InFocus 10-K 2009
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
For the Fiscal Year Ended: December 31, 2008
Commission File Number: 000-18908
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code: 503-685-8888
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ¨ No x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: ¨
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the last sales price ($1.50) as reported by the NASDAQ Global Market, as of the last business day of the Registrants most recently completed second fiscal quarter (June 30, 2008), was $59,442,344.
The number of shares outstanding of the Registrants Common Stock as of March 6, 2009 was 40,669,516 shares.
Documents Incorporated by Reference
2008 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Forward Looking Statements and Factors Affecting Our Business and Prospects
Some of the statements in this annual report on Form 10-K are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, or the PSLRA. Forward-looking statements in this Form 10-K are being made pursuant to the PSLRA and with the intention of obtaining the benefits of the safe harbor provisions of the PSLRA. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words like intend, plan, believe, anticipate, project, may, will, could, continue, expect and variations of these words or comparable words or phrases of similar meaning. They may relate to, among other things:
These forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control, which may cause actual results to differ materially from trends, plans or expectations set forth in the forward-looking statements. The forward-looking statements contained in this annual report speak only as of the date on which they are made and we do not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of this filing. See Item 1A. Risk Factors below for further discussion of factors that could cause actual results to differ from these forward-looking statements.
Where You Can Find More Information
We file annual reports, quarterly reports, current reports, proxy statements and other information with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended (Exchange Act). You can inspect and copy our reports, proxy statements and other information filed with the SEC at the offices of the SECs Public Reference Room at 100 F Street, NE Washington, DC, 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet site at http://www.sec.gov/ where you can obtain most of our SEC filings. We also make available, free of charge on our website at www.infocus.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC. The information found on our website is not part of this Form 10-K. You can also obtain copies of these reports by contacting our investor relations department at (503) 685-8800.
InFocus Corporation is the industry pioneer and a global leader in the digital projection market. The companys digital projectors make bright ideas brilliant everywhere people gather to communicate and be entertained in meetings, presentations, classrooms and living rooms around the world. Backed by more than twenty years of experience and innovation in digital projection, as well as approximately 245 U.S. and additional corresponding foreign patents, InFocus is dedicated to setting the industry standard for large format visual display. The company is based in Wilsonville, Oregon with operations in North America, Europe and Asia. InFocus is listed on the NASDAQ Global Market under the symbol INFS.
Engagement of Investment Advisor
In December 2008, we engaged Thomas Weisel Partners LLC (TWP), an investment banking firm headquartered in San Francisco, California, to provide us with advisory services, including advice related to unsolicited offers recently received by InFocus. Given our depressed share price along with recent large acquisitions of our stock by certain shareholders we decided to evaluate alternatives that will best serve the interest of all of our shareholders.
InFocus offers a range of projection products and services in four main categories.
Our current projector product offerings are as follows:
The IN1100 Series provides the ultimate mobility solution for on-the-go professionals.
The IN2100 series provides essential features for classrooms and small businesses.
The IN3100 series provides premium performance for medium to large conference rooms. ProjectorNet 3.0 networking capability, LiteTouch touch pad control, and DisplayLink connectivity are just some of the features in this robust segment of products.
Large venue projectors:
The IN5100 series provides the ultimate in flexibility for professional installations boasting features such as lens shift, interchangeable lenses, SplitSceen, and networking capabilities.
The IN80 series consist of three 1080p high definition DLP® home theater projectors available in three different contrast levels: IN81 (3,000:1 contrast), IN82 (4,000:1 contrast) and IN83 (5,000:1 contrast).
We continue to leverage our technological expertise and experience to deliver products that include true multimedia capabilities, can be integrated with other technologies and have user friendly features to improve ease of use for our end customers.
Our products are compatible with all major personal computers and video sources used in business, education and home entertainment. Users can connect to a variety of sources including, but not limited to, digital and analog PCs, DVD players, HDTV, S-video, VCRs, workstations, Blu-Ray disc players and gaming devices.
Two key characteristics of our products are resolution and video performance. Resolution is defined by using standard industry terms SVGA, XGA, WXGA, SXGA, SXGA+ and UXGA, which are terms that define the number of pixels in a display. An SVGA display has 480,000 pixels (800X600), an XGA has 786,432 pixels (1,024X768), a WXGA has 1,024,000 pixels (1,280x800), an SXGA has 1,310,720 pixels (1,280X1,024), an SXGA+ has 1,470,000 pixels (1,400X1,050) and a UXGA has 1,920,000 pixels (1,600X1,200). Video resolution in home entertainment projectors is defined as either 480p (854X480), 576p (1,024X576), 720p (1,280X720) or 1080p (1,920X1,080). We utilize the latest in video electronics to improve the video performance over normal projection devices.
Licensing our Intellectual Property
We have royalty arrangements with third parties for various projection related technologies. Current royalties being earned under these arrangements are not material.
In addition to our projection intellectual property, we also generate licensing profits from Motif, our 50/50 joint venture with Motorola. Motif has executed numerous licenses for its active addressing technology, with additional licensing arrangements under negotiation. Motif results are not consolidated with our results, but we report our share of the net income of Motif as a component of other income. Our 50% share of Motif income for 2008 was $1.5 million.
Product and Technology Development
We continue to invest in research and development primarily for advanced development of new projection technology, co-development of advanced projector features with our manufacturing partners and
complementary products and solutions. We plan to continue to invest in research and development to enable continued innovation in our product and solution offerings.
We expended $11.3 million, $14.1 million and $18.0 million on research and development activities for the years ended December 31, 2008, 2007 and 2006, respectively.
Routes to Market
As our industry has grown and matured, our marketing and sales distribution strategy has evolved so that we can reach end-user customers with our products when and where they want to buy. We sell our products through multiple distribution channels, including direct resellers who purchase from InFocus and indirect resellers that procure our products from our distributor customers. Over the years, we have devoted significant resources to develop and support a well-trained reseller network with the ability to demonstrate and sell our products to a wide range of end-users worldwide. In the U.S., our products are sold to end customers by a network of authorized audiovisual, PC, online or direct marketing resellers. These resellers purchase products directly from InFocus, or through a wholesale distribution partner.
We also maintain a direct relationship with many end users via our Strategic Accounts Program. Strategic Account customers work with our Sales and Marketing teams to identify presentation technology needs and consolidate their purchase and support requirements across geographic boundaries. Sales of projectors and services are fulfilled either directly by InFocus or through one of our local authorized business partners.
We also offer customers the ability to purchase many of our products and accessories directly from our online store in the U.S.
Outside the U.S., we sell our products to distributors and authorized resellers worldwide. These distributors sell our products to audiovisual dealers, PC resellers and, in some cases, directly to end-users. Sales personnel located in several European and Asian countries, work with international distributors and local direct dealers to sell and support our products. For information regarding certain risks related to our foreign operations please see Item 1A Risk Factors and Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations below.
Geographic revenues as a percentage of total revenues, based on shipment destination, were as follows:
Long-lived assets by geographic region were as follows (in thousands):
Given the buying patterns of various geographies and market segments, our revenues are subject to certain elements of seasonality over the course of the year. The first quarter of each year is typically down from the immediately preceding fourth quarter due to corporate buying trends and typical aggressive competition from our Asian competitors with March 31 fiscal year ends. In addition, we sell our products into the education and government markets that typically see seasonal peaks in the U.S. in the second and third quarter of each year. Historically, between 20% and 30% of our revenues have come
from Europe and, as such, we typically experience a seasonal downturn due to the vacation season in July and August, which results in decreased revenues from that region in the third quarter compared to the second quarter. Conversely, we typically experience an increase in revenue from Europe in the fourth quarter.
Sales Returns and Incentives
Some distributor and dealer agreements allow for limited partial return of products and/or price protection. Such return rights are generally limited to a contractually defined short-term stock rotation and defective or damaged product. We also have incentive programs for distributors and resellers whereby rebates are offered based upon exceeding quarterly and/or annual volume goals or to promote sell through of our products to end users.
Our global service solutions include, but are not limited to, a mix of outsourced and in-house call center and Internet customer support, factory repair, authorized service center repair, accessories, service parts, remanufactured projectors, technology upgrade program, warranty extension contracts, service contracts, service-related training, service engineering and technical publications (including service guides, technical bulletins and user guides). Design and consulting support is available for our authorized product integration resellers.
Our in-house service organization has personnel in Wilsonville, Oregon, Almere, The Netherlands and Singapore. We are currently consolidating our service organization in Almere within our Singapore office. In addition, we utilize a third party organization to assist with first level customer support for certain customer service calls. Factory repair is performed by our contract manufacturing partners as well as in partnership with UPS Supply Chain Solutions in the U.S. and The Netherlands, and PCS Peripherals Pte Ltd in Singapore and China.
In addition, we maintain a network of approximately 90 Authorized Service Centers worldwide. InFocus provides training and resources to this network in order for them to provide warranty, product repair, technical support and training to their local resellers and end-user customers.
Customers have access to technical specialists who answer application and hardware questions via telephone, email or the worldwide web. All products are covered by a warranty for parts and labor with varying terms depending on the product and geography. Extended service agreements are available for purchase.
Manufacturing and Supply
The principal components of our projectors are imaging devices, including various types of DMDs (digital micromirror devices) and LCDs, integrated circuits, light sources, optical components and lenses, plastic housing parts and electronic sub-assemblies. We qualify certain parts manufactured to our specifications and also design and deliver certain electronic components for sub-assembly. The DMD imaging engines are produced in class 10,000 clean room environments, requiring exacting design, specification and handling of precision optics. The manufacture of finished projectors includes precise alignment of optical elements and 100% image quality testing. We are currently focusing the majority of our development efforts on DMD devices based on DLP® technology from Texas Instruments.
In 2008, we procured the majority of our projectors from Hon Hai Precision Industry Company Limited, commonly known as Foxconn, and Coretronic Corporation. Both contract manufacturers are predominantly manufacturing our products in China. Each of the contract manufacturers is sourcing components directly with suppliers. Reliance on suppliers and third-party manufacturers raises several risks, including the possibility of defective parts, reduced control over the availability and delivery schedule for parts and the possibility of increases in component costs. Manufacturing efficiencies and our profitability can be adversely affected by each of these risks. See Item 1A Risk Factors below for a further discussion of these risks.
We sell our products to a large number of customers worldwide. Ingram Micro accounted for 23.0%, 22.1% and 19.5%, respectively, of total revenues for the years ended December 31, 2008, 2007 and 2006 and accounted for 40.1% and 24.0%, respectively, of our accounts receivable balance at December 31, 2008 and 2007. In addition, Tech Data accounted for 11.2%, 11.7% and 12.7%, respectively, of total revenues for the years ended December 31, 2008, 2007 and 2006 and accounted for 14.3% and 20.0%, respectively, of our accounts receivable balance at December 31, 2008 and 2007.
We had backlog of approximately $5.2 million at December 31, 2008, compared to approximately $6.6 million at December 31, 2007. Given current supply and demand estimates, it is anticipated that a majority of the current backlog will turn over by the end of the first quarter of 2009. Backlog is not necessarily indicative of sales for any future period nor is backlog any assurance that we will realize a profit from filling the orders.
Our ability to compete depends on factors within and outside our control, including the success and timing of product introductions, product performance, competitive pricing, product distribution and customer support. We believe that our twenty years of leadership in developing technologies and our focused effort on development activities give us a competitive advantage.
We face competition for our projectors from over 40 branded competitors, ten of which, along with InFocus, comprise approximately 70% of the products sold in the industry. We expect continued competition as new technologies, applications and products are introduced. Our principal current competitors include Epson, NEC, BenQ, Optoma, Hitachi, Toshiba, Panasonic, Sanyo and Sony. Our products also face competition from alternate technologies such as LCD and plasma televisions and displays.
Patents, Trademarks and Licenses
We have been issued approximately 245 U.S. patents and numerous corresponding foreign patents covering various aspects of our products. In addition, numerous applications for U.S. patents are pending on inventions that enable our products to be lighter, easier to use, and produce brighter optimized images. Corresponding applications for selected inventions are pending internationally through the Patent Cooperation Treaty and at foreign Patent Offices.
We attempt to protect our proprietary information through agreements with customers and suppliers. We require our employees, consultants and advisors to execute confidentiality agreements on the commencement of employment or service to InFocus. While we have enhanced our ability to compete by aggressively protecting our intellectual property, we believe the rapid pace of technological change in the industry will mean that our ability to develop new technologies and distribute new products on a timely basis will be of greater importance in maintaining our competitive position.
We maintain and pursue an extensive worldwide trademark portfolio. We have rights and claim ownership to numerous trademarks including InFocus, In Focus, Proxima, LP, LitePro, LiteShow, ASK, ScreenPlay, SP, LitePort, The Big Picture, ProjectorNet, ASK Proxima, Work Big, Play Big, Learn Big, IN, SplitScreen and associated design marks.
As of December 31, 2008, we had 323 employees, including 30 temporary personnel working as independent contractors or engaged through the services of employment agencies. We believe relations with our employees are good.
Because of the following factors, as well as other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.
Our business has been, and may continue to be, significantly impacted by the deterioration in general global economic conditions, and the current economic uncertainty makes it more likely that our actual results could differ from expectation, particularly in regards to demand for our products.
Global credit and financial markets have been experiencing extreme disruptions in recent months, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that there will not be further deterioration in these conditions. These economic uncertainties affect businesses like ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. Purchase decisions for our products are made by corporations, governments, educational institutions and consumers based on their overall available budget for information technology products. The current overall economic condition and the tightening of credit in financial markets may lead consumers and businesses to postpone spending, which may cause our customers to cancel, decrease or delay their existing or future orders with us. The volatility in the credit markets has severely diminished liquidity and capital availability. This could result in the insolvency of key suppliers or product delays; inability of customers, including channel partners, to obtain credit to finance purchases of our products or default on accounts receivable; or our inability to obtain additional financing. Any number of factors impacting the global economy, including geopolitical issues, balance of trade concerns, inflation, interest rates, currency fluctuations and consumer confidence, can impact the overall spending climate, both positively and negatively, in one or more geographies for our products. Demand outside the U.S. could differ materially from our expectations due to the effect of the strengthening U.S. dollar, a trend that has been very pronounced recently. Deterioration in any one or combination of these factors could change overall industry dynamics and demand for discretionary products like ours and negatively impact our results of operations. Uncertainty about current global economic conditions could also continue to increase the volatility of our stock price.
We may need to raise additional financing if our financial results do not improve.
We sustained an operating loss of $22.7 million and $27.5 million, respectively, during 2008 and 2007, contributing to a decrease in net working capital of $37.1 million and $15.0 million during the respective time periods. If we continue to experience significant operating losses and reductions in net working capital, we may need to obtain additional debt or equity financing to continue current business operations. There is no guarantee that we will be able to raise additional funds on favorable terms, if at all.
If we fail to meet all applicable continued listing requirements of The NASDAQ Global Market and NASDAQ determines to delist our common stock, the market liquidity and market price of our common stock could decline.
Our common stock is listed on the NASDAQ Global Market. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements. For example, NASDAQ rules require that we maintain a minimum bid price of $1.00 per share for our common stock. Our common stock is currently and has in the past fallen below this minimum bid price requirement and it may do so again in the future. NASDAQ has currently suspended this bid price requirement through April 20, 2009. However, if NASDAQ does not further extend this suspension and our stock price is below $1.00 at the time the suspension is lifted or falls below $1.00 after that time or if we in the future fail to meet other requirements for continued listing on the NASDAQ Global Market, our common stock could be delisted from the NASDAQ Global Market if we are unable to cure the events of noncompliance in a timely or effective manner. If our common stock were threatened with delisting from the NASDAQ Global Market, we may, depending on the circumstances, request approval by our stockholders to implement a reverse stock split in order to regain compliance with NASDAQs minimum bid price requirement. If our common stock is not eligible for quotation on another market or exchange, trading of our common stock could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as
the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of or obtain accurate quotations for the price of our common stock. There would likely also be a reduction in our coverage by security analysts and the news media, which could cause the price of our common stock to decline further.
We may not fully realize the expected operating efficiencies from our restructuring plans or the plans may not be successful.
Over the last three years, we have implemented a series of restructuring plans, key initiatives and outsourcing programs designed to achieve the goal of simplifying the business and returning the company to profitability. As part of the restructuring plans, we have implemented actions to reduce our cost to serve customers, improve our supply chain efficiency, reduce our product costs and reduce our operating expenses. Our goal as a result of these actions was to improve gross margins and reduce our operating expenses to a level that will allow us to achieve breakeven or better results. We have faced a number of challenges related to our restructuring plans including uncertainties associated with the impact of our actions on revenues and gross margins as well as factors outside our control such as changes in the economic environment. We cannot be assured that we will achieve or sustain the targeted benefits under these programs, which could result in further restructuring efforts. The implementation of key elements of these programs, such as employee job reductions and office closures, may have an adverse impact on our business, particularly in the near-term. If our restructuring plans are not successful, our business and results of operations may be negatively impacted.
If our contract manufacturers or other outsourced service providers experience any delay, disruption or quality control problems in their operations, we could lose market share and revenues, and our reputation may be harmed.
We have outsourced the manufacturing of our products to third party manufacturers. We rely on our contract manufacturers to procure components, provide spare parts in support of our warranty and customer service obligations, perform warranty repair activities on our behalf, and in some cases, subcontract engineering work. We generally commit the manufacturing of each product platform to a single contract manufacturer. In addition, going forward, we will be placing more reliance on our contract manufacturers for design activities related to our core projection products, as we move to outsource a larger percentage of our research and development work.
Our reliance on contract manufacturers exposes us to the following risks over which we may have limited control:
Our contract manufacturers are located in Asia and may be subject to disruption by natural disasters, as well as political, social or economic instability. The temporary or permanent loss of the services of any of our primary contract manufacturers could cause a significant disruption in our product supply chain and operations and delays in product shipments. In addition, we do not have long-term contracts with any of our third-party contract manufacturers and these contracts are terminable by either party on relatively short notice.
In addition, we outsourced a portion of our U.S. customer service and technical support call center to a third party provider. We rely on this third party to provide efficient and effective support to our customers and partners. To the extent our customers are not satisfied with the level of service provided by our third
party provider we may lose market share and our revenues and corporate reputation could be negatively affected.
Our competitors may have greater resources and technology, and we may be unable to compete with them effectively.
The markets for our products are highly competitive and we expect aggressive price competition in our industry, especially from Asian manufacturers, to continue into the foreseeable future. Some of our current and prospective competitors have, or may have, significantly greater financial, technical, manufacturing and marketing resources than we have.
In order to compete effectively, we must continue to reduce the cost of our products, our manufacturing and other overhead costs, incorporate differentiating features in our products that are valued by our customers, focus on the right channel sales models and reduce our operating expenses in order to offset declining selling prices for our products, while at the same time growing our presence in the markets we are in and driving our products into new markets. There is no assurance we will be successful with respect to these factors.
Our products face competition from alternate technologies and we may be unable to compete with them effectively.
In addition to competition within the projector industry, our products also face competition from alternate technologies such as LCD and plasma televisions and displays. Our ability to compete depends on factors within and outside our control, including the success and timing of product introductions, product performance and price, product distribution and customer support and adoption of our products. Our inability to successfully manage these factors could lead to reduced revenues or a greater chance of our customers shifting their purchases to alternate technologies.
If we are unable to manage the cost of older products or successfully introduce new products with higher gross margins, our revenues may decrease or our gross margins may decline.
The market in which we compete is subject to technological advances with continual new product releases and aggressive price competition. 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 is sold is generally referred to as the average selling price (ASP). In order to sell products that have a declining ASP and still maintain our gross margins, we need to continually reduce our product costs. To manage product-sourcing costs, we must collaborate with our contract manufacturers to engineer the most cost-effective design for our products. In addition, we must carefully monitor the price paid by our contract manufacturers for the significant components used in our products. We must also successfully manage our freight and inventory holding costs to reduce overall product costs. We also need to continually introduce new products with improved features and increased performance at lower costs in order to maintain our overall gross margins. Our inability to successfully manage these factors could reduce revenues or result in declining gross margins. In addition, our increased reliance on our contract manufacturers for design and development work could enhance the risks described above.
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 individual quarter or for the 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:
These trends and factors could harm our business, operating results and financial condition in any particular period.
Our operating expenses and portions of our costs of revenues are relatively fixed and we may have limited ability to reduce expenses quickly in response to any revenue shortfalls.
Our operating expenses, inbound freight and inventory handling costs are relatively fixed. Because we typically recognize a significant portion of our revenues in the last month of each quarter, we may not be able to adjust our operating expenses or other costs sufficiently to adequately respond to any revenue shortfalls. If we are unable to reduce operating expenses or other costs quickly in response to any revenue shortfall, it could negatively impact our financial results.
If we are unable to accurately predict the future needs of our customer base as it relates to sales channel inventory levels we may incur unexpected declines in revenues and gross margins.
If factors in the marketplace change that negatively impact the purchase of our products or we are not able to accurately predict the sales channel inventory needs of our larger customers, we may experience declines in our revenue and gross margins. If demand for our products declines or is not sufficient to deplete existing inventory in our sales channels this will generally have an adverse effect on future revenues.
If we do not effectively manage our sales channel inventory and product mix, we may incur costs associated with excess inventory or experience declining gross margins.
If we are unable to properly monitor, control and manage our sales channel inventory and maintain an appropriate level and mix of products with our customers within our sales channels, we may incur increased and unexpected costs associated with this inventory. We generally allow distributors, dealers and retailers to return a limited amount of our products in exchange for placing an order for other new products. In addition, under our price protection policy, subject to certain conditions, which vary around the globe, if we reduce the list price of a product, we may issue a credit in an amount equal to the price reduction for each of the products held in inventory by our distributors, dealers and retailers. If these events occur, we could incur increased expenses associated with rotating and reselling product, or inventory reserves associated with writing down returned inventory, or suffer declining gross margins.
If we cannot continually develop new and innovative products and integrate them into our business, we may be unable to compete effectively in the marketplace.
Our industry is characterized by continuing improvements in technology and rapidly evolving industry standards. Consequently, short product life cycles and significant price fluctuations are common. Product transitions present challenges and risks for all companies involved in the data/video digital projector and display markets. Demand for our products and the profitability of our operations may be adversely affected if we fail to effectively manage product transitions.
Advances in product technology require continued investment in research and development and product engineering to maintain our market position. There are no guarantees that such investment will result in the right products being introduced to the market at the right time. In addition, our increased reliance on our contract manufacturers for design and development work could enhance the risks described above.
If we are unable to provide our contract manufacturers with an accurate forecast of our product requirements, we may experience delays in the manufacturing of our products and the costs of our products may increase.
We provide our contract manufacturers with a rolling forecast of demand which they use to determine their material and component requirements. Lead times for ordering materials and components vary significantly and depend on various factors, such as the specific supplier, contract terms and supply and
demand for a component at a given time. Some of our components have long lead times measuring as much as 4 to 6 months from the point of order.
If our forecasts are less than our actual requirements, our contract manufacturers may be unable to manufacture sufficient products to meet actual demand in a timely manner. If our forecasts are too high, our contract manufacturers may be unable to use the components they have purchased. The cost of the components used in our products tends to decline as the product platform and technologies mature. Therefore, if our contract manufacturers are unable to promptly use components purchased on our behalf, our cost of producing products may be higher than our competitors due to an over-supply of higher-priced components. Moreover, if they are unable to use certain components, we may be required to reimburse them for any potential inventory exposure they incur within lead time.
Our failure to anticipate changes in the supply of product components or customer demand may result in excess or obsolete inventory that could adversely affect our gross margins.
Substantially all of our products are made for immediate delivery on the basis of purchase orders rather than long-term agreements. As a result, contract manufacturing activities are scheduled according to a monthly sales and production forecast rather than on the receipt of product orders or purchase commitments. From time to time in the past, we have experienced significant variations between actual orders and our forecasts.
If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing prices of product components, rapidly changing technology and customer requirements or an increase in the supply of products in the marketplace, we could be required to write-down our inventory and our gross margins could be adversely affected.
Our contract manufacturers may be unable to obtain critical components from suppliers, which could disrupt or delay our ability to procure our products.
We rely on a limited number of third party manufacturers for the product components used by our contract manufacturers. Reliance on suppliers raises several risks, including the possibility of defective parts, reduced control over the availability and delivery schedule for parts and the possibility of increases in component costs. Manufacturing efficiencies and our profitability can be adversely affected by each of these risks.
Certain components used in our products are now available only from single sources. Most importantly, DLP® devices are only available from Texas Instruments. The majority of our current products are based on DLP® technology making the continued availability of DLP® devices very important.
Our contract manufacturers also purchase other single or limited-source components for which we have no guaranteed alternative source of supply, and an extended interruption in the supply of any of these components could adversely affect our results of operations. We have worked to improve the availability of lamps and other key components to meet our future needs, but there is no guarantee that we will secure all the supply we need to meet demand for our products.
Furthermore, many of the components used in our products are purchased from suppliers located outside the U.S. Trading policies adopted in the future by the U.S. or foreign governments could restrict the availability of components or increase the cost of obtaining components. Any significant increase in component prices or decrease in component availability could have an adverse effect on our results of operations.
Product defects resulting in a large-scale product recall or successful product liability claims against us could result in significant costs or negatively impact our reputation and could adversely affect our business results and financial condition.
As with any high tech manufacturing company, we are sometimes exposed to warranty and potential product liability claims in the normal course of business. There can be no assurance that we will not experience material product liability losses arising from such potential claims in the future and that these
will not have a negative impact on our reputation and, consequently, our revenues. We generally maintain insurance against most product liability risks and record warranty provisions based on historical defect rates, but there can be no assurance that this insurance coverage and these warranty provisions will be adequate for any potential liability ultimately incurred. In addition, there is no assurance that insurance will continue to be available on terms acceptable to us. A successful claim that exceeds our available insurance coverage or a significant product recall could have a material adverse impact on our financial condition and results of operations.
SMT, our joint venture with TCL Corporation, was not successful in implementing its business plan and has ceased operations.
SMT, our 50-50 joint venture with TCL Corporation, was not successful in executing its business plan, primarily a result of failing to secure third party OEM customers for its products. As a result, the parent companies sought alternatives for funding ongoing operations at SMT without success. During the third quarter of 2006, SMT began the process of winding down its operations in an orderly fashion, including the sale of its assets and the negotiation of the settlement of its outstanding liabilities. At December 31, 2008, the majority of SMT employees had been laid off and only those employees working on the wind-down of the company remained. During 2006, we completely wrote off our initial investment in SMT and also recorded a charge for our share of estimated additional wind-down costs. We are uncertain how long it may take to complete the wind-down of SMT. There can be no assurance that we will not incur additional costs as SMT completes the wind-down process.
Customs or other issues involving product delivery from our contract manufacturers could prevent us from timely delivering our products to our customers.
Our business depends on the free flow of products. Due to continuing threats of terrorist attacks, U.S. Customs has increased security measures for products being imported into the U.S. In addition, increased freight volumes and work stoppages at west coast ports have, in the past, and may, in the future, cause delays in freight traffic. Each of these situations could result in delay of receipt of products from our contract manufacturers and delay fulfillment of orders to our customers. Any significant disruption in the free flow of our products may result in a reduction of revenues, an increase of in-transit inventory, or an increase in administrative and shipping costs.
We are subject to risks associated with exporting products outside the U.S.
To the extent we export products outside the U.S., we are subject to U.S. laws and regulations governing international trade and exports, including, but not limited to, the International Traffic in Arms Regulations, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury. A determination that we have failed to comply with one or more of these export controls could result in civil and/or criminal sanctions, including the imposition of fines upon us, the denial of export privileges, and debarment from participation in U.S. government contracts. Any one or more of such sanctions could have a material adverse effect on our business, financial condition and results of operations.
We are exposed to risks associated with our international operations.
Revenues outside the U.S. accounted for approximately 52% and 43%, respectively, of our revenues in 2008 and 2007. As a result of a significant portion of our revenue being derived outside of the U.S., our financial condition and results of operations could be significantly affected by numerous risks and uncertainties associated with international activities, including:
Currency exchange rate fluctuations may adversely affect our financial results.
To the extent that we incur product costs in one currency and make our sales in another, our gross margins may be affected by changes in the exchange rates between the two currencies. Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar denominated sales in Europe and certain parts of Asia, as well as non-U.S. dollar denominated operating expenses incurred throughout the world. Weakening of foreign currencies relative to the U.S. dollar will adversely affect the U.S. dollar value of our foreign currency-denominated asset, liabilities, sales and earnings, and generally will cause us to raise international pricing, potentially reducing demand for our products. In some circumstances, due to competition or other reasons, we may decide not to raise local prices, which would adversely affect the U.S. dollar value of our foreign currency denominated sales and earnings. In the past our general policy was to hedge against balance sheet currency transaction risks on a monthly basis. However, given the volatility of currency exchange rates and the high cost of hedging we cannot provide assurance that we will be able to effectively manage these risks or will continue our hedging program in the future. Volatility in currency exchange rates may generate foreign exchange losses, which could have an adverse effect on our financial condition or results of operations.
Our reliance on third-party logistics and customer service providers may result in customer dissatisfaction or increased costs.
We have outsourced all of our logistics and service repair functions worldwide. We are reliant on our third-party providers to effectively and accurately manage our inventory, service repair, and logistics functions. This reliance includes timely and accurate shipment of our products to our customers and quality service repair work. Reliance on third parties requires proper training of employees, creating and maintaining proper controls and procedures surrounding both forward and reverse logistics functions, and timely and accurate inventory reporting. In addition, reliance on third parties requires adherence to product specifications in order to ensure quality and reliability of our products. Failure of our third parties to deliver in any one of these areas could have an adverse effect on our results of operations.
In addition, we outsourced our U.S. customer service and technical support call center to a third-party provider. We rely on this third party to provide efficient and effective support to our customers and partners. To the extent our customers are not satisfied with the level of service provided by our third-party provider we may lose market share and our revenues and corporate reputation could be negatively impacted.
We may be unsuccessful in protecting our intellectual property rights.
Our ability to compete effectively against other companies in our industry depends, in part, on our ability to protect our current and future proprietary technology under patent, copyright, trademark, trade secret and other intellectual property laws. We utilize contract manufacturers in China and Taiwan, and anticipate doing increased business in these markets and elsewhere around the world including other emerging markets. These emerging markets may not have the same protections for intellectual property that are available in the U.S. We cannot make assurances that our means of protecting our intellectual property rights in the U.S. or abroad will be adequate, or that others will not develop technologies similar or superior to our trade secrets or design around our patents. In addition, management may be distracted by, and we may incur substantial costs in, attempting to protect our intellectual property.
Also, despite the steps taken by us to protect our intellectual property rights, it may be possible for unauthorized third parties to copy or reverse-engineer trade secret aspects of our products, develop similar technology independently or otherwise obtain and use information that we regard as our trade secrets, and we may be unable to successfully identify or prosecute unauthorized uses of our intellectual property rights. Further, with respect to our issued patents and patent applications, we cannot provide assurance that pending patent applications (or any future patent applications) will be issued, that the scope of any patent protection will exclude competitors or provide competitive advantages to us, that any of our patents will be held valid if subsequently challenged, or that others will not claim rights in or ownership of the patents (and patent applications) and other intellectual property rights held by us.
If we become subject to intellectual property infringement claims, we could incur significant expenses and could be prevented from selling specific products.
We are periodically subject to claims that our products infringe the intellectual property rights of others. We cannot provide assurance that, if and when made, these claims will not be successful. Intellectual property litigation is, by its nature, expensive and unpredictable. Any claim of infringement could cause us to incur substantial costs defending against the claim even if the claim is invalid, and could distract management from other business. Any potential judgment against us could require substantial payment in damages and also could include an injunction or other court order that could prevent us from offering certain products.
We rely on large distributors and other large customers for a significant portion of our revenues, and changes in price or purchasing patterns could lower our revenues or gross margins.
We sell our products through large distributors such as Ingram Micro and Tech Data and through a number of other customers and channels. We rely on our larger distributors and other large customers for a significant portion of our total revenues in any particular period. We have no minimum purchase commitments or long-term contracts with any of these customers. Our customers, including our largest customers, could decide at any time to discontinue, decrease or delay their purchases of our products. In addition, the prices that our distributors pay for our products are subject to competitive pressures and change frequently.
If any of our major customers change their purchasing patterns or refuse to pay the prices that we set for our products, our net revenues and operating results could be negatively impacted. If our large distributors and retailers increase the size of their product orders without sufficient lead-time for us to process the order, our ability to fulfill product demand could be compromised. In addition, because our accounts receivable are concentrated within our largest customers, the failure of any of them to pay on a timely basis, or at all, could reduce our cash flow or result in a significant bad debt expense.
In order to compete, we must attract, retain and motivate key employees, and our failure to do so could have an adverse effect on our results of operations.
In order to compete, we must attract, retain and motivate key employees, including those in managerial, operations, engineering, service, sales, marketing, and support positions. Hiring and retaining qualified employees in all areas of the company is critical to our business. Our international employees are on contracts or letter agreements with short notice periods. Each of our U.S. employees is an at will employee and may terminate his/her employment without notice and without cause or good reason.
We depend on our officers, and, if we are not able to retain them, our business may suffer.
Due to the specialized knowledge each of our officers possess with respect to our business and our operations, the loss of service of any of our officers could adversely affect our business. We do not carry key person life insurance on our officers. Each of our officers is an at will employee and may terminate his/her employment without notice and without cause or good reason.
During 2007 and early 2008, we experienced several changes in our executive officers, including our Chief Executive Officer and our Chief Financial Officer. Changes at the executive officer level may cause delays in achieving our operational goals and plans as new individuals learn the business.
Our results of operations could vary as a result of the methods, estimates and judgments we use in applying our accounting policies.
The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise that lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations. For example, we are required to make judgments or take certain tax positions in relation to income taxes in both U.S. and foreign tax jurisdictions. To the extent a taxing authority takes a position different from ours and we are unsuccessful in defending our position, the outcome of that decision could impact the amount of income tax expense recorded in the period these new positions are known.
We lease a 140,000 square foot corporate headquarters facility in Wilsonville, Oregon. This lease is non-cancelable and expires in October 2011. We also lease space to support regional sales and logistics in Almere, The Netherlands, Singapore, Shanghai, China and Shenzhen, China under leases expiring on August 1, 2010, March 31, 2009, December 31, 2009 and June 30, 2011, respectively.
In 2007 and 2008 we consolidated floors in our Wilsonville, Oregon corporate headquarters due to reduced space needs. In January 2007, we consolidated from four floors to three floors and in December 2007 we consolidated to two and one half floors. In December 2008, we vacated one half of a floor and, in February 2009, we vacated the other half of the floor. We currently occupy one and a half floors of the corporate headquarters building. We are actively looking for a tenant to sub-lease the vacant space or the entire building.
In January 2009 we announced that we are closing our office in Almere, The Netherlands. We anticipate estimating and providing for the anticipated loss on the lease as part of our restructuring accrual in the second or third quarter of 2009.
From time to time, we become involved in ordinary, routine or regulatory legal proceedings incidental to the business. When a loss is deemed probable and reasonably estimable an amount is recorded in our financial statements. While the ultimate results of these matters cannot presently be determined, management does not expect that they will have a material adverse effect on our results of operations or financial position.
No matters were submitted to a vote of our shareholders during the quarter ended December 31, 2008.
Stock Prices and Dividends
Our common stock trades on the NASDAQ Global Market under the symbol INFS. The high and low sales prices on the NASDAQ Global Market for the two years in the period ended December 31, 2008 were as follows:
The approximate number of beneficial shareholders and the number of shareholders of record at March 6, 2009 was 5,381 and 731, respectively.
There were no cash dividends declared or paid in 2008 or 2007 and we do not anticipate declaring cash dividends in the foreseeable future.
Equity Compensation Plan Information
Information regarding securities authorized for issuance under equity compensation plans is included in Part III, Item 12.
Stock Performance Graph
The SEC requires that registrants include in their annual report a line-graph presentation comparing cumulative five-year shareholder returns on an indexed basis, assuming a $100 initial investment and reinvestment of dividends, of (a) the registrant, (b) a broad-based equity market index and (c) an industry-specific index. The broad-based market index used is the NASDAQ Stock Market Total Return Index U.S. and the industry-specific index used is the S&P 500 Computer Storage and Peripherals Index.
Our results of operations were negatively affected in the second half of 2008 by the unexpected degree of economic turmoil. After four consecutive quarters of gross margins above 18%, gross margins were 16.1% in the third quarter of 2008 and 16.8% in the fourth quarter of 2008. As economic conditions deteriorated, we experienced softening demand for our products, especially in the U.S.
During the fourth quarter of 2008, we made a decision to return to our core business of not just projectors, but differentiated projectors, which positively affected our average selling prices and helped differentiate us from the more than 40 commodity projector companies. This return to our core business contributed to a 33% decline in projector unit sales in the fourth quarter of 2008 compared to the third quarter of 2008 and a 7% decline in projector unit sales in all of 2008 compared to all of 2007.
In the near-term, we expect that the economic challenges will create an even more aggressive competitive environment, resulting in lower world-wide demand and continuing pricing and margin pressures. Our strategy for mitigating such factors is to introduce new products with differentiated features to improve gross margins, as described below.
During the third and fourth quarters of 2008, we began shipping four new projector platforms:
All of these platforms have been well received by our channel partners and customers. According to Pacific Media Associates, as of December 31, 2008, the IN2100 series was the number one selling projector overall and the IN5100 was the top selling installation model in the IT channel in North America.
With these new projectors, we are transforming our business from one that has been offering commodity products to one that provides innovative, value-added, differentiated solutions. Our ongoing investments in product development resources support our strategy of creating value-added solutions and differentiation in our products and our brand name. The evolving features of our products are intended to address the changing needs of our customers and the evolving usage model for displaying visual content. We are addressing the commoditization in our industry by bringing back innovation to the InFocus brand. In addition to differentiated products, we are differentiating ourselves by improving our supply chain and striving for service excellence.
During 2008, we redefined our internal projector categories to better reflect the converging usage models between the commercial and home market segments. We now classify our projectors into the categories Portable, Mobile and Installation. Portable represents what was previously referred to as our meeting room category and better represents our projectors used in meeting or classrooms. The mobile projector category has not changed and includes all of our projectors that weigh less than 4.4 pounds and are
easily adaptable for travel. Installation now includes our home projectors, as well as our business installation projectors.
Our patent portfolio remains strong and is growing as we continue to invest in advanced development for new projection opportunities and applications. We currently have approximately 245 issued U.S. patents and numerous corresponding foreign patents. Additionally, we will seek to partner with third parties where a solution may be more readily available. In the first quarter of 2008, we announced a partnership with DisplayLink Corporation to utilize DisplayLink USB graphics connection technology, which is now being used in our products. This addition improves ease of use of our products and allows for application innovations for new projector solutions. We expect to explore other opportunities to leverage third parties technology and products where there are market opportunities outside of our core competencies or a solution is more readily available for incorporation into our overall solution.
We continue to streamline our Sales, Marketing and General and Administration functions to drive greater efficiencies and eliminate redundant activities. Operating expenses in the fourth quarter of 2008, exclusive of charges for restructuring and long-lived asset impairment, were at the lowest level in approximately 10 years.
Restructuring charges totaled $5.5 million in 2008 and included the following:
Of the 2008 charge, $1.5 million was paid out in 2008 with the majority of the remaining severance of $1.5 million expected to be paid in the first half of 2009 and $2.5 million related to lease losses over the remaining life of the leases through 2011. We expect to incur an additional charge of approximately $1.2 million related to these actions in 2009 for facility consolidations. The anticipated reduction in costs resulting from our restructuring actions will allow us to continue to invest in sales and product development activities while maintaining the desired operating expense levels.
We also recorded a long-lived asset impairment charge of $2.6 million in the fourth quarter of 2008 to fully write off our property and equipment. In accordance with SFAS No. 144, we determined that this charge was necessary as a result of continuing operating losses and a significant decline in our market capitalization.
Engagement of Investment Advisor
In December 2008, we announced that we have engaged Thomas Weisel Partners LLC (TWP), an investment banking firm headquartered in San Francisco, California, to provide us with advisory services, including advice related to unsolicited offers recently received by us. We decided to evaluate alternatives that will best serve the interest of all of our shareholders given our depressed share price.
Results of Operations
Revenues decreased $52.5 million, or 17.0%, in 2008 compared to 2007 and decreased $66.6 million, or 17.8%, in 2007 compared to 2006.
The decrease in revenue in 2008 compared to 2007 was due primarily to a 10% decrease in ASPs. This decrease in ASPs was primarily due to a higher percentage of our overall revenue being derived from lower-margin, entry-level products in 2008 compared to 2007, as well as price reductions made on products reaching their end of life. In addition, the turmoil experienced in the economic and financial markets and the strengthening of the U.S. dollar against the euro placed additional pressures on ASPs. These factors were partially offset by the introduction of several new, higher ASP products that began shipping in the third quarter of 2008.
We sold 317,000 units in 2008 compared to 342,000 units in 2007, a 7.3% decrease. This decrease was primarily due to a decline in total units sold in the industry as global economic turmoil worsened in the second half of 2008.
The decrease in revenue in 2007 compared to 2006 was due primarily to an 18% decrease in ASPs, due to both lower overall pricing across various products and a shift toward a greater weighting of overall sales being derived from our lower-priced entry-level meeting room, classroom and home products. In the first quarter of 2007, compounding the pressure on ASPs already experienced due to the above, we recognized a higher volume of sales of our IN24 and IN26 products at lower margins, as we worked to deplete existing inventory in order to transition the market to the higher-margin and better featured IN24+ and IN26+. Also contributing to the ASP declines in 2007 was increased unit sales of the IN72 entry level home entertainment product. In the first half of 2007, we aggressively sold a large quantity of the IN72 product to deplete existing inventory as the product moved to end of life.
The decrease in revenue attributable to the lower ASPs was partially offset by an increase in total projector units sold to 342,000 units in 2007 compared to 331,000 units in 2006. This increase was primarily due to the increase in sales of entry-level meeting room and classroom products discussed above.
Revenue by geographic area and as a percentage of total revenue, based on shipment destination, was as follows (dollars in thousands):
U.S. revenues in 2008 decreased 29.2% compared to 2007. This decrease was primarily due to a decline in unit sales of 28.4%, which resulted primarily from deteriorating economic conditions and exiting the brick and mortar retail sector of the market during 2008. Slightly impacting U.S. revenues in 2008 compared to 2007 was an ASP decline due to an increase in the percentage of the overall sales coming from the entry-level products sold primarily into the education sector as well as sales of end of life products in the first part of the year. These factors were partially offset by our launch of several higher-margin follow-on products late in the third quarter of 2008.
U.S. revenues in 2007 decreased 26.8% compared to 2006, primarily due to a 7.6% decline in unit sales and a 21.6% decline in ASPs. The ASP decline was affected by the greater weighting towards sales of lower-margin entry-level meeting room, classroom and home entertainment products in 2007 compared to 2006. The overall declines in units and ASPs in 2007 compared to 2006 reflected the continued industry dynamics including intense competition from our Asian competitors and a decline in revenue in the value added reseller channel.
European revenues decreased 3.5% in 2008 compared to 2007, primarily due to an 18.3% decline in ASPs, offset by an increase in units sold of 18.0%. The increase in units sold in 2008 compared to 2007 was driven by new product introductions targeted at specific channels and markets where we had identified strong growth potential. The decline in ASPs in 2008 compared to 2007 was affected by the greater weighting towards sales of lower-margin products. In addition, the strengthening of the U.S. dollar against the euro and deteriorating economic conditions in specific regions of Europe during the third and fourth quarters of 2008 negatively affected our revenues and ASPs.
European revenues were relatively flat in 2007 compared to 2006, primarily due to a 23.1% increase in unit sales, mostly offset by a 15.4% decline in ASPs.
Asian revenues increased 3.6% in 2008 compared to 2007, primarily due to a 23.6% increase in units sold, partially offset by a 16.2% decline in ASPs. The increase in units sold in 2008 compared to 2007 was driven by new product introductions targeted at specific channels and markets where we had identified strong growth potential.
Asian revenues increased 26.1% in 2007 compared to 2006 as we focused more of our sales efforts in this region, which contributed to increases in unit sales and market share. The increase in unit sales of 55% was partially offset by a decrease in ASPs of 18.6%.
Other revenues primarily consist of sales in Canada and Latin America. Other revenues increased 2.5% in 2008 compared to 2007, primarily due to a 15.0% increase in unit sales, partially offset by an 11.0% decrease in ASPs. The decrease in ASPs was primarily attributable to a shift in mix to our lower-margin entry-level products.
Other revenues decreased 38.2% in 2007 compared to 2006. Unit sales decreased 23.0% in 2007 compared to 2006, primarily due to the sale of 8,500 units, which resulted in $6.2 million of revenue, in the first quarter of 2006 related to an education tender order in Mexico that did not reoccur in 2007. Revenue in 2007 was also impacted by a 19.8% decrease in ASPs compared to 2006.
At December 31, 2008, we had backlog of approximately $5.2 million, compared to approximately $6.6 million at December 31, 2007. Given current supply and demand estimates, it is anticipated that a majority of the current backlog will turn over by the end of the first quarter of 2009. The stated backlog is not necessarily indicative of sales for any future period, nor is a backlog any assurance that we will realize a profit from filling the orders.
We achieved a gross margin percentage of 17.9% in 2008, 16.5% in 2007 and 14.4% in 2006.
The increase in gross margin in 2008 compared to 2007 was primarily due to the introduction of several new, higher-margin product platforms. We also realized decreases in other costs of goods sold primarily due to efficiencies achieved within our supply chain and lower costs associated with warranty repair activities. Charges for inventory related write-downs totaled $4.3 million in 2008 compared to $5.1 million in 2007.
These factors were partially offset by sales of end-of-life products in the first half of 2008, softening in the global markets, increasing competition and a relatively high mix of our revenues coming from lower-priced products in the first half of 2008. Margins were also negatively affected in 2008 by the strengthening of the U.S. dollar against the euro and other currencies, which essentially lowers our realizable ASPs for our products priced in local currencies.
The improvement in our gross margin percentage in 2007 compared to 2006 was due primarily to the introduction of new products with improved gross margins, improved product mix and efficiency improvements in supply chain management, resulting in lower warranty repair and improved inventory management. Charges for inventory related write-downs totaled $5.1 million in 2007 compared to $8.7 million in 2006.
These improvements were offset by price reductions across our product portfolio as discussed above.
The charge for inventory write-downs in 2008 related primarily to write-downs on service parts inventory, declines in market values on specific slow moving parts and accruals for end-of-life costs for various product platforms. The charge for inventory write-downs in 2007 related primarily to declines in market value on specific slow moving finished goods inventory and write-downs on service parts inventory. The write-downs for service parts inventory related to the decline in usage of service parts for warranty and non-warranty repair activities, as our warranty repair activities were significantly reduced in 2007. The charge for inventory write-downs in 2006 related primarily to end-of-life costs for various product platforms and a decline in market value on slow moving finished goods. The inventory write-downs reduced our gross margin percentage by 1.7 percentage points in 2008, 1.6 percentage points in 2007 and 2.3 percentage points in 2006.
We continue to focus on improving our gross margin percentage through managing the mix of products sold, our emphasis on our new, differentiated products and continuing to improve our supply chain efficiencies by working closely with our contract manufacturers to control product costs, improve quality and reduce product freight, handling and storage costs.
Stock-based compensation included as a component of cost of sales totaled $298,000 in 2008, $302,000 in 2007 and $145,000 in 2006.
Marketing and Sales Expense
Marketing and sales expense decreased $3.6 million, or 9.9%, to $32.2 million in 2008 compared to $35.8 million in 2007 and decreased $13.3 million, or 27.1%, in 2007 compared to $49.1 million in 2006.
The decrease in marketing and sales expense in 2008 compared to 2007 was primarily due to lower variable expenses resulting from lower revenue levels and more focused marketing programs in our effort
to better align the cost structure with revenue and gross margin levels. The majority of the reductions were made in our marketing programs, such as promotions, direct mail programs, advertising and public relations. We have continued to reduce our personnel related expenses along with discretionary spending. Also contributing to the decrease was a reduction in the amount of IT and facilities expenses allocated to sales and marketing as a result of facility consolidations and reductions in the IT cost structure.
The decrease in marketing and sales expense in 2007 compared to 2006 was primarily due to lower discretionary spending as a result of our previous restructuring activities and continued focus on management of expenses. These actions included reductions in personnel related costs and other discretionary spending. We also achieved decreases in overall spending for sales and marketing programs and advertising related spending.
Stock-based compensation included as a component of marketing and sales totaled $427,000 in 2008, $391,000 in 2007 and $359,000 in 2006.
Research and Development Expense
Research and development expense decreased $2.8 million, or 20.1%, to $11.3 million in 2008 compared to $14.1 million in 2007 and decreased $3.9 million, or 21.5%, in 2007 compared to $18.0 million in 2006.
The decreases in research and development expense in 2008 compared to 2007 and in 2007 compared to 2006 were primarily due to a reduced cost structure related to our restructuring activities, including a decrease in personnel related costs, and other discretionary spending. We have shifted our research and development model to rely more on our contract manufacturing partners for the core projection design, allowing us to reduce our in-house research and development resources. These decreases were partially offset by our increased investment in advanced development research to support our strategy of creating differentiation in our products and our brand name. Also contributing to the decrease was a reduction in the amount of IT and facilities expenses allocated to research and development.
Stock-based compensation included as a component of research and development totaled $277,000 in 2008, $304,000 in 2007 and $151,000 in 2006.
General and Administrative Expense
General and administrative expense decreased $3.2 million, or 16.3%, to $16.7 million in 2008 compared to $19.9 million in 2007, and decreased $1.8 million, or 8.2%, in 2007 from $21.7 million in 2006.
The decrease in general and administrative expense from 2007 to 2008 was due to significant decreases in personnel related costs and consulting services, along with decreases in rent, travel, legal fees, internal audit fees and general insurance expenses. These decreases were partially offset by an increase in tax strategy fees.
Included in general and administrative expense in 2007 was $1.3 million of costs incurred for various external advisors engaged as part of our strategic alternatives evaluation process and $0.4 million of costs related to the hiring of a new Chief Executive Officer. General and administrative expense in 2008 included $0.1 million of costs related to the engagement of an investment advisor in the fourth quarter of 2008.
Included in general and administrative expense in 2006 was $1.8 million of costs related to our audit committee investigations, which concluded in the second quarter of 2006. We also realized decreased overall spending in 2007 compared to 2006 as a result of our previous restructuring activities.
Stock-based compensation included as a component of general and administrative totaled $685,000 in 2008, $416,000 in 2007 and $489,000 in 2006.
Restructuring charges totaled $5.5 million in 2008 and included the following:
At December 31, 2008, $5.8 million of the restructuring charges were included on our balance sheet as other accrued liabilities. We expect to incur approximately $1.2 million of additional charges related to facility consolidations in 2009. See Note 3 of Notes to Consolidated Financial Statements for additional information related to accrued restructuring charges.
Restructuring charges totaled $8.4 million in 2007 and included the following:
A portion of the $2.1 million charge recorded in the second quarter of 2007 for severance costs was related to a shift in our research and development model to outsource more of the design functions to our contract manufacturers, which allows us to reduce necessary in-house research and development resources.
Restructuring charges totaled $5.4 million in 2006 and included the following:
Impairment of Long-Lived Assets
Long-lived asset impairment charges of $2.6 million were recorded in the fourth quarter of 2008 to fully write off our property and equipment. In accordance with SFAS No. 144, we determined that this charge was necessary as a result of continuing operating losses and a significant decline in our market capitalization.
Regulatory assessments of $9.4 million in 2006 included charges totaling $10.7 million related to the initial settlement of our Shanghai customs case, offset by the $1.3 million reversal of the remaining accrual related to our Office of Foreign Assets Control case.
Other Income (Expense)
Interest income in 2008 was $1.3 million compared to $2.7 million in 2006 and $2.4 million in 2005. The decrease in 2008 compared to 2007 was due to lower interest rates realized on our invested balances and lower average invested balances. The increase in interest income in 2007 compared to 2006 was due to increasing interest rates. Our average cash and investment balance was $25.9 million, $29.2 million and $28.3 million, respectively, in 2008, 2007 and 2006.
Other, net included the following (in thousands):
Losses related to foreign currency transactions consist primarily of the fees related to our hedging program. To the extent that our hedges have been effective, the gain or loss excluding the fees charged to place the hedges, relates to the settlement of foreign balances. As part of our plans to simplify our business in 2009, we adjusted our hedging strategy and, as of February 2009, we no longer hedge foreign currency. We will continue to be exposed to foreign currency risk associated with sales of products denominated in non-functional foreign currencies. While we expect to save approximately $1.0 million on the cost of the hedges, we cannot estimate the impact that the revaluation of these balances will have on other, net due to the fluctuation in the foreign balances and in foreign currency exchange rates.
Motif license fees are recognized when licensees report sales and resultant royalties, which are currently contractually required on a semi-annual basis and primarily fall in the first and third quarters of each year. The increase in income related to our Motif joint venture in 2008 compared to 2007 was primarily due to an increase in Motifs net income as a result of a settlement Motif reached related to previously unreported royalties offset by an increase in income tax expense. The decrease in income related to our Motif joint venture in 2007 compared to 2006 was due to lower reported revenues by Motifs licensees and an increase in tax expense as Motif has now utilized the majority of its income tax loss carry forwards.
SMT has ceased operations. The settlement of its assets and liabilities continues. The $1.1 million charge included as a component of other, net in 2006 is our best estimate of our share of the costs for the wind-down.
Income tax expense of $1.1 million in 2008 was made up of $21,000 of income tax benefit from U.S. operations offset by $1.1 million of income tax expense from foreign operations. The $21,000 of tax benefit from U.S. operations was the result of the reversal of an income tax reserve due to the expiration of the applicable statute of limitations and a withholding tax refund on foreign royalty payments, offset by state income taxes. The $1.1 million of income tax expense from foreign operations was primarily comprised of the write off of a $1.0 million deferred tax assets and $0.1 million net tax expense from foreign operations.
Income tax benefit of $29,000 in 2007 was made up of $41,000 of income tax expense from U.S. operations offset by $70,000 of income tax benefit from foreign operations. The $40,000 of tax expense from U.S. operations was the result of withholding tax on foreign royalty payments received and state income taxes. The $70,000 of income tax benefits from foreign operations was primarily comprised of a $270,000 tax benefit related to the resolution of a penalty dispute with the Dutch Tax Authorities offset by a $200,000 net tax expense from foreign operations.
Income tax expense of $0.7 million in 2006 was made up of $0.1 million and $0.6 million of income tax expense from U.S. operations and foreign operations, respectively. The $0.1 million of tax expense from U.S. operations was the result of withholding tax on foreign royalty payments received and state income taxes net of 2005 return to provision adjustments. The $0.6 million of tax expense from foreign operations was primarily comprised of $0.3 million for anticipated transfer pricing adjustments, $0.2 million for adjustments to various deferred tax assets that were not offset by valuation allowances, and $0.1 million net tax expense on foreign operations.
See Note 8 of Notes to Consolidated Financial Statements for more details concerning our income tax provision.
We believe that the impact of inflation was minimal on our business in 2008, 2007 and 2006.
Liquidity and Capital Resources
For the fiscal years ended December 31, 2008, 2007 and 2006, we incurred net losses of $23.0 million, $25.6 million and $61.9 million, respectively. As a result we have an accumulated deficit of $146.4 million at December 31, 2008. The current challenging economic climate also may lead to adverse changes in working capital levels and funding requirements, which also may have a direct impact on our results of operations and financial position. These and other factors may adversely affect our liquidity and our ability to generate profits in the future.
We anticipate that our existing capital resources, including availability under our line of credit and cash flows from operations, will be adequate to satisfy our liquidity requirements through January 2010. To address future liquidity needs managements plans include pursuing alternative financing arrangements or reducing expenditures as necessary to meet our cash requirements. However, there is no assurance that, if required, we will be able to raise additional capital or reduce discretionary spending to provide the required liquidity, which, in turn, may have an adverse effect on our results of operations and financial position.
Total cash, cash equivalents, restricted cash and marketable securities were $33.4 million at December 31, 2008. Working capital totaled $46.2 million at December 31, 2008, which included $16.8 million of unrestricted cash and cash equivalents. The current ratio at December 31, 2008 and 2007 was 1.8 to 1 and 2.0 to 1, respectively.
During 2008 our line of credit facility with Wells Fargo Foothill, Inc. (Wells Fargo) was amended as follows:
In the first quarter of 2008, we amended our line of credit facility with Wells Fargo to:
In the third quarter of 2008, we again amended our line of credit facility to:
In the fourth quarter of 2008, we again amended our line of credit facility to:
During the fourth quarter of 2008, we began borrowing under our line of credit. However, at December 31, 2008, we did not have any amounts outstanding under the credit facility. At December 31, 2008, we were out of compliance with the financial covenants in the credit facility agreement. On March 10, 2009, we entered into an agreement with Wells Fargo to amend our line of credit facility. The amendment waived the event of default arising from the covenant violation as of December 31, 2008, restated the Base Rate Margin to 4.50 percentage points, reset financial covenants related to Minimum EBITDA for the first half of 2009, and extended the term of the agreement until August 31, 2010. See Note 17 of Notes to the Consolidated Financial Statements.
In the third quarter of 2008, our Board of Directors authorized a share repurchase program for the purchase of up to 4,000,000 shares of our common stock over a three-year period. As of December 31, 2008, 50,000 shares had been purchased pursuant to this program at an average price of $1.53 per share, calculated inclusive of commissions and fees, and 3,950,000 shares remained available for purchase. We have currently suspended our stock repurchase efforts as a result of the hiring of an investment banking firm to provide us with advisory services.
At December 31, 2008, we had three outstanding standby letters of credit totaling $12.3 million, which secure our obligations to foreign suppliers for purchases of inventory. The fair value of these letters of credit approximates their contract values. The letters of credit were collateralized by $12.9 million of cash and marketable securities at December 31, 2008, which were reported as restricted on the consolidated balance sheets. The remaining restricted cash and marketable securities of $3.7 million secures our merchant credit card processing account and deposits for value-added taxes in foreign jurisdictions.
Accounts receivable decreased $21.0 million to $25.3 million at December 31, 2008 compared to $46.3 million at December 31, 2007, due primarily to lower sales in the fourth quarter of 2008 compared to the fourth quarter of 2007, as well as a decrease in days sales outstanding (DSO) to 45 days at December 31, 2008 compared to 51 days at December 31, 2007.
Inventories increased $7.5 million to $38.5 million at December 31, 2008 compared to $31.0 million at December 31, 2007. This increase primarily resulted from lower than expected revenues in the second half of 2008 as the global economic conditions worsened, partially offset by a $2.6 million decrease in consigned inventories as we exited the brick and mortar retail channel in the U.S. during 2008 and a reduction of $1.1 million in lamps and accessories inventory. See Note 6 of Notes to Consolidated Financial Statements for a summary of the components of inventory as of these dates.
At December 31, 2008 and 2007, we had approximately 7 weeks and 5 weeks of inventory, respectively, in the Americas channel. Annualized inventory turns were approximately 6 times for the quarter ended December 31, 2008 and 7 times for the quarter ended December 31, 2007. While total inventories and the number of weeks of inventory in the Americas channel were both up at December 31, 2008, we believe the inventory consists primarily of current products.
Other current assets decreased $3.5 million to $4.0 million at December 31, 2008 compared to $7.5 million at December 31, 2007. This decrease primarily resulted from a decrease in deferred income tax and a decrease in accounts receivable insurance claims. A 2004 freight claim was settled in the quarter ended September 30, 2008.
Expenditures for property and equipment totaled $2.1 million in 2008 and were primarily for purchases of product tooling and computer software. Total expenditures for property and equipment are expected to be between $3.0 million and $4.0 million in 2009, primarily for IT infrastructure, tooling and equipment.
Cost-based investments, which represent investments in technology companies accounted for under the cost method for which we do not have the ability to exercise significant influence, increased to $6.0 million at December 31, 2008 compared to $30,000 at December 31, 2007. The increase reflects our investment of $6.0 million in a technology company over the course of 2008. We currently hold a minority interest and are carrying the value of our investment at cost.
Other assets, net, which include building deposits and investments in our joint venture with Motorola, Motif, were unchanged from December 31, 2007 to December 31, 2008.
Accounts payable decreased $25.3 million to $38.8 million at December 31, 2008 compared to $64.1 million at December 31, 2007. This decrease primarily resulted from the timing of inventory purchases and payments made to vendors.
Accrued warranty costs, both short and long-term, decreased $5.1 million to $4.7 million at December 31, 2008 compared to $9.8 million at December 31, 2007. The reduction in accrued warranty costs was due primarily to reductions in the warranty cost per unit associated with the transition in our warranty model toward purchasing two-year supplier warranties from our contract manufacturers and a reduction in failure rates we are experiencing. As our contract manufacturers have improved the manufacturing quality of the projectors we sell, we have been transitioning towards purchasing warranty coverage as part of the product we source. For the products procured from the contract manufacturer with the warranty coverage included, our future liability is calculated based on the difference between the warranty period offered from the supplier and the warranty period we offer to the end customer.
Contractual Payment Obligations
A summary of our contractual commitments and obligations as of December 31, 2008 was as follows (in thousands):
Given the buying patterns of various geographies and market segments, our revenues are subject to certain elements of seasonality during various portions of the year. The first quarter of each year is typically down from the immediately preceding fourth quarter due to corporate buying trends and typical aggressive competition from our Asian competitors with March 31 fiscal year ends. In addition, we sell our products into the education and government markets that typically see seasonal peaks in the U.S. in the second and third quarter of each year. Historically, between 20% and 30% of our revenues have come from Europe and, as such, we typically experience a seasonal downturn due to the vacation season in July and August, which results in decreased revenues from that region in the third quarter compared to the second quarter. Conversely, we typically experience an increase in revenue from Europe in the fourth quarter.
Critical Accounting Policies and Use of Estimates
The preparation of our financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Following is a discussion of our critical accounting estimates.
Allowance for Uncollectible Trade Accounts Receivable
Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer to initiate and modify their credit limits. We regularly evaluate the collectibility of our trade accounts receivable balances based on a combination of factors. When a customers account becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation, such as in the case of a bankruptcy filing, deterioration in the customers operating results or financial position or other material events impacting their business, we record a specific reserve for bad debt to reduce the related receivable to the amount we expect to recover given all information presently available. In certain situations, if an account is determined to be a bad debt, we may use collection agencies to work with the customer to receive payment in return for a fee. If circumstances related to specific customers change, our estimates of the recoverability of receivables could materially change. Bad debt expense (recovery), net totaled $0.3 million, $(0.1) million and $0.5 million, respectively, in 2008, 2007 and 2006. Our allowance for uncollectible accounts totaled $2.1 million and $2.0 million at December 31, 2008 and 2007, respectively, and is included on the consolidated balance sheets as a reduction of accounts receivable. See Note 5 of Notes to Consolidated Financial Statements for additional information.
Allowance for Sales Returns and Other Deductions from Revenue
Some distributor, dealer, and retailer agreements allow for partial return of products and/or price protection under certain conditions within limited time periods. Such return rights are generally limited to contractually defined, short-term stock rotation and defective or damaged product although we have granted retailers return policies consistent with the retailers return policies for their customers. We maintain a reserve for sales returns and price adjustments based on historical experience and other qualitative factors. We also have incentive programs for dealers and distributors whereby rebates are offered based upon exceeding volume goals. Estimated sales returns, price protection and rebates are deducted from revenue.
Historical return rates are monitored on a product-by-product basis. As new products are introduced, these historical rates are used to establish initial sales returns reserves and are adjusted as better information becomes available. We also regularly monitor and track channel inventory with our significant customers. Variability in channel inventory levels from quarter to quarter is further used to qualitatively adjust our sales returns reserves. Typically, return rates, on a worldwide basis, have averaged 2% to 4%
of sales to customers who are granted such rights. If a dramatic change in the rate of returns were to occur, our estimate of our sales return accrual could change significantly.
One of the factors we consider in estimating future returns, for customers who are granted such rights, is the sell through of products by our distributors and dealers. We have controls in place to monitor channel inventory levels with these customers. We believe the risk of returns increases when inventory held by any particular customer exceeds their near term needs. Accordingly, we defer recognition of revenue on certain channel inventory estimated to be in excess of 60 days.
Our reserves deducted from revenues and accounts receivable for sales returns, price protection and other rebates totaled $1.2 million and $2.7 million, respectively, at December 31, 2008 and 2007. Historically, our actual experience for sales returns, price protection and other sales incentives has not differed materially from our estimates. See Note 5 of Notes to Consolidated Financial Statements for additional information.
We regularly evaluate the realizability of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, estimated service period, product end-of-life dates, estimated current and future market values, service inventory requirements and new product introductions, as well as other factors. Purchasing requirements and alternative usage avenues are explored within these processes to mitigate any identified inventory exposure. Lamps, accessories and service inventories with quantities in excess of forecasted usage are reviewed at least quarterly by our service planning, operations and finance personnel for obsolescence. Resultant write-downs are typically caused by decreased usage of parts in service repair activity and product end of life adjustments in the market. Finished goods are reviewed quarterly by sales, finance and operations personnel to determine if inventory carrying costs exceed market selling prices and demand. Service inventory is systematically and judgmentally reviewed for write downs based on the estimated remaining service life of the inventory. We record write-downs for inventory based on the above factors and take into account worldwide quantities and demand in our analysis. If circumstances related to our inventories change, our estimates of the realizability of inventory could materially change. Inventory write-downs totaled $4.3 million, $5.1 million and $8.7 million, respectively, in 2008, 2007 and 2006. At December 31, 2008 and 2007, our inventory reserves totaled $4.6 million and $4.7 million, respectively, and were recorded as a reduction of inventory on our consolidated balance sheets. See Note 6 of Notes to Consolidated Financial Statements for additional information.
We evaluate our obligations related to product warranties on a quarterly basis. In general, we offer a standard two-year warranty and, for certain sales channels, products and regions, we offer a three-year warranty. We monitor failure rates on a product category basis through data collected by our manufacturing sites, factory repair centers and authorized service providers. The service organizations also track costs to repair each unit. Costs include labor to repair the projector, replacement parts for defective items, freight costs and other incidental costs associated with warranty repairs. Any cost recoveries from warranties offered to us by our suppliers covering defective components are also considered, as well as any cost recoveries of defective parts and material, which may be repaired at a factory repair center or through a third party. In addition, as our contract manufacturing partners have improved the manufacturing quality of the projectors we sell, we have been transitioning towards purchasing warranty coverage as part of the product we source. For the products procured from the contract manufacturer with warranty coverage included, our future liability is calculated based on the estimated warranty costs associated with the difference between the warranty period offered from the contract manufacturer and the warranty period offered to the end customer. This data is then used to calculate our future warranty liability based on the actual quantity of projectors sold in each projector category and warranty coverage model, and remaining warranty periods. If circumstances change, or a dramatic change in the failure rates were to occur, our estimate of the warranty liability could change significantly. Revenue generated from sales of extended warranty contracts is deferred and recognized as revenue over the term of the extended warranty coverage. Deferred warranty revenue totaled $0.8 million and $2.1 million, respectively, at December 31, 2008 and 2007 and was included in other current
liabilities on our consolidated balance sheets. Our warranty liability at December 31, 2008 totaled $4.7 million, of which $2.6 million was classified as a component of current liabilities and $2.1 million was classified as other long-term liabilities on our consolidated balance sheets. Our warranty accrual at December 31, 2007 totaled $9.8 million, of which $6.2 million was classified as a component of current liabilities and $3.6 million was classified as long-term liabilities on our consolidated balance sheets.
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets arise from the tax benefit of amounts expensed for financial reporting purposes but not yet deducted for tax purposes and from unutilized tax credits and NOL carry forwards. We evaluate our deferred tax assets on a regular basis to determine if a valuation allowance is required. To the extent it is determined that the recoverability of the deferred tax assets is unlikely; we record a valuation allowance against deferred tax assets. At December 31, 2008 and 2007, we had a valuation allowance of $248.3 million and $273.2 million against deferred tax assets, which resulted in a net deferred tax asset balance of $0 million and $1.1 million, respectively. See Note 8 of Notes to Consolidated Financial Statements for additional information.
We also follow the guidance of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which defines the threshold for recognizing the benefits of tax return positions in the financial statements as more-likely-than-not to be sustained by the taxing authority. The interpretation applies to all income tax related positions.
As a result of the implementation of Interpretation No. 48 on January 1, 2007, there was no change in the liability for unrecognized tax benefits, and no adjustments were made to the January 1, 2007 balance of retained earnings. As of December 31, 2008 and 2007, unrecognized tax benefits totaled $0.1 million and $0.2 million, respectively, the disallowance of which would not materially affect our annual effective income tax rate.
Long-Lived Asset Impairment
Long-lived assets held and used by us and intangible assets with determinable lives are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets. We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Such reviews assess the fair value of the assets based upon our estimates of future cash flows that the assets are expected to generate.
In 2008, we recorded impairment charges related to long-lived assets as a result of an impairment test performed in the fourth quarter. We performed the impairment test as a result of triggering events identified, including worsening economic conditions and a significant decline in our market capitalization in the fourth quarter of 2008. The analysis indicated that the book value of our long-lived assets exceeded fair value. Accordingly, we recorded an impairment charge totaling $2.6 million in the fourth quarter of 2008 to fully write off our property and equipment. The majority of these long-lived assets are continuing to be used in operations.
We did not record any long-lived asset impairments in 2007 or 2006.
New Accounting Pronouncements
See Note 2 of Notes to Consolidated Financial Statements for a discussion of the impact of new accounting pronouncements.
Off-Balance Sheet Arrangements
As of December 31, 2008, we leased our non-owned facilities under operating lease agreements as described under contractual payment obligations above. Except for these operating lease agreements, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Foreign Currency Exposure
Our financial market risk arises from fluctuations in foreign currencies and interest rates.
Our net investment exposure in foreign subsidiaries translated into U.S. dollars using the period-end exchange rates at December 31, 2008, was approximately $10.0 million. The potential loss in fair value resulting from a hypothetical 10% adverse change in foreign exchange rates would be approximately $1.0 million at December 31, 2008. At December 31, 2008 we had no formal plans to liquidate any of our operating foreign subsidiaries outside of the consolidated group, and therefore, foreign exchange rate gains or losses on our foreign investments are reflected as a cumulative translation adjustment and do not affect our results of operations. In 2008, we liquidated two foreign subsidiaries in Norway that had been inactive since 2005, leaving one remaining sales subsidiary in that region. Upon liquidation of the two foreign subsidiaries, the net assets were distributed to the parent. As the net assets were not distributed outside of the consolidated group, there was no recognition of a net gain or loss upon liquidation of the entities. In 2009, we may liquidate additional European subsidiaries within the consolidated group in an effort to simplify our legal structure.
We are exposed to changes in exchange rates through the sale of products denominated in non-functional foreign currencies. Our purchases of inventory are largely denominated in U.S. dollars and we anticipate that we will continue to purchase in U.S. dollars in the foreseeable future, therefore we are not exposed to foreign currency fluctuations on these purchases. During 2008 we had a foreign currency derivative program in place; utilizing foreign currency forward contracts (forward contracts) to mitigate certain foreign currency transaction exposures. Under this program, increases or decreases in our foreign currency transactions are substantially offset by gains and losses on the forward contracts, so as to mitigate foreign currency transaction gains and losses. The effect of an immediate 10% change in our foreign currency forward contracts would not have a material effect on our results of operations. These forward contracts are not designated as qualifying hedges and, accordingly, are marked to market at the end of each period, with the resulting gain or loss being recorded as a component of other income or expense on our consolidated statement of operations.
The table below summarizes, by major currency, the contractual amounts of our forward exchange contracts translated to U.S. dollars as of December 31, 2008 and 2007. The forward contracts outstanding as of December 31, 2008 mature within 34 days of year end. The bought amounts represent the net U.S. dollar equivalents of commitments to purchase foreign currencies, and the sold amounts represent the net U.S. dollar equivalent of commitments to sell foreign currencies.
Forward contracts outstanding were as follows at December 31, 2008 and 2007 (in thousands):
As part of our plans to simplify our business in 2009, we adjusted our hedging strategy and, as of February 2009, we no longer hedge foreign currency. We will continue to be exposed to foreign currency risk associated with sales of products denominated in non-functional foreign currencies. However, in 2008 our foreign currency balances have significantly decreased and an immediate 10% adverse change in foreign exchange rates would not have a material effect on our results of operations.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates to our line of credit and our investment portfolio.
As of the end of 2008, our line of credit facility with Wells Fargo bears interest on outstanding borrowings at prime plus 2.5%, however, at no time will the interest rate be below 4%. As of March 10, 2009, the effective date of our sixteenth amendment to the credit agreement, our line of credit facility with Wells Fargo bears interest at prime plus 4.5%. During the fourth quarter of 2008, we began borrowing under our line of credit. However, we had no outstanding borrowings at December 31, 2008. Our average outstanding balance for the year ended December 31, 2008 was not significant, therefore, a change in the prime rate would not have had a significant effect on our financial condition or results of operations. Assuming the maximum available balance was outstanding for all of 2009, a hypothetical immediate 10% adverse change in the interest rate would result in an increase in interest expense of approximately $1.0 million.
The primary objective of our investment activities is to preserve principal while secondarily maximizing yields without significantly increasing risk. As of December 31, 2008, 100% of our cash and our investment portfolio were held in bank deposits and money market funds. We maintain cash deposits with major banks that, from time to time, may exceed federally insured limits. Due to the short duration of our investment portfolio, an immediate 10% increase or decrease in interest rates would not have a material effect on our financial condition or results of operations.
The financial statements and notes thereto required by this item begin on page F-1 of this document, as listed in Item 15 of Part IV. Unaudited quarterly financial data for each of the eight quarters in the two-year period ended December 31, 2008 was as follows:
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a 15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.
The effectiveness of our internal control over financial reporting as of December 31, 2008 was audited by KPMG LLP, an independent registered public accounting firm, as stated in their report included below.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a- 15(b) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management does not expect that our disclosure controls and procedures will prevent and detect all errors and fraud. Any control system, no matter how well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute assurance, that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected.
Report of Independent Registered Public Accounting Firm
The Board of Directors and
Shareholders of InFocus Corporation:
We have audited InFocus Corporations internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). InFocus Corporations management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, InFocus Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of InFocus Corporation and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2008, and our report dated March 13, 2009 expressed an unqualified opinion on those consolidated financial statements.
March 13, 2009
Given the timing of the event, the following information is included in the Form 10-K pursuant to Item 1.01 of Form 8-K Entry into a Material Definitive Agreement in lieu of filing a Form 8-K.
On March 10, 2009, we entered into an agreement with Wells Fargo to amend our line of credit facility. The amendment waived the event of default arising from the covenant violation as of December 31, 2008, restated the Base Rate Margin to 4.50 percentage points, reset financial covenants related to Minimum EBITDA for the first half of 2009, and extended the term of the agreement until August 31, 2010.
See Sixteenth Amendment to Credit Agreement filed as Exhibit 10.48 to this Form 10-K.
Board of Directors
The following persons serve on our Board of Directors:
John D. (J.D.) Abouchar is an independent consultant to GRT Capital Partners, LLC, focused on technology holdings, and a portfolio manager to GRT Technology L.P. hedge fund. Prior to joining GRT Capital Partners in 2006, Mr. Abouchar was a Senior Analyst for six years at Pacific Edge Investment Management, a hedge fund specializing in various electronics and technology industries based in Palo Alto, California. Prior to working at Pacific Edge Investment Management, Mr. Abouchar was employed as a Senior Equity Analyst for Preferred Capital Markets, Inc. from 1998 to 2000. In this role, Mr. Abouchar actively covered InFocus as an analyst for over two years. Mr. Abouchar holds a B.S. degree in Economics from Wharton School, University of Pennsylvania.
Peter D. Behrendt has been a Venture Partner with New Enterprise Associates (NEA) since 1999. In addition, Mr. Behrendt currently serves as Chairman of the Board of ProStor Systems, a Boulder, Colorado based company that specializes in removable disk storage for data back-up and archiving needs. From September 2000 until 2003, Mr. Behrendt was the Chairman of the Board of Troika Networks, a storage networking company. From 1987 until 1997, Mr. Behrendt was the Chairman and Chief Executive Officer of Exabyte Corp., a publicly traded company that was the worlds largest independent manufacturer focused exclusively on tape storage products, tape libraries and recording media. In addition, prior to working at Exabyte Corp., Mr. Behrendt spent 26 years in numerous executive positions at International Business Machines, Inc. (IBM), including worldwide responsibility for business and product planning for IBMs tape and disk drives business and general management of IBMs worldwide electronic typewriter business. Mr. Behrendt was an Adjunct Professor of Entrepreneurship at the University of Colorado at Boulder and holds a B.S. degree in Engineering from UCLA. Mr. Behrendt serves on the board of Western Digital Corporation (NYSE: WDC) and several private companies.
Michael R. Hallman has served as President of The Hallman Group, a management consulting company focusing on marketing, sales, business development and strategic planning for the information systems industry, since October 1992. Mr. Hallman served as President and Chief Operating Officer of Microsoft Corporation, a developer and manufacturer of a wide range of software products for a multitude of computing devices from February 1990 until March 1992. From 1987 to 1990, he was Vice President of
the Boeing Company, a major aerospace company, and President of Boeing Computer Services. From 1967 to 1987, Mr. Hallman worked for IBM in various sales and marketing executive positions, with his final position being Vice President of Field Operations. Mr. Hallman holds a B.B.A. and an M.B.A. from the University of Michigan. Mr. Hallman is a member of the Board of Directors of Intuit, Inc. (NASDAQ: INTU), a leading provider of business and financial management solutions for small and medium sized businesses.
Robert B. Ladd has served as Managing Member of Laddcap Value Associates LLC, which serves as General Partner of Laddcap Value Partners LP, since late 2002. Prior to forming his private investment partnership, Mr. Ladd was a Managing Director at the investment management firm Neuberger Berman, from 1988 through 2002, where he served as a securities analyst and portfolio manager for various high net worth clients of the firm. In addition, Mr. Ladd serves as a member of the Board of Directors of Delcath Systems, Inc. (NASDAQ: DCTH), a development stage company developing a drug delivery system for the introduction of chemotherapy agents. Mr. Ladd is a Chartered Financial Analyst and has over 20 years of experience in the investment management field. He earned a B.S. degree in economics from the Wharton School, University of Pennsylvania and a M.B.A. from Northwestern Universitys Kellogg School of Management.
Bernard T. Marren has served as the Chairman, Chief Executive Officer and President of OPTi Inc., an intellectual property licensing company based in Palo Alto, California, since 1998. In addition, Mr. Marren serves as a member of the Board of Directors of Microtune, Inc. (NASDAQ: TUNE), a fabless semiconductor manufacturing company based in Plano, Texas and Uni-Pixel, Inc. (OTC Bulletin Board: UNXL), a developer of flat panel color display technology, based in The Woodlands, Texas. Mr. Marren has over 40 years of experience in the technology industry and earned a B.S.E.E. degree from the Illinois Institute of Technology.
Michael A. Nery joined the Board in February 2009. Mr. Nery founded Nery Capital Partners, L.P., an investment fund based in Asheville, NC, and has acted as its manager since September 1999. From January 1997 to May 1999, Mr. Nery served as Vice President and Senior Analyst with Denver Energy Partners, LP. From 1995 to 1997, Mr. Nery was a Research Associate for Fidelity Management and Research Company. Mr. Nery is a Chartered Financial Analyst and holds a B.S. degree in Psychology from Williams College. Mr. Nery has served as a director of Tandy Leather Factory, Inc. (AMEX: TLF) since December 2003.
Robert G. OMalley joined InFocus as its President, Chief Executive Officer and Director on October 1, 2007. Prior to joining InFocus, Mr. OMalley served as Senior Vice President of Marketing at Tech Data Corporation, a distributor of IT hardware, software and services, since 2005. Mr. OMalley served as a consultant and in short-term executive positions at various technology companies between 2003 and 2005 and was President, CEO and Chairman of Immersion Corporation, a developer of tactile, or haptic, technologies that engage the sense of touch in the digital world, between 2000 and 2003. In addition, prior to 2000, Mr. OMalley held various senior executive positions at Intermec Technologies, Pinacor, MicroAge, and IBM. Mr. OMalley earned a Masters degree in Business Administration from Arizona State University in Tempe, and a Bachelors degree in aeronautical engineering from the University of Minnesota in Minneapolis.
The Audit Committee is a separately-designated standing committee established in accordance with section 3(a)(58)(A) of the Exchange Act and was composed of the following during 2008:
Mr. Nery was added to the Audit Committee upon joining the Board in February 2009.
Audit Committee Financial Expert
Our Board of Directors has determined that Mr. Abouchar, the Chair of the Audit Committee, is an audit committee financial expert as such term is defined in Item 407(d) of Regulation S-K promulgated by the SEC. Mr. Abouchar is also independent as prescribed by NASDAQ and the Securities and Exchange Commission, including Rule 10A-3(b)(1) under the Exchange Act related to audit committee member independence.
Code of Ethics
We adopted the InFocus Corporation Code of Conduct, which is a code of conduct and ethics that applies to all of our directors, officers and employees, including our principal executive officer and our principal financial officer. We filed a copy of our Amended and Restated Code of Conduct as exhibit 14 to our Form 8-K filed with the Securities and Exchange Commission on August 8, 2006. You can also access our Code of Conduct on our website at www.infocus.com. We will provide without charge a copy of our Code of Conduct upon written request from any shareholder. Written requests should be mailed to the Secretary, InFocus Corporation, 27500 SW Parkway Avenue, Wilsonville, Oregon 97070.
The following table identifies our executive officers as of March 6, 2009, the positions they hold and the year in which they began serving as an executive officer. Officers are elected by the Board of Directors to hold office until their successors are elected and qualified.
For biographical information on Mr. OMalley, see Board of Directors above.
Joseph OSullivan joined InFocus in September 2004 as Vice President, Global Supply Chain Management and, in mid-2006, Mr. OSullivan was appointed Vice President, Global Operations and General Manager Asia Sales. In May 2007, Mr. OSullivan became Acting Chief Operating Officer, Vice President Global Operations and General Manager Asia Sales. In November 2007, Mr. OSullivan was named Chief Operating Officer. Prior to joining InFocus, Mr. OSullivan was a consultant working with Banta Global Turnkey, a global outsourcing company from March 2003 to September 2004. Prior to that, Mr. OSullivan held various executive positions at Apple Computer, Inc. from 1988 to 2003 with his final position being Vice President of Asia Operations. Apple Computer designs, manufactures, and markets personal computers and a line of portable digital music players along with related software, services, accessories, and networking solutions.
Lisa K. Prentice joined InFocus on January 17, 2008 as its Senior Vice President, Finance and, on March 7, 2008, was also named as its Corporate Secretary and Treasurer. On March 12, 2008, Ms. Prentice was named Chief Financial Officer. Prior to Joining InFocus, Ms. Prentice served as Chief Financial Officer of PACCESS, a global supply chain solutions provider with primary operations in Asia, since 2001. Prior to PACCESS, Ms. Prentice worked in senior financial management roles at Tektronix, Inc., a provider of test, measurement and monitoring instrumentation, and later at Xerox Corporation, a manufacturer of high-technology document processing products. Ms. Prentice earned a Masters degree in Business Administration from Portland State University, and a B.S. degree in Business with a concentration in Accounting from the University of Oregon.
Steve Stark joined InFocus in 1992 as a manufacturing engineer and also spent 10 years in our research and development department as a Design Engineer, Projection Display Architect and Engineering Director. In September 2005, Mr. Stark was promoted to Vice President, Engineering. Prior to joining
InFocus, Mr. Stark held a variety of design and test engineering leadership positions for 17 years at Tektronix, Inc. Mr. Stark holds a B.S. degree in Electronics Engineering from the University of Portland, has completed continuing programs in Engineering and Technology Management and is the author of several patents in the InFocus technology portfolio.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the 1934 Act requires our Directors and executive officers and persons who own more than ten percent of the outstanding shares of our common stock (ten percent shareholders) to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of shares of our common stock and other equity securities. To our knowledge, based solely on review of the copies of such reports furnished to us or otherwise in our files and on written representations from our Directors, executive officers and ten percent shareholders that no other reports were required, during the fiscal year ended December 31, 2008, our officers, Directors and ten percent shareholders complied with all applicable Section 16(a) filing requirements.
Compensation Committee Interlocks and Insider Participation
During 2008, the Compensation Committee of our Board of Directors was composed of:
Mr. Nery was added to the Compensation Committee upon joining the Board in February 2009.
All members of the Compensation Committee are non-employee, outside Directors. Although Mr. OMalley, our President and Chief Executive Officer, served on our Board of Directors in 2008 while also an employee and participated in compensation discussions, he did not participate in any deliberations or decisions regarding his own compensation. None of our executive officers served as a director or a member of a compensation committee of any other company for which any of our Directors serves as an executive officer.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis, included below, with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Form 10-K.
Submitted by the Compensation Committee of the Board of Directors:
Mr. Behrendt (Chair)
The following table summarizes compensation paid to non-employee members of our Board of Directors related to their 2008 service:
Non-employee Directors are reimbursed for their expenses in attending meetings of our Board of Directors. In addition, non-employee Directors receive an annual retainer fee of $28,000 and a $2,500 fee for each Board meeting attended in person and a $500 fee for each telephonic Board meeting attended. Each chair or member of a Board committee receives an additional annual retainer as follows:
Each non-employee Director is granted an option to purchase 30,000 shares of our common stock upon initial election to the Board and an option to purchase 25,000 shares of our common stock for each year of additional service as a Director. Committee chairs also receive an additional option to purchase 1,000 shares of our common stock. Pursuant to our Officer and Director Stock Ownership Program, non-employee Directors also receive restricted stock grants based on a ratio of one share for every two shares of our common stock purchased by them up to a maximum of 5,000 shares per year. We do not pay any additional remuneration to employees who also serve as Directors.
Equity incentive awards outstanding at December 31, 2008 for each non-employee Director were as follows:
Compensation Discussion and Analysis
In this section, we give an overview and analysis of our compensation programs and policies, the material compensation decisions we have made under those programs and policies, and the material factors that we considered in making those decisions. Under the heading Executive Compensation Summary Information below, you will find a series of tables containing specific information about the compensation earned or paid in 2008 to the individuals named in the Summary Compensation Table, whom we refer to as our named executive officers, or NEOs.
The discussion below is intended to help you understand the detailed information provided in those tables and put that information into context within our overall compensation program.
Compensation Philosophy and Policies
Our general philosophy is to structure executive officer compensation to attract, motivate and retain senior management by providing an opportunity for competitive compensation based on market rates and the Companys performance. Our compensation philosophy is designed to be competitive with comparable employers and to align managements incentives with the long-term interests of our stockholders. We compensate our senior management through a mix of base salary and incentive pay. Incentive pay includes annual bonus plans and a mix of short-term and long-term stock-based incentive opportunities. Annual bonus plans are generally designed to reward both company-wide performance and department-specific performance by tying payouts to pre-approved operating income goals and departmental financial or measurable operational objectives. In 2008, however, in view of our focus on returning to profitability, payouts were tied only to company-wide operating income goals. Short-term and long-term stock-based incentive opportunities include grants of options to purchase our common stock in the future and grants of restricted stock. It is also the policy of the Compensation Committee of our Board of Directors (the Compensation Committee) that, to the extent possible, compensation will be structured so that it meets the performance-based criteria as defined by Section 162(m) of the Internal Revenue Code of 1986, as amended, and therefore is not subject to federal income tax deduction limitations. The Compensation Committee has the right to waive pre-established performance criteria in granting awards.
The Compensation Committee has been assigned the responsibility by the Board of Directors for setting compensation for our executives and acts as the plan administrator of our stock-based compensation plans. On an annual basis, the Compensation Committee reviews and evaluates the performance of the Chief Executive Officer (CEO) relative to the Boards approved goals and objectives. Based on this evaluation, the Compensation Committee sets the CEOs annual compensation including salary, bonus and long-term stock-based compensation. The Compensation Committee also reviews and approves the evaluation process and compensation structure under which compensation is paid or awarded to our other executive officers. The roles and responsibilities of the Compensation Committee are defined in its charter, which is available on our corporate website at www.infocus.com.
Elements and Objectives of our Compensation Program
The elements of our 2008 target overall executive compensation program included: annual base pay, Executive Bonus plan and stock-based compensation. The objective of the compensation program was to provide a mix of stable and consistent income (annual base pay) as well as income that has substantial risk and reward opportunities tied to our financial performance (annual Executive Bonus plan and stock-based compensation). The annual base pay and bonus plans represent the short-term elements of our compensation program and are designed to balance the stability of base pay with short-term, at risk bonus elements. Bonus plan payments are tied to company performance, with potential for considerable increase in total compensation as well as substantial risk of forfeiture.
In contrast, the remaining stock-based compensation plans represent long-term incentive programs, designed to retain high-quality executives and to inspire their continuing efforts to improve corporate financial results and shareholder value. Our philosophy is that key decision-makers whose actions and performance are critical to the long-term success of our company should have a meaningful portion of their total target compensation linked to our success in meeting our long-term performance objectives and increasing shareholder value. The NEOs have more of their total compensation leveraged within the long-term programs than other members of senior management. The Compensation Committee believes the NEOs have more ability to influence our performance and thus should have a higher portion of their total compensation at risk, with the potential not only for higher growth opportunities, but also greater risk if performance goals are not met.
The process used in establishing overall target compensation for our NEOs is similar to the process used to establish total target compensation for our entire employee base. Our main data source and tool in setting target compensation for our NEOs is participating in and reviewing the results of Radfords
Compensation Surveys conducted by Radford Associates and evaluating compensation in relation to comparable positions in the target geographic region. In determining appropriate comparable data, we use the survey results that compare compensation data for companies with revenue between $200 million and $1.0 billion, regardless of the industry. We review companies with revenue ranges that are comparable to ours regardless of the industry because we are committed to providing compensation and benefit programs that are competitive both within our industry as well as with other relevant organizations we compete with for qualified employees. Senior management and our human resource department utilize Radfords Compensation Survey and collaborate to make compensation recommendations to the Compensation Committee. Management analyzes the range of salaries paid by companies nation-wide for each specific comparable executive position, and uses a range of the 50th to 60th percentile as a guideline for assigning total compensation. The Compensation Committee chose to use the 50th to 60th percentile range as the guideline for setting executive compensation because we feel up to a 10% premium to market average supports our goal of attracting qualified senior management and allows for future compensation growth opportunities. In addition to the Radford survey, other factors, such as previous experience, are taken into consideration when determining compensation recommendations.
Annual Base Salary
Our goal in establishing annual base salary levels is to provide our senior management with a level of assured cash compensation that would normally accompany their professional status and accomplishments. The annual base salary for all our NEOs, and any increases to annual base salary established during the year, was set in accordance with the guidelines discussed above.
Annual Bonus Plans for 2008
Executive Bonus Plan
We believe a significant portion of an executives compensation should be variable, or at risk, in order to help drive the desired annual financial results. The 2008 Executive Bonus Plan (the Bonus Plan) is the vehicle through which this variable pay opportunity was established in 2008. The Compensation Committee annually reviews and approves the financial goals on which the Bonus Plan is based. While our standard practice is to award cash bonuses based upon company and individual/team performance objectives, in view of our focus on operating profitability in 2008, bonuses for our NEOs were based solely upon the company achieving the overall targeted financial objectives by the end of that period. The percentage of compensation at risk under this plan is higher for the more senior officers, in recognition of the fact that they have a greater role in influencing the direction and outcome of corporate objectives. The Compensation Committee sets the targets for achieving the bonus at a level that is attainable but still requires significant improvement to the relative operating results. In 2008 the targets were not achieved and the bonuses were not earned.
The Executive Bonus Plan provides for the payment of executive officer bonuses based on achievement of corporate adjusted operating income targets. The Compensation Committee chose adjusted operating income as the financial measure to tie the executives incentive bonus to the operations of the business most in their control. The operating income goals are generally approved by the Board of Directors at the beginning of each year based on the operational and financial plan prepared by management. However, due to the desire to create a more aligned sense of urgency and timeliness, the 2008 goals were established in February 2008 and set to be paid quarterly in Q1 and Q2 of 2008. Infrequent or unusual adjustments such as restructuring charges, asset impairments or one-time gains and losses were excluded from operating income in both establishing targets and measuring results. The 2008 annual operating income goal was set at a level that required significant improvement in our performance relative to 2007.
Generally, the percentage of the target bonus to be paid out is adjusted according to the percentage achievement of the applicable goals and objectives. Over achievement or under achievement of the goal could result in increased or decreased payment amounts on a prorated basis. More than 100% of the target bonus may be paid out if more than 100% of the adjusted operating income target is achieved. The adjusted operating income target has to be met at the 50% level or greater for the executive officers to receive any payments under the Bonus Plan. Provided the minimum adjusted operating income target
(50%) is achieved, the target bonus attributable to individual/team results is determined based on performance against those specific goals, but is capped at 150% of the target amount. If the corporate adjusted operating income is between 50% and 125%, the target bonus payout amount is prorated. Any payments to the CEO, CFO, COO and other Vice Presidents under the Bonus Plan occur following the end of the fiscal year based on the audited annual financial statements. Payments to all other executives are typically made quarterly based on achieving quarterly operating income targets and individual/team objectives. For all executives of the Company who are Corporate Officers, 100% of their bonus is based upon the achievement of the annual adjusted operating income goal because we believe these positions have the most influence on the financial success of the company and, therefore, their bonuses should be based entirely on achievement of our financial goals. For other non-Corporate Officer eligible executives and employees, the percent of their bonus that is dependent on achievement of the operating income goals and achievement of the executives or employees individual/team goals are determined annually.
In a meeting held on February 12, 2008, the Compensation Committee approved the Bonus Plan for 2008. Target bonuses for 2008 under the Bonus Plan were 50% and 45% of annual base salary for Chief Executive Officer and Senior Vice Presidents/Vice Presidents, respectively. In 2008, no amounts were earned or paid under the Bonus Plan.
Stock Option Awards for 2008
Our Stock Incentive Plan provides for the issuance to officers and employees of incentive and non-qualified options to purchase shares of our common stock at an exercise price equal to the fair market value of the underlying shares on the date of grant. In awarding stock options, the Compensation Committee looks at equity compensation practices of other similar companies and considers the position of the individual executive, benchmark data from Watson Wyatt for similar positions, the individuals annual base pay and his/her ability and opportunity to direct improvements of the Company as a whole.
In consultation with Watson Wyatt, a global compensation consulting firm, in December 2005, we articulated the objectives of our long-term equity incentive program and analyzed the effectiveness of our equity compensation programs in light of those objectives. We view our equity compensation programs as (i) a tool for competitive positioning, retention, and linkage of executive compensation to long-term share price movement, and (ii) a means by which to minimize compensation expense and cash impact to the Company compared to the value delivered to the executive. We determined that, despite the change in accounting treatment, stock options best meet the objectives of our long-term incentive program. We also concluded that a mix of time-based vesting and performance-based vesting was the most effective method for creating the desired results for our long-term equity incentive program.
Each year, the Compensation Committee reviews the total stock pool available for option grants. Executive stock options are approved by the Compensation Committee at an exercise price equal to the closing price of our common stock on the NASDAQ Global Market on the date of grant. The effective date of all option grants to executives is the date the Compensation Committee approves such grants, unless a future date is so designated by the Compensation Committee. We do not have a practice of timing stock option grants to our executives in coordination with the release of nonpublic information. The Compensation Committees schedule for meetings is determined in advance in conjunction with our quarterly Board of Directors meetings. These meetings are typically scheduled after our quarterly earnings announcements. The proximity of any awards to other market events is coincidental.
The number of stock options granted is determined using market data and ranges established for each job grade. The stock option guidelines are then reviewed and approved by the Compensation Committee, including stock option grants for officers newly hired. New-hire executive stock option grants have an effective date of the date of Compensation Committee approval of the stock option for the individual executive or the hire date of the executive, whichever is later.
The 2008 stock option grants were approved by the Compensation Committee in a meeting on February 12, 2008 and the Compensation Committee determined the grant date of the options would be February 12, 2008. A total of 165,000 options were granted to our executive officers. Each of the options has a term of five (5) years and becomes exercisable as to 25% of the total shares one year from the date of
grant and as to an additional 1/48th of the total shares each month thereafter, subject to the executives continuous employment following the date of grant.
Additionally, on January 21, 2008, in connection with the hiring of our new Chief Financial Officer, we issued an option exercisable for 150,000 shares of our common stock. The option has a term of seven years and vests as to 25% of the total on the first anniversary of the grant date and as to an additional 1/48 of the total each month thereafter, with full vesting occurring on the fourth anniversary of the grant date.
The option agreements pursuant to which awards were granted contain an accelerated vesting provision triggered if the officer involuntarily loses his/her job, or voluntarily resigns due to a significant change in job responsibilities, within 12 months of a change-in-control.
See the table captioned Grants of Plan-Based Awards for the Fiscal Year Ended December 31, 2008 for a detailed summary of the stock options granted to the NEOs during 2008.
Restricted Stock Awards for 2008
Our Stock Incentive Plan provides for the granting of restricted stock to officers, employees and consultants including non-employee board members. Restricted stock grants to executive officers are another form of equity compensation that we use periodically to better align the interests of senior management with the short-term and long-term objectives of our shareholders.
On January 21, 2008, in connection with the hiring of our new Chief Financial Officer, we issued 100,000 shares of restricted stock, which vest as to 25% of the total on the first anniversary of the grant date and as to an additional 1/48 of the total each month thereafter, with full vesting occurring on the fourth anniversary of the grant date.
The agreement pursuant to which this award was granted contains an accelerated vesting provision triggered if the officer involuntarily loses his/her job, or voluntarily resigns due to a significant change in job responsibilities, within 12 months of a change-in-control.
In addition, we have an Officer and Director Stock Ownership Program designed to increase the level of stock ownership in the company and to foster and promote long-term financial success of the company by attracting and retaining outstanding executive leadership. This program contains a matching provision in which we issue one share of company stock for every two shares of company stock (rounded up to the nearest whole share) purchased by the officer or Director up to a maximum of 5,000 shares each year. The term purchase means any acquisition pursuant to the exercise of any stock option awarded under one or more of our stock option or incentive plans, or any open market purchase that has been pre-approved by the Compliance Officer. The purchased shares are referred to as matched shares. Each share of restricted stock granted under this program vests at the end of the three-year period commencing on the date the officer or Director makes the qualifying purchase, provided that the participant has maintained continuous service as an elected or appointed officer or Director throughout the three-year period and the participant continues to hold the matched shares. No shares were issued pursuant to this plan to the NEOs during 2008 and 15,000 shares were issued to Directors.
See the table captioned Grants of Plan-Based Awards for the Fiscal Year Ended December 31, 2008 for a detailed summary of all restricted stock awarded to the NEOs during 2008.
Stock Option Change-in-Control Agreements
The stock option agreements of all executive officers provide that all options held that were granted prior to December 31, 2005 shall become immediately exercisable, without regard to any contingent vesting provision to which such option may otherwise be subject, in the event of the occurrence of a change-in-control. Vesting acceleration, if any, of options granted on or after January 1, 2006, is determined by the Compensation Committee in granting each particular option. The stock option agreements for options granted to our executive officers in 2008 contain a double trigger accelerated vesting provision that provides for acceleration of vesting if the officer involuntarily loses his/her job, or voluntarily resigns due to
significant change in job responsibilities or other good reason, within 12 months of a change-in-control. In addition, except for the restricted shares granted to Mr. OMalley and Mrs. Prentice as part of their employment agreements, any unvested restricted stock will become fully vested immediately prior to the consummation of a change-in-control. The restricted shares granted to Mr. OMalley and Mrs. Prentice upon joining the Company will fully vest if a change-in-control transaction is completed during the vesting period in which the Company is acquired for a price equal to or above $4.00 per share.
Executive Severance Pay Plan
We believe that companies should provide reasonable severance benefits to employees. With respect to NEOs, these severance benefits should reflect the fact that it may be difficult for an NEO to find comparable employment within a short period of time. Our goal is to offer severance benefits for our NEOs that are competitive with those offered at other companies in our industry and of our size. The Executive Severance Pay Plan (the Executive Plan) provides for the payment of severance benefits to persons currently serving as executives of InFocus. Under the Executive Plan, covered executives are entitled to receive severance benefits in the event their employment is terminated without cause. In addition, a covered executive is entitled to severance benefits in the event the executive terminates his/her employment for good reason within 18 months after a change-in-control. Good reason is defined as one of the following occurrences: (i) substantial alteration of the executives duties or responsibilities; (ii) material reduction of the executives pay or benefits; (iii) relocation of the executives place of employment by more than 35 miles; or (iv) failure to pay the executives compensation within 10 days of the date it is due.
For all NEOs the amount of severance payable under the Executive Plan is 12 months of salary continuation. In addition to salary continuation, the executives receive a lump sum payment covering the cost of continuing the executives health insurance during the period of salary continuation, as well as outplacement services for the salary continuation period. The amount of severance pay is subject to reduction in the event any portion of the payment would be subject to the excise tax imposed pursuant to Rule 280(g) promulgated under the Internal Revenue Code.
In order to receive severance under the Executive Plan, covered executives must sign a release of any claims against the Company. In addition, severance payments may be immediately terminated in the event the executive discloses any of our confidential information or violates certain non-competition provisions. There is a six-month delay in the commencement of payment of benefits to any executive who is a specified employee as that term is used in Section 409A of the Internal Revenue Code.
Perquisites and Other Benefits
Annually, we review any perquisites that senior management receives. The primary perquisites for executive level positions are reimbursements of certain expenses (e.g. tax preparation, annual physicals). We believe that access to tax preparation assistance helps maximize the net financial reward to the NEO of the compensation they receive. The amounts related to tax preparation and annual physicals were de minimis in 2008. In addition, to the extent we have executives who are on assignment in a country other than their home country, they are provided housing and other benefits similar to those typically allotted to an expatriate. In the case of Mr. OSullivan, who is currently located in our Singapore office, he receives a monthly allowance to be used for housing, living and transportation expenses. In 2008, Mr. OSullivan received allowances of $82,988 for housing and living expenses and $29,635 for transportation expenses.
Executive Compensation Summary Information
The following table provides certain summary information concerning compensation awarded to, earned by or paid to our (i) Principal Executive Officer (PEO); (ii) our Principal Financial Officer (PFO); (iii) two additional highly compensated executive officers, other than our PEO and PFO, who were serving as executive officers at the end of the last completed fiscal year and whose total compensation was greater than $100,000; and (iv) one additional person who served as our PFO during 2008 (herein referred to as the named executive officers or NEOs).
Grants of Plan-Based Awards for the Fiscal Year Ended December 31, 2008
Outstanding Equity Awards at Fiscal Year-End as of December 31, 2008
Option Exercises and Stock Vested for the Year Ended December 31, 2008
Potential Payments on Termination or Change-in-Control
The Executive Plan governs payments to executives in the event of termination without cause or in connection with a change-in-control. Under the Executive Plan, all NEOs receive the amount of severance equivalent to 12 months of salary continuation. In addition to salary continuation, the executives receive a lump sum payment covering the cost of continuing the executives health insurance during the period of salary continuation as well as outplacement services.
The stock option agreements of all executive officers provide that all options held that were granted before December 31, 2005 shall become immediately exercisable, without regard to any contingent vesting provision to which such option may otherwise be subject, in the event of a change-in-control. Vesting acceleration, if any, of options granted on or after January 1, 2006, is determined by the Compensation Committee in granting each particular option. The stock option agreements for options granted to our executive officers in 2007 and 2008 contain a double trigger accelerated vesting provision that provides for acceleration of vesting if the officer involuntarily loses his/her job, or voluntarily resigns due to significant change in job responsibilities or other good reason within 12 months of a change-in-control.
The stock options granted to Mr. OMalley and Mrs. Prentice as part of their employment agreements include the same double trigger acceleration of vesting provisions, provided that 25% of the total shares will vest if the conditions are met during the first year of employment, 66% of the total shares will vest if the conditions are met in during the second year of employment and 100% of the total shares will vest if the conditions are met in the third year of employment. In addition, except for the restricted shares granted to Mr. OMalley and Mrs. Prentice as part of their employment agreements, any unvested restricted stock will become fully vested immediately prior to the consummation of a change-in-control. The restricted shares granted to Mr. OMalley and Mrs. Prentice upon joining the Company will fully vest if a change-in-control transaction is completed during the vesting period in which the Company is acquired for a price equal to or above $4.00 per share.
The following table provides quantitative disclosure of payouts to NEOs assuming a change-in-control and associated triggering events occurred on December 31, 2008 and the price per share of our common stock is the closing market price on that date.
Equity Securities Authorized for Issuance
The following table summarizes equity securities authorized for issuance with respect to compensation plans as of December 31, 2008:
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 6, 2009, certain information furnished to us with respect to ownership of our common stock of (i) each Director, (ii) the named executive officers (as defined under Executive Compensation Summary Information), (iii) all persons known by us to be beneficial owners of more than 5% of our common stock, and (iv) all current executive officers and Directors as a group.
The Board of Directors has determined that Messrs. Abouchar, Behrendt, Hallman, Ladd, Marren and Nery are each an independent director under Nasdaq Global Market Marketplace Rule 4200(a)(15). The Board of Directors has also determined that each member of the three committees of the Board of Directors meets the independence requirements applicable to those committees prescribed by NASDAQ and the Securities and Exchange Commission, including Rule 10A-3(b)(1) under the Securities Exchange Act of 1934 (the Exchange Act) related to audit committee member independence.
In February 2004, the Board of Directors designated Mr. Hallman as the Lead Independent Director pursuant to the InFocus Corporate Governance Policies. The Lead Independent Director may periodically help schedule or conduct separate meetings of the independent Directors and perform such other duties as may be determined by the Board of Directors.
Certain Relationships and Related Transactions
It is our policy, as set forth in our Code of Conduct and our Audit Committee Charter, that officers and Directors disclose and obtain advance approval from the Audit Committee for any situation involving a transaction with the Company where an officer or Director could potentially have a personal interest, including any transaction that would require disclosure under Item 404 of Regulation S-K. Directors must also excuse themselves from participation in any decision in which a personal interest may be involved. There were no such transactions disclosed to, or reviewed by, the Audit Committee during 2008.
Fees Paid to KPMG LLP Related to 2008 and 2007
All audit and non-audit services performed by KPMG LLP, and all audit services performed by other independent registered public accountants, must be pre-approved by the Audit Committee or the Audit Committee Chair. These services include, but are not limited to, the annual financial statement audits, the audits of internal controls over financial reporting, statutory audits of our foreign subsidiaries, audits of employee benefit plans, tax compliance assistance, tax consulting and assistance with executing our strategic alternatives process. KPMG LLP may not perform any prohibited services as defined by the Sarbanes-Oxley Act of 2002 including, but not limited to, any bookkeeping or related services, information systems consulting, internal audit outsourcing, legal services and management or human resources functions. All of the services disclosed above under Audit Related Fees or Tax Fees were approved by the Audit Committee pursuant to the pre-approval policies.
Financial Statements and Schedules
The following exhibits are filed herewith and this list is intended to constitute the exhibit index. An asterisk (*) beside the exhibit number indicates the exhibits containing a management contract, compensatory plan or arrangement, which are required to be identified in this report.
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 16, 2009:
Report of Independent Registered Public Accounting Firm
The Board of Directors and
Shareholders of InFocus Corporation:
We have audited the accompanying consolidated balance sheets of InFocus Corporation (an Oregon corporation) and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of InFocus Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), InFocus Corporations internal control over financial reporting as of December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2009 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
Consolidated Balance Sheets
(In thousands, except share amounts)
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Operations
(In thousands, except per share amounts)
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Shareholders Equity and Comprehensive Loss
For The Years Ended December 31, 2008, 2007 and 2006
(In thousands, except share amounts)
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows