors may be lower than if we owned exclusive rights to the technology we license and use. On the other hand, if a competitor enters into an exclusive arrangement with any of our third-party technology providers, our ability to develop and sell products containing that technology could be severely limited. Our licenses often require royalty payments or other consideration to third parties. Our success will depend in part on our continued ability to have access to these technologies on commercially reasonable terms. If we are unable t o license the necessary technology, we may be forced to acquire or develop alternative technology of lower quality or performance standards. This could limit and delay our ability to offer competitive products and increase our costs of production. As a result, our gross margins, market share, and operating results could be harmed.

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

 

We provide our third-party contract manufacturers with a rolling forecast of demand which they use to determine their material and component requirements. Lead times for ordering materials and components vary significantly and depend on various factors, such as the specific supplier, contract terms and demand and supply for a component at a given time. Some of our components have long lead times. If our forecasts are less than our actual requirements, our contract manufacturers may be unable to manufacture products in a timely manner. If our forecasts are too high, our contract manufacturers will be unable to use the components they have purchased. The cost of the components used in our products tends to drop rapidly as volumes increase and the technologies mature. Therefore, if our contract manufacturers are unable to p romptly use components purchased on our behalf, our cost of producing products may be higher than our competitors due to an over-supply of higher-priced components. Moreover, if they are unable to use certain components, we may need to reimburse them for any losses they incur.

If disruptions in our transportation network occur or our shipping costs substantially increase, our operating expense could increase and our financial results could be negatively impacted.

 

We are highly dependent upon the transportation systems we use to ship our products, including surface, ocean and air freight. Our attempt to closely match our inventory levels to our product demand intensifies the need for our transportation systems to function effectively and without delay. The transportation network is subject to disruption from a variety of causes, including labor disputes or port strikes, acts of war or terrorism and natural disasters. If our delivery times increase unexpectedly for these or any other reasons, our ability to deliver products on time could result in delayed or lost revenue. In addition, if the recent increases in fuel prices were to continue, our transportation costs would likely increase. A prolonged transportation disruption or a significant increase in the cost of freight could se verely disrupt our business and harm our operating results.

 

	24

If we fail to continue to introduce new products that achieve broad market acceptance on a timely basis, we will not be able to compete effectively and we will be unable to increase or maintain net sales and gross margins.

 

We operate in a highly competitive, quickly changing environment, and our future success depends on our ability to develop and introduce new products and product enhancements that achieve broad market acceptance in the business and home markets. Our future success will depend in large part upon our ability to:

• Identify demand trends in the business and home display markets and quickly develop, manufacture and sell products that satisfy these demands;
• Manage our cost structure to enable us to bring new products to market at competitive prices;
• Respond effectively to new product announcements by our competitors by designing, either internally or through third parties, competitive products; and
• Provide compatibility and interoperability of our products with products offered by other vendors and new technologies as they emerge.

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

 

We are highly dependent on James Chu, our Chairman of the Board and Chief Executive Officer and majority stockholder, and other officers. Due to the specialized knowledge each of our officers possesses with respect to our business and our operations, the loss of service of any of our officers could adversely affect our business. We do not carry key man life insurance on our officers.

Each of our officers may terminate their employment without notice and without cause or good reason. We currently are not aware that any officer is planning to leave or retire.

If we do not succeed in executing our growth strategies within our markets, our revenues may not increase.

 

Our strategies include further expanding our business in markets in which we currently operate, including China, Russia, Eastern and Western Europe. In many of these markets, we face barriers in the form of long-standing relationships between our potential customers and their local suppliers, as well as protective regulations. In addition, pursuing international growth opportunities may require us to make significant investments long before we realize returns on the investments, if any. Increased investments may result in expenses growing at a faster rate than revenues. Our overseas investments could be adversely affected by:

• Reversals or delays in the opening of foreign markets to new participants;
• Exchange controls;
• Restrictions on foreign investment or the repatriation of profits or invested capital;
• Nationalization of local industry;
• Changes in export or import restrictions;
• Changes in the tax system or rate of taxation in the countries where we do business; and
• Economic, social, and political risks.

In addition, difficulties in foreign financial markets, economies and foreign financial institutions, particularly in emerging markets, could adversely affect demand from customers in the affected countries. Because of these factors, we may not succeed in expanding our business in international markets. This could hurt our business growth prospects and results of operations.

Intellectual property litigation and infringement claims could cause us to incur significant expenses or prevent us from selling our products.

 

Many of our products are designed to include software or other intellectual property licenses from third parties. Competitors’ protected technology may be unavailable to us or be made available to us only on unfavorable terms and conditions. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, we believe that, based upon past experience and standard industry practice, these licenses generally can be obtained on commercially reasonable terms. There can be no assurances, however, that we will be able to obtain, on commercially reasonable terms or at all, from third parties the licenses that we will need. Due to the existence of a large number of patents in our field and the rapid rate of issuance of new patents, it is not practical to determine in advance wheth er a product or any of its components infringe the patent rights of others.

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We routinely receive claims regarding patent and other intellectual property matters. Pursuant to our agreements with our suppliers, we generally seek indemnification from our suppliers in connection with such claims. Whether or not these claims have merit, they may require significant resources to defend. To date, none of these claims have had a material impact on our business. We are currently involved in several such proceedings, none of which we believe are material to our business. If an infringement claim is successful and we are unable to obtain the license for the infringed technology or substitute similar non-infringing technology, our business could be harmed.

We may be subject to product liability claims that could result in significant direct or indirect costs to us.

 

There is a risk that defects may occur in our products and services. The occurrence of these defects could make us liable for damages caused by these defects, including consequential damages. To date, none of these claims have had a material impact on our business. Negative publicity concerning these problems could also make it more difficult to convince customers to buy our products and services. Both could hurt our business, operating results, and financial condition.

We rely on our contract manufacturers for assistance in new product development, and our new product introduction efforts could be harmed by any adverse change in these relationships.

 

We work with our contract manufacturers to develop and/or incorporate new technologies and products. Our contract manufacturers design the electronic and mechanical systems of a display product around our choice of major components and our specific industrial design. Aside from these major specifications mandated by us, the contract manufacturers choose electronic and mechanical solutions of standard design to reduce the development time, engineering cost and procurement risk associated with more customized designs. Our relationships with these contract manufacturers generally do not include a long-term commitment on behalf of either party. If our contract manufacturers encounter financial or other business difficulties, if their strategic objectives change, or if they perceive us to no longer be an attractive customer, they may no longer assist us in our product development efforts. Our business could be harmed if we were unable to continue one or more of our contract manufacturing relationships.

 

Impairment of our investment portfolio could harm our net earnings.

We have an investment portfolio that includes a variety of investments. In most cases, we do not attempt to reduce or eliminate our market exposure on these investments. We could incur losses related to the impairment of these investments, which could result in charges to net earnings. Some of our investments are in public and privately-held companies that are still in the start-up or development stage, which have inherent risks because the technologies or products they have under development are typically in the early stages and may never become successful. Furthermore, the values of our investments in publicly-traded companies are subject to significant market price volatility. We often couple our investments in technology companies with a strategic commercial relationship. Our commercial agreements with these companie s may not be sufficient to allow us to obtain and integrate such products and services into our offerings or otherwise benefit from the relationship, and third parties, including competitors, may subsequently acquire these companies. Economic weakness could further impact our investment portfolio.

 

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Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

 

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limit ations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

Based on their evaluation as of September 30, 2004, our Chief Executive Officer and Chief Financial Officer have concluded that, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were sufficiently effective to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  

Changes in Internal Controls

During the third quarter of 2004, we implemented an internal audit function. We believe that the implementation of an internal audit function is reasonably likely to materially affect our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of business, we are involved in lawsuits, claims, investigations, proceedings, and threats of litigation consisting of intellectual property, commercial, employment and other matters. In accordance with SFAS No. 5, “Accounting for Contingencies,” we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us, as well as adequate provisions for any probable and estimable losses. If an unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on our results of operations for that period. We believe that, given our current liquidity and cash and investment balances, even were we to receive an adverse judgment with respect to litigation that we are currently a party to, it is likely that such a judgment would not have a material impact on our financial condition, results of operations or liquidity.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

From July 1, 2004 through September 30, 2004, we sold and issued the following unregistered securities:

(1)    From July 1, 2004 through September 30, 2004, we did not grant any stock options to purchase shares of our common stock, to employees, consultants and directors pursuant to our 1999 Stock Plan. During this period, stock options to purchase an aggregate of 481,054 shares of our common stock were canceled without being exercised.

(2)    From July 1, 2004 through September 30, 2004, we issued an aggregate of 18,662 shares of our common stock, at an exercise price of $1.00 per share, pursuant to the exercise of outstanding stock options to purchase shares of our common stock granted pursuant to our 1999 Stock Plan. The aggregate proceeds resulting from such sales were approximately $19,000.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

 

In August 2004, we submitted the following matter to our stockholders for their approval.  On August 12, 2004, our stockholders approved the matter, as set forth below.  We did not receive written consent from each stockholder.  As of the record date for taking such action, we had 361,419,677 shares of our capital stock outstanding (on an as-if-converted basis).  The results of the voting from stockholders that returned written consents to us are as follows:

Approve the 2004 Equity Incentive Plan.

 

For:	253,138,456
Against:		0
Withheld:		0

 

ITEM 5. OTHER INFORMATION

 

Non-Audit Services

 

Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Public Company Accounting Reform and Investor Protection Act of 2002, we are responsible for disclosing the nature of the non-audit services approved by our Audit Committee during a quarter to be performed by our independent auditor. Non-audit services are services other than those provided by our independent auditor in connection with an audit or a review of our financial statements. During the quarter ended September 30, 2004, our Audit Committee did not approve any new or recurring non-audit services.

 

Employment Agreement 

  

Jan Jensen, age 42. We entered into an employment agreement with Jan Jensen, the President and Managing Director of ViewSonic Europe, dated September 3, 2004. From February 2003 to October 2004, Mr. Jensen served as Vice President Worldwide Sales Channels for Proxim  Corporation, a U.S. company. From October 2001 to January 2003, Mr. Jensen served as Deputy Chief Operating Officer for Metro International, a global media company. From June 1999 to September 2001, Mr. Jensen served as Vice President Business to Business for Gateway, Inc., a U.S. company, in Europe, the Middle East and Africa. From August 1996 to May 1999, Mr. Jensen was Director of International Channel Management at Siemens Computer Systems Worldwide Headquarters, a German company.  Mr. Jensen has a Master of Science Degree f rom Aarhus School of Business Administration.

 

    Mr. Jensen commenced employment with us on October 18, 2004. Under the terms of his agreement with us, Mr. Jensen has an annualized base salary of Euro 240,000 and is also entitled to a variable compensation bonus that is targeted at Euro 120,000, if Mr. Jensen achieves goals related to the bonus as determined by the Board of Directors. Mr. Jensen was given a signing bonus of Euro15,000 and a car allowance of Euro 2,300 per calendar month. If Mr. Jensen’s employment is terminated or he resigns within twelve months of his start date, he must repay ViewSonic the entire amount of the signing bonus. Mr. Jensen also received a pension equal to 10% of his base salary. In connection with his agreement, ViewSonic agreed to grant Mr. Jensen, subject to a pproval by the Compensation Committee of the Board of Directors, an option to purchase 500,000 shares of Common Stock of ViewSonic at the current fair market value of ViewSonic’s shares at the time of grant. The option vests 25% on the date of grant and the remainder vests on a pro rata basis over 3 years, such that on the third anniversary of the grant date of the option grant, the shares shall be fully vested. Mr. Jensen’s address is c/o ViewSonic Corporation, 381 Brea Canyon Road, Walnut, California 91789.

 

ITEM 6. EXHIBITS

10.15	Director's Service Agreement, by and between Jan Jensen and ViewSonic, dated September 8, 2004.
31.1	Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1*	Certification of Chief Executive Officer and Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.

 

*

The certification attached as Exhibit 32.1, accompanies this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of ViewSonic Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 15, 2004.

 

	ViewSonic Corporation
	By:	/s/ James A. Morlan
		James A. Morlan
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

	29

EXHIBIT INDEX

 

 

Exhibit Number		Exhibit Title
10.15		Director's Service Agreement, by and between Jan Jensen and ViewSonic, dated September 8, 2004.
31.1		Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1*		Certification of Chief Executive Officer and Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.

 

*

The certification attached as Exhibit 32.1, accompanies this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of ViewSonic Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.