10-Q 1 form10q.htm VIEWSONIC 10Q 3-31-2006 Viewsonic 10Q 3-31-2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q

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

For the quarterly period ended March 31, 2006

OR

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


For the transition period from ____________ to ____________.
 
Commission file number: 000-50730
 
VIEWSONIC CORPORATION
(Exact name of Registrant as Specified in Its Charter)
 
Delaware
95-4120606
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)

381 Brea Canyon Road
Walnut, California 91789
(909) 444-8800
(Address, including Zip Code, of Registrant's Principal Executive Offices
and Registrant's Telephone Number, including Area Code)

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated file” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of the registrant's common stock outstanding was 354,124,268 shares and the number of shares of Series B preferred stock outstanding was 0 shares, each as of April 30, 2006.
 

VIEWSONIC CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
   
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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

VIEWSONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 2006 AND DECEMBER 31, 2005
(In thousands, except for share data and par value)
(Unaudited)
 
 
  
March 31,
2006
  
December 31,
2005
  
ASSETS
  
 
  
 
  
CURRENT ASSETS:
  
 
  
 
  
Cash and cash equivalents
  
$
73,393
 
$
93,998
  
Short-term investments
    
3,302
   
—
  
Trade receivables—net
    
159,633
   
145,982
  
Other receivables
    
8,154
   
7,013
  
Inventories
    
151,259
   
155,389
  
Deferred income taxes
    
3,203
   
3,194
  
Prepaids and other current assets
    
3,347
   
2,931
  
Income taxes receivable
    
166
   
761
  
Total current assets
    
402,457
   
409,268
  
               
PROPERTY, PLANT AND EQUIPMENT—Net
    
15,432
   
12,929
  
LONG-TERM INVESTMENTS
    
3,283
   
2,676
  
GOODWILL
    
1,347
   
1,347
  
OTHER ASSETS—Net
    
2,783
   
6,505
  
TOTAL
  
$
425,302
 
$
432,725
  
LIABILITIES AND STOCKHOLDERS' EQUITY
          
CURRENT LIABILITIES:
          
Bank borrowings
  
$
16,160
 
$
4,852
  
Accounts payable
    
247,987
   
266,867
  
Accrued promotional expenses
    
27,972
   
22,663
  
Accrued warranty expense
    
22,244
   
21,350
  
Other accrued expenses
    
25,394
   
20,809
  
Total current liabilities
    
339,757
   
336,541
  
               
SUBORDINATED NOTES PAYABLE—Related party
    
43,000
   
43,000
  
CONVERTIBLE MANDATORILY REDEEMABLE PREFERRED STOCK
    
—
   
14,952
  
STOCKHOLDERS' EQUITY:
          
Common stock, $.01 par value:
          
Authorized—600,000,000 shares at March 31, 2006 and December 31, 2005
          
Outstanding— 354,124,268 and 353,974,268 shares at March 31, 2006 and December31, 2005, respectively.
    
3,541
   
3,540
  
Additional paid-in capital
    
93,818
   
93,716
  
Accumulated deficit
    
(52,082
)
  
(55,611
)
Accumulated other comprehensive loss
    
(2,732
)
  
(3,413
)
Total stockholders' equity
    
42,545
   
38,232
  
TOTAL
  
$
425,302
 
$
432,725
  

The accompanying notes are an integral part of these consolidated condensed financial statements.


VIEWSONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
MARCH 31, 2006 AND 2005
(In thousands, except per share data)
(Unaudited)
 
 
  
Three Months Ended March 31,
  
   
2006
  
2005
  
Net sales
  
$
326,794
  
$
273,912
  
Cost of sales
    
296,578
    
245,843
  
Gross profit
    
30,216
    
28,069
  
Selling, general and administrative expenses
    
26,907
    
27,312
  
Income from operations
    
3,309
    
757
  
Other income (expense)—net:
            
Interest income (expense)—net
   
157
    
(52
)
Other income (expense)—net
    
1,336
    
(1,419
)
Other income (expense)—net
    
1,493
    
(1,471
)
Income (loss) from continuing operations before income taxes
    
4,802
    
(714
)
Provision (benefit) for income taxes
    
1,226
    
(200
)
Income (loss) from continuing operations
    
3,576
    
(514
)
Net loss on disposal of discontinued operations, net of tax
    
—
    
(70
)
Net income (loss)
    
3,576
    
(584
)
Preferred stock accretion
    
(48
)
  
(361
)
Net income (loss) available to common stockholders
  
$
3,528
  
$
(945
)
 
          
Basic earnings (loss) per share:
           
Continuing operations
  
$
0.01
  
$
(0.00
)
Discontinued operations
    
0.00
    
(0.00
)
Total basic earnings (loss) per share
  
$
0.01
  
$
(0.00
)
Diluted earnings (loss) per share
            
Continuing operations
  
$
0.01
  
$
(0.00
)
Discontinued operations
    
0.00
    
(0.00
)
Total diluted earnings (loss) per share
  
$
0.01
  
$
(0.00
)
Basic weighted average shares outstanding
    
354,059
    
353,962
  
Diluted weighted average shares outstanding
    
360,764
    
353,962
  

The accompanying notes are an integral part of these consolidated condensed financial statements.


VIEWSONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
MARCH 31, 2006 AND 2005
(In thousands)
(Unaudited)

 
  
Three Months Ended March 31,
  
 
  
2006
  
2005
(Revised)
  
CASH FLOWS FROM OPERATING ACTIVITIES:
  
 
  
 
  
Income (loss) from continuing operations
  
$
3,576
 
$
(514
)
Adjustments to reconcile net income (loss) from continuing operations to net cash used in operating activities:
            
Depreciation and amortization
    
748
   
765
  
Loss (gain) on disposal of property, plant and equipment
    
7
   
(3
)
Provision for doubtful accounts
    
81
   
(25
)
Net loss (gain) on sale and impairment of long-term investments
    
366
   
(46
)
Deferred income taxes
    
324
   
244
  
Stock-based compensation expense
    
47
   
—
  
Changes in operating assets and liabilities:
            
Trade receivables
    
(13,284
)
  
24,713
  
Other receivables
    
(1,105
)
  
966
  
Inventories
    
4,440
   
33,560
  
Prepaids and other current assets
    
(413
)
  
178
  
Accounts payable
    
(19,569
)
  
(85,158
)
Accrued promotional and other expenses
    
9,259
   
(1,050
)
Accrued warranty expense
    
883
   
1,396
  
Income taxes payable/receivable
    
1,168
   
446
  
Net cash used in operating activities
    
(13,472
)
  
(24,528
)
CASH FLOWS FROM INVESTING ACTIVITIES:
            
Purchases of property, plant and equipment
    
(157
)
  
(141
)
Proceeds on sale of long-term investments
    
—
   
90
  
Sales of short-term investments
    
4,123
   
2,268
  
Purchases of short-term investments
    
(7,439
)
  
—
  
Net cash (used in) provided by investing activities
    
(3,473
)
  
2,217
  
               
CASH FLOWS FROM FINANCING ACTIVITIES:
            
Net proceeds from bank borrowings
    
11,221
   
(3,529
)
Proceeds from issuance of common stock
    
57
   
9
  
Redemption of preferred stock
    
(15,000
)
  
—
  
Net cash used in financing activities
    
(3,722
)
  
(3,520
)
CASH FLOW FROM DISCONTINUED OPERATIONS
              
Cash flow from operating activities
    
—
   
(1,052
)
Cash flow from investing activities
    
—
   
40
  
Cash flow from financing activities
    
—
   
—
  
Net cash used in discontinued operations
    
—
   
(1,012
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
    
(20,667
)
  
(26,843
)
CASH AND CASH EQUIVALENTS—Beginning of year
    
93,998
   
100,497
  
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    
62
   
26
  
CASH AND CASH EQUIVALENTS—End of period
  
$
73,393
 
$
73,680
  

The accompanying notes are an integral part of these consolidated condensed financial statements.


VIEWSONIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1 - Summary of Significant Accounting Policies

Basis of Presentation
 
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim consolidated condensed financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.

In the opinion of management, the accompanying unaudited consolidated condensed financial statements for ViewSonic Corporation and its subsidiaries (collectively, the “Company”) contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position as of March 31, 2006, and the Company’s results of operations and cash flows for the three months ended March 31, 2006 and 2005. The consolidated condensed balance sheet as of December 31, 2005 is derived from the December 31, 2005 audited consolidated financial statements.

The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2005 and notes thereto included in the Company’s Form 10-K filed with the Securities and Exchange Commission, (the “SEC”) on April 3, 2006.

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates 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. Actual results may differ from these estimates under different assumptions or conditions.


Revenue Recognition, Warranty and Promotions

Revenues are recognized when products are shipped and risk of loss is transferred, evidence of an arrangement exists, the price is fixed or readily determinable, and collectability is probable. The Company extends rights of return to its customers, which are accrued for based on estimated future returns determined by using estimates and historical experience.

The Company provides a variety of warranty programs worldwide, and each program is based on the specific products and geographic locations. Accruals are provided for such estimated future costs at the time the product is sold, and such amounts are based upon historical experience.

The Company offers promotions such as rebates, price protection and other incentives to customers in the normal course of business. Accruals for these promotions are provided for based on estimates and historical experience. The costs of these promotions are offset against sales.

The Company occasionally requests that its contract manufacturers ship finished goods directly to its customers. However, the Company's primary business practice is to have finished goods delivered from its contract manufacturers directly to the Company's regional warehouses, where it is stored for eventual shipment to its customers. For vendor drop shipment sales, the Company retains title to the shipment from the time it leaves the contract manufacturer's port of choice, until the time title passes to the customer.


Promotional Pricing Incentives from Vendors

The Company receives promotional pricing incentives from its product vendors. The amount of the pricing incentives is based on various factors including the volatility of pricing of key product components, market dynamics and the quantity of the Company’s purchases from such vendors. The pricing incentives do not require the Company to commit to future component purchases from these vendors. The Company records the reimbursement from vendors for these promotional pricing incentives when the Company is released of the legal liability for the payment of the product purchases by the vendors. The benefit from pricing incentives related to products that have not been sold is deferred and recorded as a reduction of inventory cost. The benefit from pricing incentives related to products that have been sold is recorded as a reduction of the cost of sales.


Statements of Cash Flows

As of December 31, 2005, the management of the Company determined that the cash flows associated with discontinued operations should not have been presented as a single line item in the Consolidated Statement of Cash Flows. As a result, the Company revised the presentation of cash flows for the period ended March 31, 2005 to present separate disclosure of cash flows from discontinued operations from operating, investing, and financing activities.


Reclassifications

Interest expense and interest income have been shown net in the first quarter of 2005 to conform to the first quarter of 2006 presentation.


Note 2 - Stock-Based Compensation 

During the second quarter of 2005, the Company elected to adopt the fair value based employee stock-based compensation expense recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), using the modified prospective method. The Company previously had applied the intrinsic value based expense recognition provisions set forth in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). Had the Company adopted SFAS No. 123, the Company’s net income would be decreased by $19,000 during the first quarter of 2005.

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS No. 123(R)”), which requires all share-based payments to employees, including grants of employee stock options, to be expensed and recognized over the requisite service period based on the grant date fair value of those awards. Among other differences, SFAS No. 123(R) includes an estimate of volatility. SFAS No. 123 does not require the use of volatility for privately held companies in estimating the fair value of stock options and accordingly, the Company used the minimum value method afforded by SFAS No. 123.

The Company adopted SFAS No. 123(R) using the prospective method and accordingly, the consolidated financial statements for prior periods have not been restated to reflect the impact of SFAS No. 123(R). Stock-based compensation expense recognized during the first quarter of 2006 applies to unvested stock options granted prior to December 31, 2005 based on the grant date minimum value estimated in accordance with the original provisions of SFAS No. 123. Additionally, stock-based compensation expense recognized during the first quarter of 2006 has been reduced by estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The adoption of the prospective application of SFAS No. 123(R) did not have a material impact on the Company’s consolidated financial positions, results of operations, cash flows, or earnings per share. The cumulative effect upon adoption of SFAS No. 123(R) was $11,000.

During the first quarter of 2006, stock-based compensation expense was $47,000. There were no grants of stock options or other share-based payments during the first quarter of 2006. As of March 31, 2006, there was unrecognized compensation expense of $223,000 related to unvested stock options. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.1 years.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 
  
Three Months Ended
  
  
  
March 31, 2005
  
  
  
 
  
Dividend yield 
    
0
%
Expected volatility
    
0
%
Risk-free interest rates
    
3.90
%
Expected lives 
    
4 years
  
Weighted-average fair value of options granted
  
$
0.05
  
 
The following table is a summary of stock option activity under the Plan as of March 31, 2006, and changes during the three months ended March 31, 2006.

 
   
Options
  
 Weighted
Average
Exercise Price
Per Share
  
Weighted
Average
Remaining
Contractual Term
  
Aggregate
Intrinsic Value
  
                      
Outstanding at December 31, 2005
    
27,625,596
  
$
0.38
              
Granted
    
—
  
$
—
              
Exercised
    
150,000
  
$
0.38
              
Canceled
    
1,523,101
  
$
0.38
              
                           
Outstanding at March 31, 2006
    
25,952,495
  
$
0.38
    
5.97
  
$
1,773,310
  
                           
Exercisable at March 31, 2006
    
19,904,532
  
$
0.38
    
5.16
  
$
1,386,098
  

The weighted-average grant-date fair value of the options granted during the three months ended March 31, 2005 was $0.05 per option. The total intrinsic value of options exercised during the three months ended March 31, 2006 and 2005 was $10,500 and $0, respectively. The intrinsic value of options is the amount by which the fair value of the underlying stock exceeds the exercise price of an option.


The following table summarizes information for options outstanding at March 31, 2006:

Range of Prices
  
Option Outstanding
  
Weighted-
Average
Remaining Life
(Years)
  
 Weighted-
Average Exercise
Price
  
Options
Exercisable
  
                    
$0.38
    
25,445,495
    
5.87
  
$
0.38
    
19,904,532
  
$0.45
    
507,000
    
9.58
  
$
0.45
    
—
  

 
Note 3 - Comprehensive Income

Comprehensive income includes foreign currency translation gains and losses and unrealized gains and losses on marketable securities available for sale that are reflected in stockholders’ equity instead of net income.  The following table sets forth the calculation of comprehensive income for the periods indicated (in thousands):

 
  
Three Months Ended March 31,
  
 
  
2006
  
2005
  
 
  
 
  
 
  
Net income (loss)
  
$
3,576
  
$
(584
)
Foreign currency translation
    
90
    
88
  
Unrealized holding gains on marketable securities-less realized gains
    
591
    
576
  
Net change in other comprehensive income
    
681
    
664
  
Total comprehensive income
  
$
4,257
  
$
80
  


Note 4 - Income Taxes

The Company recorded a non-cash charge of $13.7 million to establish a valuation of allowance against its net deferred U.S. based income tax assets during the second quarter ended June 30, 2005. In addition, the Company has valuation allowances against its deferred income taxes in all foreign jurisdictions other than its foreign subsidiary in Taiwan. The valuation allowances have been calculated pursuant to SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”), which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance. Such evidence includes the Company’s past and projected future performance, the market environment in which the Company operates, the utilization of past tax credits and the length of the carry-back and carry-forward periods of net operating losses. As of March 31, 2006, the total valuation allowance was $15.5 million against domestic net deferred income tax assets and $1.8 million against foreign net deferred tax assets. The Company intends to maintain a valuation allowance until sufficient positive evidence, as contemplated by SFAS No. 109, exists in future periods.


Note 5 - Commitments and Contingencies

Litigation— The Company is involved in various legal matters in the normal course of its business. Management believes that the ultimate outcome of such matters will not have a material adverse effect on the consolidated condensed financial statements.

Imposition of Additional Duties and Taxes— The European Union, (the “EU”), issued notices stating that effective January 18, 2006, LCD monitors with a digital video interface (“DVI”) connector, would incur a 14% import duty tax.  To date, this change in classification has been applied prospectively.  The Company believes it is reasonably possible, but not probable that the tariff could be applied retroactively; however, the Company will continue to monitor this situation and work to change the Company’s business processes to minimize any negative impact resulting from this new tariff.

Laws, Regulations and Directives — The Company is subject to local laws and regulations in the various regions in which the Company operates, including the EU.  There are two particular EU directives that may have a material impact on the Company’s business.  The first is the Restriction of Certain Hazardous Substances Directive (“RoHS”) that restricts the distribution of certain substances, including lead, within the EU and is effective July 1, 2006.  In addition to specifying the elimination and/or reduction in the level of specified hazardous materials from the manufacture of the Company’s products, the Company must take reasonable measures to ensure that it is not being supplied with products containing the restricted chemical substances. The Company is starting to receive requests from its customers for RoHS-compliant products. The Company is in the process of compiling RoHS-compliant information on the Company’s products as well as procuring RoHS-compliant material and information from the Company’s suppliers. The second directive is the Waste Electrical and Electronic Equipment Directive (“WEEE”) that became effective on August 13, 2005, and requires manufacturers or importers to provide a process of recycling all of its manufactured products or imports into the EU. Certain EU countries adopted WEEE on August 13, 2005. The majority of EU countries into which the Company’s European region sells its products, have adopted the legislation with the exception of France and the United Kingdom. Many of those countries, which adopted WEEE in August 2005, have not published regulations nor have issued legislation with respect to a manufacturer or importer’s obligations. The Company is currently unable to assess the impact of these directives on the Company’s operations until more information becomes available, but at this time, the Company does not believe that these regulations will have a material impact on the Company’s business.

Income Tax Contingencies — The Company has recorded a $3.1 million liability related to certain tax positions.  The resolution of such income tax contingencies is not expected to have an adverse material effect on the consolidated financial statements.


Note 6 - Business Segments

In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), the Company has three reportable segments: Americas, Europe and Asia Pacific. The Company sells similar products in the local markets, including CRT displays, LCD displays, projectors, plasma displays, HDTV technology and the latest in mobile products including wireless monitors. The types and class of customers, primarily distributors and retailers, are also similar across the product lines. The following segment financial information is for the periods indicated (in thousands):

 
  
Three Months Ended March 31,
  
 
  
2006
  
2005
  
Net sales:
  
 
  
 
  
Americas
  
$
152,941
 
$
120,639
  
Europe
    
73,264
   
76,221
  
Asia Pacific
    
100,589
   
77,052
  
Total
  
$
326,794
 
$
273,912
  
Income (loss) from operations:
            
Americas
  
$
5,423
 
$
(6,670
)
Europe
    
(5,318
)
  
4,417
  
Asia Pacific
    
3,204
   
3,010
  
Total
  
$
3,309
 
$
757
  


Note 7 - Warranty

The Company provides product warranty programs on a worldwide basis that vary in term from 12 to 36 months. The length of the warranty period and the specific warranty coverage are based on the type of product. The Company accrues for estimated warranty costs at the time the product is sold, and such amounts are based upon historical experience. The historical data that determines the warranty accrual and the overall estimate of the warranty reserve includes the following key factors: net cost of repair (repair costs less reimbursements from suppliers), defect rates and total number of products under warranty. The following table summarizes the Company’s activity in the warranty liability for the periods indicated (in thousands):

Three Months Ended March 31,
  
Beginning
Accrued
Warranty
Liability
  
Payments
for Units
Returned
  
Additional
Warranty
Expense
for Units
Sold
  
Adjustments
  
Ending
Accrued
Warranty
Liability
  
   
 
  
 
  
 
  
 
  
 
  
2006
  
$
21,350
  
$
(4,166
)
$
4,947
  
$
113
  
$
22,244
  
2005
  
$
17,365
  
$
(3,110
)
$
3,533
  
$
974
  
$
18,762
  

Note 8 - Earnings Per Share

The Company presents both basic and diluted earnings (loss) per share (“EPS”) amounts. Basic EPS is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted EPS amounts are based upon the weighted-average number of common and potential common shares, including warrants outstanding during the period.

Potential common shares are excluded from the computation in periods in which they have an anti-dilutive effect. The Company uses the treasury stock method to calculate the impact of outstanding stock options. Stock options for which the exercise price exceeds the average fair market value over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation. For the three months ended March 31, 2006 and 2005, options for 507,000 and 29,379,365 shares, respectively, were excluded from the diluted earnings per common share calculation because they were anti-dilutive. For the three months ended March 31, 2006 and 2005, warrants for 7,500,000 and 10,800,000, respectively, were excluded from the diluted earnings per common share calculation because they were anti-dilutive. On January 10, 2006, the Company redeemed all 7,500,000 outstanding shares of Series B Preferred Stock and therefore such shares had an insignificant impact on the Company’s EPS calculations.

The basic and diluted EPS was calculated using the EITF 03-06 Participating Securities and the Two Class Method under SFAS No. 128 (“EITF 03-06”). The following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations. Amounts are for the periods indicated (amounts in thousands, except per share information).

 
  
Three Months Ended March 31,
  
 
  
2006
  
2005
  
Basic EPS:
  
 
  
 
  
Numerator:
  
 
  
 
  
Income (loss) from continuing operations (1)
  
$
3,528
  
$
(875
)
(Loss) from discontinued operations
  
$
—
 
$
(70
)
Denominator—weighted-average shares outstanding
    
354,059
    
353,962
  
Basic EPS:
            
Continuing operations
  
$
0.01
  
$
(0.00
)
Discontinued operations
  
$
0.00
  
$
(0.00
)
Total Basic EPS
  
$
0.01
  
$
(0.00
)
Diluted EPS:
            
Numerator:
            
Income (loss) from continuing operations (1)
  
$
3,528
  
$
(875
)
(Loss) from discontinued operations
  
$
—
 
$
(70
)
Denominator:
              
Weighted-average shares outstanding
    
354,059
    
353,962
  
Stock options(2)
    
3,478
    
—
  
Interest warrants(3)
    
3,227
    
—
  
Total shares
    
360,764
    
353,962
  
Diluted EPS:
            
Continuing operations
  
$
0.01
  
$
(0.00
)
Discontinued operations
  
$
0.00
  
$
(0.00
)
Total Diluted EPS
  
$
0.01
  
$
(0.00
)
 

(1)
In accordance with EITF 03-06, income (loss) from continuing operations includes the accretion for the mandatorily redeemable preferred stock. The EPS calculation allocated income from continuing operations between common stock and the convertible mandatorily redeemable preferred stock.

(2)
For the three months ended March 31, 2005, all stock options were excluded from the diluted earnings per common share calculation because they were anti-dilutive due to the Company’s net loss.

(3)
For the three months ended March 31, 2006 and 2005, common stock issuable upon the exercise of outstanding warrants of 7,500,000 and 10,800,000, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive.


Note 9 - Convertible Mandatorily Redeemable Preferred Stock and Warrants for Series C Preferred Stock

On January 10, 2002, the Company entered into a Series B Preferred Stock Exchange and Warrant Purchase Agreement (the "Exchange Agreement") with the investor. Under the Exchange Agreement, the investor paid an additional $5,000,000, bringing the total cash paid to $15,000,000. The exchange was made for the 3,676,471 shares of Series A Stock originally issued and related warrants. As consideration for the exchange, the Company issued to the investor 7,500,000 shares of Series B convertible mandatorily redeemable convertible preferred stock, par value of $.001 per share (the "Series B Stock"). Each share of Series B Stock was convertible into one share of common stock or redeemable for cash for $2.00 per share on January 10, 2006. In connection with such issuance, the Company granted to the investor 3,300,000 Interest Warrants and 7,500,000 Valuation Warrants to purchase Series C non-redeemable convertible preferred stock (par value of $.001 per share). The Interest Warrants vested on January 10, 2006, have an exercise price of $.01 per share and expire on July 10, 2006. The Valuation Warrants were immediately vested, have an exercise price of $2.00 per share, and expire on July 10, 2006.

As of March 31, 2006, a total of 18,000,000 shares of Series C preferred stock were authorized, and no shares were issued or outstanding. On January 10, 2006, the Company redeemed its outstanding Series B Stock for $15 million, representing the full redemption price for such Series B Stock. 


Note 10 - Subsequent Event

Four of the Company’s stockholders filed a purported derivative action against James Chu, the Company’s Chairman and Chief Executive Officer, and the Company on April 17, 2006 in the United States District Court for the Central District of California. The complaint alleges, among other things, that Mr. Chu has breached various fiduciary duties by personally investing in certain of the Company’s suppliers, thereafter directing the Company’s contracts to these suppliers and failing to disclose such actions. Plaintiffs are seeking actual and punitive damages, attorneys’ fees, costs, disgorgement of alleged profits made by Mr. Chu, a declaratory judgment against Mr. Chu for alleged breaches of various fiduciary duties and an injunction prohibiting the award of contracts to suppliers in which Mr. Chu or his relatives have a financial interest. The Company believes that the claims against Mr. Chu and the Company are not an appropriate derivative action and are in the process of defending against them on such grounds.


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to the "safe harbor" created by those sections. These forward-looking statements include but are not limited to: statements related to industry trends and future growth in the markets for visual display technology products; our product development efforts; the timing of our introduction of new products; industry and consumer acceptance of our products; and future profitability. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. The “Risk Factors” section, among other things, should be considered in evaluating our prospects and future financial performance.

In this report, all references to “ViewSonic,” ”we,” “us,” or “our” mean ViewSonic Corporation and our subsidiaries.


Our Company

ViewSonic Corporation is a leading global provider of visual display technology products. We develop, market and support a broad range of display technology products, including liquid crystal displays, or LCD, monitors, cathode ray tube, or CRT, monitors, projectors, LCD TVs, plasma displays and the latest in mobile products including wireless monitors.

Our ViewSonic branded products are sold through distributors, retailers and other resellers to businesses, including Fortune 1000 companies, small and medium sized businesses and consumer electronics markets. We sell our products globally and our sales are managed geographically in three regional segments: the Americas, Europe and Asia Pacific.


Recent Trends in Our Business

Income from continuing operations was $3.6 million in the first quarter of 2006, as compared to a $0.5 million loss in the first quarter of 2005. During 2005, we began to implement key initiatives to improve supply chain and logistics efficiency, simplify our business processes to maximize operating efficiencies, grow sales in regional markets and expand core product offerings, among others. In addition, we started to source a key component of LCD monitors directly from manufacturers in December 2005. We believe this sourcing initiative brings us closer to the supply base so that we can keep abreast of recent market trends and supply cycles. This initiative also allows us to consolidate our LCD panel purchasing power. We expect that both advantages should enable us to secure better pricing and better allocation of the LCD key component. By means of this key component sourcing initiative, we hope to be less vulnerable to the instability that is inherent in the LCD monitor industry. As was demonstrated by our first quarter operating results, we believe that the implementation of these key initiatives will position us to successfully compete. However, our profit margin continues to be negatively impacted by intense competition, volatility of supply, declining average selling prices, or ASPs, and fluctuating product costs.

The ASP of our LCD monitors decreased 11.6% in the first quarter of 2006 compared to the first quarter of 2005. This decline was primarily due to increased production capacity and aggressive price competition. We expect the excess capacity situation and ASP declines to continue in the short run until anticipated market demand growth is realized and consumes the increased supply.

We sold approximately 1.5 million visual display products in the first quarter of 2006 compared to approximately 1.3 million visual display products in the first quarter of 2005, representing 15.4% growth. The display industry continues to experience a shift from older technologies, such as CRT, to newer technologies, such as LCD, as well as a broadening of applications from PC monitors to TVs and other digital media applications. Our sales of LCD monitors grew 57.1% to 1.1 million units in the first quarter of 2006 from 0.7 million units in the first quarter of 2005, while sales of CRT monitors declined 25.0% to 0.3 million units in the first quarter of 2006 from 0.4 million units in the first quarter of 2005. Also, unit sales of LCD TVs grew 152.9% to 43,000 units in the first quarter of 2006 from 17,000 units in the first quarter of 2005.

Our net sales increased to $326.8 million in the first quarter of 2006 from $273.9 million in the first quarter of 2005, an increase of 19.3%. We also demonstrated selling, general and administrative expenses leverage improvement from 10.0% of net sales in the first quarter of 2005 to 8.2% of net sales in the first quarter of 2006. In addition, we recorded an exchange gain of $1.7 million in the first quarter of 2006 as compared to an exchange loss of $1.5 million in the first quarter of 2005. As a result, we recorded a $4.1 million improvement in income from continuing operations from the first quarter of 2005 to the first quarter of 2006.
 

Results of Operations

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

 
  
Three Months Ended March 31,
  
 
  
2006
  
2005
  
Net sales
    
100.0
%
  
100.0
%
Cost of sales
    
90.8
    
89.8
  
Gross profit
    
9.2
    
10.2
  
Selling, general and administrative expenses
    
8.2
    
10.0
  
Income from operations
    
1.0
    
0.2
  
Other income (expense) - net:
            
Interest income (expense) - net
    
0.1
    
(0.0
)
Other income (expense) - net
    
0.4
    
(0.5
)
Other income (expense)- net
    
0.5
    
(0.5
)
Income (loss) from continuing operations before income taxes
    
1.5
    
(0.3
)
Provision (benefit) for income taxes
    
0.4
    
(0.1
)
 
            
Income (loss) from continuing operations
    
1.1
    
(0.2
)
Net loss on disposal of discontinued operations, net of tax
    
0.0
    
(0.0
)
Net income (loss)
    
1.1
    
(0.2
)
Preferred stock accretion
    
(0.0
)
  
(0.1
)
Net income (loss) available to common stockholders
    
1.1
%
  
(0.3
)%
 
 
 
  
Three Months Ended March 31,
  
Dollar
Increase/
  
Percentage
Increase/
  
 
  
2006
  
2005
  
(Decrease)
  
(Decrease)
  
 
  
(in thousands)
  
Net Sales
  
 
  
 
  
 
  
 
  
Americas
  
$
152,941
  
$
120,639
  
$
32,302
    
26.8
%
Europe
    
73,264
    
76,221
    
(2,957
)
  
(3.9
)
Asia Pacific
    
100,589
    
77,052
    
23,537
    
30.5
  
Total
  
$
326,794
  
$
273,912
  
$
52,882
    
19.3
%
 
                        
Income (loss) from operations:
                        
Americas
  
$
5,423
  
$
(6,670
)
$
12,093
    
181.3
%
Europe
    
(5,318
)
  
4,417
    
(9,735
)
  
(220.4
)
Asia Pacific
    
3,204
    
3,010
    
194
    
6.4
  
Total
  
$
3,309
  
$
757
  
$
2,552
    
337.1
%

Consolidated Results of Operations—March 31, 2006 Compared to March 31, 2005


Net Sales

Our consolidated net sales increased $52.9 million, or 19.3% to $326.8 million in the first quarter of 2006 from $273.9 million in the first quarter of 2005. The increase was primarily due to an increase in LCD unit sales and increasing LCD TV sales with relatively higher ASPs, partially offset by a decline in the ASPs within the LCD and CRT product categories. The decline in the ASPs reflects the effects of competition, our pricing initiatives to compensate for the industry’s oversupply of LCD products and reduced costs associated with advances in visual display technology.

We sold approximately 1.5 million visual display products in the first quarter of 2006 compared to approximately 1.3 million visual display products in the first quarter of 2005. The increase in units sold was mainly due to strong unit sales in Americas and continued expansion in China and other Asian markets. Of the visual display products sold in the first quarter of 2006, CRTs accounted for 16.9%, LCDs accounted for 69.6%, and other products accounted for 13.5% as compared to 30.6%, 53.0%, and 16.4%, respectively, in the first quarter of 2005.

Americas - In our Americas region, net sales increased $32.3 million, or 26.8%, to $152.9 million in the first quarter of 2006 from $120.6 million in the first quarter of 2005. The increase in net sales was primarily due to 71.6% increase in LCD unit sales even though LCD ASPs dropped 15.2% for the same period and increasing LCD TV unit sales and their higher ASPs relative to LCDs and CRTs. LCD TV units accounted for $18.3 million in net sales for the first quarter of 2006, representing growth of 161.4% over the first quarter of 2005.

Europe - In our Europe region, net sales decreased $3.0 million, or 3.9%, to $73.3 million in the first quarter of 2006 from $76.2 million in the first quarter of 2005. The decrease in net sales was primarily due to a decrease of $11.6 million in net sales to Russia during the first quarter of 2006 as compared to the first quarter of 2005. This decrease in sales was caused by the oversupply in the Russian market as well as increased import duties on display products entering Russia. However, our Europe region experienced increased sales in Sweden, Saudi Arabia, Germany, and Israel compared to the first quarter of 2005. The 2.8% stronger Euro exchange rate during the first quarter of 2006 relative to the U.S. dollar also had a positive impact on our net sales in the first quarter of 2006.

Asia Pacific - In our Asia Pacific region, net sales increased $23.5 million, or 30.5%, to $100.6 million in the first quarter of 2006 from $77.1 million in the first quarter of 2005. The increase was due to our continued growth in the China market and expanded sales efforts in Taiwan, Australia, New Zealand and Southeast Asia.


Cost of Sales

Cost of sales increased $50.7 million, or 20.6%, to $296.6 million in the first quarter of 2006 from $245.8 million in the first quarter of 2005.  As a percentage of net sales, cost of sales increased to 90.8% in the first quarter of 2006 from 89.8% in the first quarter of 2005. The increase in cost of sales as a percentage of net sales is due to the ASP of our products declining at a faster rate than our cost of sales declined. Lower margins occurred primarily in our European region due to oversupply in the Russian market and increased import duties into Russia resulting in an inventory write-down of $2.2 million in the first quarter of 2006 compared to $1.1 million in the first quarter of 2005, which was partially offset by our sourcing of LCD components directly from manufacturers resulting in better pricing. As a percentage of net sales, product costs increased to 86.3% in the first quarter of 2006 from 84.0% in the first quarter of 2005. The decrease in gross margin was partially offset by $8.3 million of promotional pricing incentives received from our vendors during the first quarter of 2006 as well as increased efficiencies and reductions in freight and warranty expenses. Overall, gross margin declined to 9.2% in the first quarter of 2006 from 10.2% in the first quarter of 2005 mainly due to increased promotional allowances offered to the customers. We believe this reduction in gross margin percentage enabled us to offer competitive prices in many markets leading to the increases in net sales and gross profits.


Selling, General, and Administrative Expenses

Selling, general and administrative expenses decreased $0.4 million, or 1.5%, to $26.9 million in the first quarter of 2006 from $27.3 million in the first quarter of 2005. Selling, general and administrative expenses as a percentage of net sales for the first quarter of 2006 decreased to 8.2% compared to 10.0% in the first quarter of 2005. The decrease in expenses was mainly attributable to lower legal fees related to patent infringement lawsuits of $0.8 million and strategic initiatives undertaken to maximize operating efficiencies and enhance our competitiveness. Some of these initiatives resulted in lower advertising and marketing expenses of $0.4 million, as well as lower personnel-related expenses of $0.4 million due to lower headcount and $0.3 million for product development as we moved into second generation products. Offsetting these decreases is an increase in account development funds expense of $1.5 million due to the increase in net sales.


Income from Operations

Income from operations increased $2.6 million, or 337.1%, to $3.3 million in the first quarter of 2006 from $0.8 million in the first quarter of 2005. As a percentage of net sales, income from operations increased to 1.0% in the first quarter of 2006 from 0.2% in the first quarter of 2005.

Americas - In our Americas region, income from operations increased $12.1 million, or 181.3%, to $5.4 million in the first quarter of 2006 from a loss of $6.7 million in the first quarter of 2005. The increase was mainly due to aggressive pricing strategies resulting in a 26.8% increase in net sales, effective inventory management by lowering inventory revaluation and write-downs, as well as sourcing of LCD components from manufacturers which resulted in reduced costs, and a decrease in expenses for general, administrative, and sales operations.

Europe - In our Europe region, income from operations decreased $9.7 million, or 220.4%, to a $ 5.3 million loss in the first quarter of 2006 from $4.4 million of income in the first quarter of 2005. Despite solid growth in Sweden, Saudi Arabia, Germany and Israel, an oversupply of LCD monitors in Russia and increased import duties resulted in higher inventory write-down expense. Selling, general and administrative expenses increased slightly in the first quarter of 2006 due to higher advertising and marketing expense in order to promote sales in a very competitive environment.

Asia Pacific - In our Asia Pacific region, income from operations increased $0.2 million, or 6.4%, to $3.2 million in the first quarter of 2006 from $3.0 million of income in the first quarter of 2005. The increase was mainly due to the increase in net sales in the China, Taiwan, Australia, New Zealand, and Southeast Asia markets combined with stable gross margins and lower selling, general and administrative expenses as a percent of net sales.

Other Income (Expense) - Net

Other income (expense), net increased to $1.5 million of other income in the first quarter of 2006 from $1.5 million in expense in the first quarter of 2005. The increase was mainly due to foreign exchange gains during the first quarter of 2006 compared to foreign exchange losses during the first quarter of 2005 and higher interest income. The increase was partially offset by a $0.4 million investment impairment during the first quarter of 2006.

Provision (Benefit) for Income Taxes

The provision for income taxes increased $1.4 million in the first quarter of 2006 to a $1.2 million provision from a benefit of $0.2 million in the first quarter of 2005. The effective tax rate on net income (i.e., provision) increased to 25.5% for the first quarter of 2006 from an effective tax rate on the net losses of (28.0)% for the first quarter of 2005. During 2006, in part, because of the full valuation allowance against deferred tax assets in the U.S., we did not provide for federal income taxes on Americas pre-tax income of $5.4 million. However, this benefit was substantially offset by our European region, where we did not provide tax benefits for our operating losses of $5.3 million due to the full valuation allowance in Europe. Prior to the quarter ended June 30. 2005, we did not have a valuation allowance against our Americas income. As a result, during the first quarter of 2005, benefit was provided for our Americas losses of approximately $6.7 million.


Liquidity and Capital Resources
 
 
  
Three Monthss Ended March 31,
  
 
  
 
2006
  
 
2005
  
 
  
(in thousands)
  
Net cash used in operating activities
  
$
(13,472
)
$
(24,528
)
Net cash (used in) provided by investing activities
    
(3,473
)
  
2,217
  
Net cash used in financing activities
    
(3,722
)
  
(3,520
)
Net cash used in discontinued operations
    
—
   
(1,012
)
Net decrease in cash and cash equivalents
  
$
(20,667
)
$
(26,843
)

As of March 31, 2006, we had cash and cash equivalents of $73.4 million. Our cash balances are held in numerous locations throughout the world. Most of the amounts held outside the United States can be repatriated to the United States, but, under current law, would be subject to U.S. federal income taxes, less applicable foreign tax credits. In certain countries, foreign exchange limitations limit the amount of cash that can be repatriated. We have accounted for the U.S. federal tax liability on these amounts for financial statement purposes except for foreign earnings that are considered indefinitely reinvested outside the United States. Repatriation could result in additional U.S. federal income tax payments in future years. Where local restrictions prevent an efficient inter-company transfer of funds, our intent is that cash balances would remain in the foreign country and we would meet U.S. liquidity needs through ongoing cash flows from operations, external borrowings, or both. We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. We expect to meet expected and unexpected cash flow needs by accessing our credit lines in the Americas, Europe and Asia Pacific.


Operating Activities

Cash flow used in operating activities was $13.5 million during the first quarter of 2006 compared to cash flow used in operating activities of $24.5 million during the first quarter of 2005. The reduced cash outlay during the first quarter of 2006 compared to the first quarter of 2005 was primarily due to $65.6 million and $10.3 million less cash outlay in accounts payable and accrued promotional and other expenses, respectively, during the first quarter of 2006 compared to the first quarter of 2005. This reduced cash outlay was partially offset by a $38.0 million and $29.1 million more cash outlay for trade receivables and inventories, respectively, during the first quarter of 2006 compared to the first quarter of 2005.

Trade receivables increased $13.3 million during the first quarter of 2006 due to increased sales. Day sales outstanding decreased from 45 days at December 31, 2005 to 42 days at March 31, 2006. Payment terms vary by geographic location and, in some cases, a cash discount option is offered in addition to the standard payment terms. We have not materially changed our payment terms or delinquency policies between 2005 and 2006.

Inventories decreased $4.4 million during the first quarter of 2006. The reduction in inventories resulted from selling of European inventories, which were overstocked due to oversupply in Russia and increased import duties on LCD monitors entering Russia. Our inventory turns have remained relatively stable at two turns during the first quarter of 2006 and the first quarter of 2005.

Accounts payable decreased $19.6 million during the first quarter of 2006. The decrease was primarily due to slightly lower accounts payable turn days and the timing of payments to our suppliers.


Investing Activities

Cash used in investing activities was $3.5 million during the first quarter of 2006 mainly due to the purchase of short-term investments. Cash provided by investing activities of $2.2 million during the first quarter of 2005 was primarily from the proceeds of the sale of short-term investments.


Financing Activities

Cash used in financing activities was $3.7 million during the first quarter of 2006 and $3.5 million during the first quarter of 2005. During the first quarter of 2006, we redeemed all outstanding shares of series B convertible mandatorily redeemable preferred stock for $15.0 million and had net borrowings of $11.2 million. During the first quarter of 2005, we repaid bank loans of $3.5 million.


Contractual Obligations and Commitments

As of March 31, 2006, we had contractual obligations and commercial commitments as shown in the table below. The table below excludes obligations related to accounts payable and accrued liabilities incurred in the ordinary course of business.
 
 
  
 
  
Payments due by period
  
Contractual Obligations
  
Total
  
Less than 1 year
  
1-3 years
  
3-5 years
  
More  than 5 years
  
 
  
(in thousands)
  
Operating lease obligations
 
$
2,561
  
$
1,956
  
$
605
  
$
—
  
$
—
  
Subordinated notes payable (1)
    
46,470
    
1,707
    
44,763
    
—
    
—
  
Total
  
$
49,031
  
$
3,663
  
$
45,368
  
$
—
  
$
—
  
 
(1)
Includes interest payable of $1.7 million and $1.8 million for the respective periods presented above.


Credit Facilities

We have a $60.0 million credit line that expires in March 2008. Advances bear interest at the prime rate plus 0.50% (8.25% at March 31, 2006) with interest payable monthly. As of March 31, 2006 and December 31, 2005, there was no outstanding balance on the line-of-credit. All advances under the agreement are collateralized by substantially all of the assets of ViewSonic Americas. Under the agreement we are subject to various restrictive covenants, which, among other things, limit dividends (not to exceed $250,000 per year without the consent of the financial institution), capital expenditures and executive compensation and require us to maintain a minimum earnings before interest, taxes, depreciation and amortization amount. We are not required to comply with the restrictive covenants when borrowing capacity exceeds $15.0 million.

In June 2004, ViewSonic Europe Limited entered into a $20.0 million line-of-credit facility with a financial institution. This line-of-credit is secured by trade receivables and inventory of ViewSonic Europe Limited. Advances bear interest at Libor plus a margin. Borrowings against this facility were $16.2 million and $0 as of March 31, 2006, and December 31, 2005, respectively.

Certain of our other international subsidiaries also have line-of-credit facilities with various financial institutions that are secured by certain of their assets. These credit facilities allow cash advances, letters of credit and bank guarantees. As of March 31, 2006 and December 31, 2005, there were outstanding cash advances of $0 and $4.9 million, respectively. As of March 31, 2006, the borrowing limit was $23.7 million.

As of March 31, 2006, we were in compliance with the covenants of all our various borrowing arrangements.


Off-Balance Sheet Arrangements

As of March 31, 2006 and 2005, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.


Seasonality

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


Operating Capital and Capital Expenditure Requirements

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


 
·
Decreased demand and market acceptance for our products;
 
·
Inability to successfully develop our next generation products;
 
·
An adverse change in payment terms with our customers or our suppliers;
 
·
Competitive pressures resulting in lower than expected ASPs; and
 
·
New product announcements or product introductions by our competitors.


Critical Accounting Policies and Estimates

Our critical accounting policies reflecting our estimates and judgments are described in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on April 3, 2006. We have not changed those policies since such date other than described below.

During the second quarter of 2005, we elected to adopt the fair value based employee stock-based compensation expense recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), using the modified prospective method. We previously had applied the intrinsic value based expense recognition provisions set forth in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). Had we adopted SFAS No. 123, the Company’s net income would be decreased by $19,000 during the first quarter of 2005.

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS No. 123(R)”), which requires all share-based payments to employees, including grants of employee stock options, to be expensed and recognized over the requisite service period based on the grant date fair value of those awards. Among other differences, SFAS No. 123(R) includes an estimate of volatility. SFAS No. 123 does not require the use of volatility for privately held companies in estimating the fair value of stock options and accordingly, we used the minimum value method afforded by SFAS No. 123.

We adopted SFAS No. 123(R) using the prospective method and accordingly, the consolidated financial statements for prior periods have not been restated to reflect the impact of SFAS No. 123(R). Stock-based compensation expense recognized during the first quarter of 2006 applies to unvested stock options granted prior to December 31, 2005 based on the grant date minimum value estimated in accordance with the original provisions of SFAS No. 123. Additionally, stock-based compensation expense recognized during the first quarter of 2006 has been reduced by estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The adoption of the prospective application of SFAS No. 123(R) did not have a material impact on our consolidated financial positions, results of operations, cash flows, or earnings per share. The cumulative effect upon adoption of SFAS No. 123(R) was $11,000.

During the first quarter of 2006, stock-based compensation expense was $47,000. There were no grants of stock options or other share-based payments during the first quarter of 2006. As of March 31, 2006, there was an unrecognized compensation expense of $223,000 related to unvested stock options. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.1 years.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

We have significant European net sales denominated in the Euro. During the first quarter of 2006, the Euro-to-U.S. Dollar foreign currency exchange rate strengthened against the U.S. Dollar increasing 2.8% compared to the year-end rate of 2005. During the first quarter of 2005, the Euro-to-U.S. Dollar decreased by 0.3% as compared to the 2004 year-end rate. The strengthening of the Euro positively impacted our first quarter 2006 net sales and income from operations by $496,000 and $448,000, respectively, assuming all other factors remain constant. We cannot determine the ultimate impact of future changes to these and other currency exchange rates on our 2006 net sales, income from operations, net income, equity, and comprehensive income.


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


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

Based on their evaluation as of March 31, 2006, our Chief Executive Officer and Chief Financial Officer have concluded that, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were sufficiently effective to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  

Changes in Internal Control

There were no changes in our internal control over financial reporting during the three months ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II - OTHER INFORMATION
LEGAL PROCEEDINGS
 
Four of our stockholders filed a purported derivative action against James Chu, our Chairman and Chief Executive Officer, and ViewSonic on April 17, 2006 in the United States District Court for the Central District of California. The complaint alleges, among other things, that Mr. Chu has breached various fiduciary duties by personally investing in certain of our suppliers, thereafter directing our contracts to these suppliers and failing to disclose such actions. Plaintiffs are seeking actual and punitive damages, attorneys fees, costs, disgorgement of alleged profits made by Mr. Chu, a declaratory judgment against Mr. Chu for alleged breaches of various fiduciary duties and an injunction prohibiting the award of contracts to suppliers in which Mr. Chu or his relatives have a financial interest. We believe that the claims against Mr. Chu and ViewSonic are not an appropriate derivative action and are in the process of defending against them on such grounds.

In addition, in the ordinary course of business, we are involved in lawsuits, claims, investigations, proceedings, and threats of litigation consisting of intellectual property, commercial, employment and other matters. In accordance with SFAS No. 5, Accounting for Contingencies, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us, as well as adequate provisions for any probable and estimable losses. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any pending legal matters will have a material adverse effect on our consolidated condensed balance sheets, although statements of operations or cash flows could be affected in a particular period.


RISK FACTORS
 
Factors that May Affect Our Business and Financial Results

The risks described below are not exhaustive of the risks that might affect our business. Other risks, including those we currently deem immaterial, may also impact our business. Any of the following risks could materially and adversely affect our business operations, results of operations and financial condition.

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

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

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

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

Our industry is highly competitive and such price competition may substantially reduce our revenues and profits.

Competitive factors in the display industry include product features, product quality, breadth and reliability, price and performance characteristics, end user support, marketing and channel capability as well as corporate reputation and brand strength. We believe that we compete favorably with respect to all of these factors in the monitor market. However, we are a new entrant to the home entertainment market, and, therefore, we are just beginning to establish our competitive position. Many of our competitors in our markets have significantly greater financial, technical, manufacturing and marketing resources than we have. We believe that competition will have the effect of continually reducing the ASP of our products over time. We expect price competition to increase in future periods and such price competition may substantially reduce our revenues and products in such periods. Our competition includes established consumer electronic companies, personal computer manufacturers and Asian manufacturers interested in building a brand presence for their goods, including Acer Inc., BenQ Corporation, LG Philips LCD Ltd., NEC Display Solutions, and Samsung Electronics.


We believe that over time, this competition will have the effect of reducing the ASP of our products. Some of our competitors have substantially longer operating histories, greater assets, and name recognition, as well as greater financial, marketing, technical and other resources, than we do. These advantages may allow our competitors to, among other things: undertake more extensive marketing initiatives, implement and sustain more aggressive pricing, obtain more favorable pricing, obtain more favorable allocations from suppliers or cross subsidize their display operations from their other operations. Consequently, there is no assurance that our products will remain competitive relative to those of our competitors. To the extent we are unable to effectively compete against our competitors for any of these reasons or otherwise, our business, financial conditions and results of operations would be materially adversely affected.

Volatility in our industry could require us to raise additional capital. 

Although we believe that our existing cash balances, credit facilities and anticipated cash flows from operations will be sufficient to meet our operating, acquisition and capital requirements for at least the next 12 months, we may be required to raise additional capital through either equity or debt financing. Factors that could affect our cash used or generated from operations and, as a result, our need to seek additional borrowings or capital include:

 
·
Decreased demand and market acceptance for our products;
 
·
Inability to successfully develop our next-generation products;
 
·
Competitive pressures resulting in lower than expected average selling prices;
 
·
An adverse change in payment terms with our customers or our suppliers; or
 
·
New product announcements or product introductions by our competitors.

We also may require additional capital for other purposes not presently contemplated. If we are unable to obtain sufficient capital, we could be required to curtail capital equipment purchases or research and development expenditures, which could harm our business.

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

As a percentage of net sales, selling, general and administrative expenses represent 8.2% and 10.0% for the three months ended March 31, 2006 and 2005, respectively. We expect sales, general and administrative expenses to remain relatively fixed or decrease as a percentage of net sales as we continue to improve efficiencies in all aspects of our business. Additionally, because we typically recognize a substantial portion of our revenues in the last month of each quarter, we may not be able to adjust our operating expenses in a timely manner in response to any revenue shortfalls. If we are unable to reduce operating expenses quickly in response to any revenue shortfalls, it would negatively impact our financial results.
 
We may fail to comply with the Restriction of Certain Hazardous Substances Directive, or RoHS, and Waste Electrical and Electronic Equipment Directive, or WEEE, which could harm our business.
 
We are subject to local laws and regulations in various regions in which we operate, including the European Union, or the EU. There are two particular EU directives, RoHS and WEEE that may have a material impact on our business. RoHS restricts the distribution of certain substances, including lead, within the EU and is effective July 1, 2006. RoHS requires us to eliminate and/or reduce the level of specified hazardous materials from our products and requires us to maintain and publish a detailed list of all chemical substances in our products. WEEE, requires us to take back and recycle all products we manufacture or import into the EU at our own expense and became effective in January 2006. If we fail to comply with the EU directives our business may be harmed. For example,

 
·
We may be unable to procure appropriate RoHS compliant material in sufficient quantity and quality and/or be unable to incorporate it into our product procurement processes without compromising quality and/or harming our cost structure;
 
·
We may not be able to sell non-compliant product into the EU or to any customer whose end product will be sold into the EU, which may result in reduced sales; or
 
·
We may face excess and obsolete inventory risk related to non-compliant inventory that we may continue to hold in 2006 for which there is reduced demand and we may need to write down.


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

Inventory purchases are based upon future demand forecasts. These forecasts are based upon assumptions about future demand that might prove to be inaccurate. 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.

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

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

We generated a majority of our total net sales to customers outside of the United States and other Americas in the first quarter of 2006. Sales to these customers outside of the United States and other Americas subjects us to a number of risks associated with conducting business outside of the United States and other Americas, including the following:

 
·
International economic and political conditions;
 
·
Unexpected changes in, or impositions of, legislative or regulatory requirements;
 
·
Increases or decreases in the U.S. dollar as compared to other currencies;
 
·
Inadequate local infrastructure;
 
·
Delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions;
 
·
Transportation delays;
 
·
Longer payment cycles;
 
·
Tax laws (including U.S. taxes on foreign operations);
 
·
Foreign currency exchange rates;
 
·
Imposition of additional taxes and penalties; and
 
·
The burdens of complying with a variety of foreign laws.

Any one of the foregoing factors could cause our business, operating results and financial condition to suffer.
 
If we fail to maintain and/or expand our sales channels, our revenue may decline.

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

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

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

We rely on a limited number of wholesale distribution and national retail customers for most of our sales, and changes in price or purchasing patterns and failure to maintain or establish new distributor relationships in existing and new sales channels could lower our revenue or gross margins.


We sell our products through wholesale distributors such as Ingram Micro, Inc., Tech Data Corporation and Synnex Corporation and national retailers such as CompUSA, Inc. We expect that a majority of our net sales will continue to come from sales to a small number of wholesale distributors and national retailers for the foreseeable future. We have no minimum purchase commitments or long-term contracts with any of these customers. The wholesale distributors and retailers could decide at any time to discontinue, decrease or delay their purchases of our products. We must also monitor and evaluate new sales channels in existing markets and in new markets. If we fail to establish a presence in an important developing sales channel or market, our business could be harmed.

In addition, the prices that wholesale distributors and retailers pay for our products are subject to negotiation and could change frequently. If any of our major wholesale distributors or retailers change their purchasing patterns or refuse to pay the prices that we set for our products, our net sales and operating results could be negatively impacted. If our wholesale distributors and retailers increase the size of their product orders without sufficient lead-time for us to process the order, our ability to fulfill product demands would be compromised. In addition, because our accounts receivable are concentrated within a small group of wholesale distributors and retailers, the failure of any of them to pay on a timely basis, or at all, would reduce our cash flow.

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

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

The ASP of our products typically decreases rapidly over the life of the product, which negatively affects our gross margin.

The market in which we compete is subject to technological advances with yearly new product releases and price competition. As a result, the price at which we can sell our products typically declines over the life of the product. The decline in LCD monitors’ ASP is primarily due to increased production capacity and aggressive pricing by the competition. Over the recent years, the decline in ASP for LCD monitors has been faster than the decline in our product-sourcing costs and this has resulted in decreased margins.

In order to sell products that have a declining ASP and still maintain our gross margins, we need to continually reduce our product costs and manage our inventory. To manage product-sourcing costs, we must collaborate with our contract manufacturers to engineer the most cost-effective design for our products. In addition, we must carefully manage the price paid for components used in our products. We must also successfully manage our freight and inventory holding costs to reduce overall product costs. We also need to continually introduce new products with more attractive sales prices and gross margins in order to maintain our overall gross margins. If we are unable to manage the cost of older products or successfully introduce new products with higher gross margins, our net sales will decrease and our gross margins will decline.

We seek to mitigate the risk of declining ASPs by obtaining promotional pricing incentives from several product vendors. A vendor’s willingness to give us a pricing incentive and the amount of the pricing incentive are based on how competitive the market is, the volatility of the price on our key product components, and the quantity of historical purchases of these components from vendors. The pricing incentives do not require us to commit to future component purchases from vendors. We record the reimbursement from our vendors for these promotional pricing incentives when we are released of the legal liability for the payment of the product purchases by the vendors. If we are unable to obtain the promotional pricing incentives or if these incentives are unexpectedly discontinued, our gross margins will decline and our business could be harmed.

Our implementation of strategic initiatives may strain our operations and increase our operating expense or harm our net earnings.

We have been implementing strategic initiatives designed to focus our resources on our core products, to improve supply chain and logistics efficiency, to simplify our business processes to maximize operating efficiencies in all aspects of our business, to grow sales in regional markets and to expand core product offerings, among others. The undertaking of these initiatives may strain our existing management, information systems, employee workforce, operational capability and financial controls. The difficulties associated with implementing these initiatives, procedures and controls may place a significant burden on our management, operational and financial resources. If we fail to successfully implement these initiatives or encounter unexpected difficulties during the implementation, our business could be harmed.


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

All of our products are manufactured, assembled, tested and packaged by contract manufacturers. We rely on several, component suppliers and contract manufacturers to procure components and, in some cases, subcontract engineering work. Some of our products are manufactured by a single contract manufacturer. Our component suppliers and contract manufacturers are primarily located in mainland China, Taiwan, and Thailand and may be subject to disruption by earthquakes, typhoons and other natural disasters, epidemics, pandemics, as well as political, social or economic instability. We do not have any long-term contracts with any of these third party component suppliers and contract manufacturers. Product pricing is generally negotiated on an order-by-order basis. All of our contracts with our component suppliers and contract manufacturers, including those contracts containing provisions that may be materially favorable to us, are generally terminable for any reason and by either party with 90 day’s notice. If our component suppliers and contract manufacturers encounter financial or other business difficulties, if their strategic objectives change, or if they perceive us to no longer be an attractive customer, they may no longer assist us in our product development efforts, and our business could be harmed.

The loss of the services of any of our primary contract manufacturers or a change in material terms could cause a significant disruption in operations and delays in product shipments and adverse impact on cash flow. Qualifying a new contract manufacturer and commencing volume production is expensive and time consuming.

Our reliance on third party component suppliers and contract manufacturers also exposes us to the following risks over which we have limited control:

 
·
Inability to procure key required components for our finished products to meet our customer’s demand;
 
·
Unexpected increases in manufacturing and repair costs;
 
·
Unexpected reductions in payment terms;
 
·
Interruptions in shipments if one of our manufacturers is unable to complete production;
 
·
Inability to control the quality of finished products;
 
·
Inability to control delivery schedules;
 
·
Inability to obtain favorable pricing;
 
·
Unpredictability of manufacturing yields; and
 
·
Potential lack of adequate capacity to manufacture all or a part of the products we require.
 
We rely upon third parties for technology that is critical to our products, and if we are unable to continue to license this technology and future technology, our ability to offer competitive products could be harmed and our costs of production could increase.

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

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

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


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

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

If we fail to continue to introduce new products that achieve broad market acceptance on a timely basis, or fail to market or sell our products in a way that receives broad acceptance in the market place, we will not be able to compete effectively and we will be unable to increase or maintain net sales and gross margin and our financial results could be negatively impacted.

We operate in a highly competitive, quickly changing environment. We are dependent upon sufficient demand and broad market acceptance for display products, which are branded separately from the computing devices (primarily desktop PCs and laptops) to which they are attached. Our future success depends on our ability to develop and introduce new products and product enhancements that achieve broad market acceptance in the business and home markets. Our future success will depend in large part upon our ability to:

 
·
Identify demand trends in the business and home display markets and quickly develop, manufacture and sell products that satisfy these demands;
 
·
Manage our cost structure to enable us to bring new products to market at competitive prices;
 
·
Respond effectively to new product announcements from our competitors by designing, competitive products, either internally or through the use of third parties;
 
·
Provide compatibility and interoperability of our products with products offered by other vendors and new technologies as they emerge;
 
·
Manage our product offerings either as stand-alone, in combination with other products or services, or in some other manner; and
 
·
Respond effectively to unexpected shifts in market demand towards display and PC products sold together under the same brand or away from stand-alone displays.

In investigating and/or litigating a stockholder derivative action, we may incur substantial costs

We and James Chu, our Chairman and Chief Executive Officer, are named as defendants in a purported derivative action brought by certain of our stockholders. The complaint alleges, among other things, that Mr. Chu has breached various fiduciary duties by personally investing in certain of our suppliers, thereafter directing contracts to these suppliers and failing to disclose such actions. In connection with investigating and/or litigating this action, we may incur substantial costs.

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

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

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

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

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

 
·
Reversals or delays in the opening of foreign markets to new participants;
 
·
Exchange controls;
 
·
Restrictions on foreign investment or the repatriation of profits or invested capital;
 
·
Nationalization of local industry;


 
·
Changes in export or import restrictions;
 
·
Changes in the tax system or rate of taxation in the countries where we do business; and
 
·
Economic, social, and political risks.

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

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

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

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

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

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

Expensing employee stock options may materially and adversely affect our reported operating results and could adversely affect our competitive position as well.

Since inception, we have used stock options as a fundamental component of our compensation packages. We believe that these incentives directly motivate our employees and, through the use of vesting, encourage our employees to remain with us. During the second quarter of 2005, we elected to adopt the fair value based employee stock-based compensation expense recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123, in connection with an option re-pricing program, using the modified prospective method. We previously applied the intrinsic value based expense recognition provisions set forth in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. In December 2004, the Financial Accounting Standards Board, issued SFAS No. 123(R), Share-Based Payment, or SFAS No. 123(R), which requires the measurement and recognition of compensation expense for all stock-based compensation payments. In April 2005, the SEC delayed the effective date of SFAS No. 123(R), which is now effective for annual periods that begin after June 15, 2005. We adopted SFAS No. 123(R) effective as of January 1, 2006 using the modified prospective method.  SFAS No. 123(R) requires that we record compensation expense for stock options using the fair value of those awards.  Expensing these incentives in future periods may materially and adversely affect our reported operating results as the stock-based compensation expense is charged directly against our reported earnings.

To the extent that SFAS No. 123(R) results in additional expenses when granting stock options we may elect to incur increased cash compensation costs instead. In addition, actions that we may take to reduce stock-based compensation expense that might be more severe than any actions our competitors may implement, could make it difficult to attract, retain and motivate employees, which could adversely affect our competitive position, as well as our business and operating results.

Impairment of our investment portfolio could harm our net earnings.

We have an investment portfolio that includes a variety of investments. In most cases, we do not attempt to reduce or eliminate our market exposure on these investments. We could incur losses related to the impairment of these investments, which could result in charges to net earnings. Some of our investments are in public and privately held companies that are still in the start-up or development stage, which have inherent risks because the technologies or products they have under development are typically in the early stages and may never become successful. Furthermore, the values of our investments in publicly traded companies are subject to significant market price volatility. We often couple our investments in technology companies with a strategic commercial relationship. Our commercial agreements with these companies may not be sufficient to allow us to obtain and integrate such products and services into our offerings or otherwise benefit from the relationship, and third parties, including competitors, may subsequently acquire these companies. Economic weakness could further impact our investment portfolio. Our investments in privately held companies were valued at $0.1 million as of March 31, 2006 and December 31, 2005. For the three months ended March 31, 2006 and 2005, we recorded impairments on our public and private- securities investments of $0.4 million and $0.0 million, respectively.


UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
ISSUER PURCHASES OF EQUITY SECURITIES
 
Period
(a) Total Number of
Shares (or Units)
Purchased
(b) Average Price Paid
per Share (or Unit)(2)
(c) Total Number of Shares
(or Units) Purchased as Part
of Publicly Announced Plans
or Programs
(d) Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that May
Yet Be Purchased Under the
Plans or Programs
January 1, 2006
through January 31,
2006(1)
7,500,000
$2.00
--
--
February 1, 2006
through February
28, 2006
--
--
--
--
March 1, 2006
through March 31,
2006
--
--
--
--
Total
7,500,000
$2.00
--
--

 
(1) On January 5, 2006, Intel Corporation notified us, pursuant to Article IV(D)(8)(a) of our Certificate of Incorporation, that it had elected, as the sole stockholder of our Series B Preferred Stock, to cause us to redeem all outstanding shares of Series B Preferred Stock. On January 10, 2006, the redemption date set forth in the Certificate of Incorporation, we redeemed all 7,500,000 outstanding shares of Series B Preferred Stock held by Intel Corporation for aggregate cash consideration of $15,000,000, representing the full redemption price of the Series B Preferred Stock.

(2) Represents the price paid for the redemption of the Series B Preferred Stock.
 

DEFAULTS UPON SENIOR SECURITIES

Not applicable.


SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

Not applicable.
 

OTHER INFORMATION

See Item 9B of our Annual Report for the year ended December 31, 2005 on Form 10-K filed with the SEC on April 3, 2006, which is incorporated by reference herein in its entirety.

 
EXHIBITS

Exhibit No.
Description of Exhibits

10.18 (1)
Director’s Service Agreement, by and between Jan Jensen and ViewSonic Netherlands, dated January 10, 2006.

10.19 (2)
Director’s Service Agreement, by and between Jan Jensen and ViewSonic Europe Limited, dated January 10, 2006.

10.20(3)
Director’s Service Agreement, by and between Jan Jensen and ViewSonic SARL, dated January 10, 2006.

31.1
Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2
Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1*
Certification of Chief Executive Officer and Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.
 
(1)
Incorporated by reference to Exhibit 10.18 to ViewSonic Corporation’s Annual Report on Form 10-K, (000-50730) filed with the Securities and Exchange Commission on April 3, 2006.
(2)
Incorporated by reference to Exhibit 10.19 to ViewSonic Corporation’s Annual Report on Form 10-K, (000-50730) filed with the Securities and Exchange Commission on April 3, 2006.
(3)
Incorporated by reference to Exhibit 10.20 to ViewSonic Corporation’s Annual Report on Form 10-K, (000-50730) filed with the Securities and Exchange Commission on April 3, 2006.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 15, 2006.
 
 
ViewSonic Corporation
  
  
  
 
By:
/s/ James A. Morlan
   
James A. Morlan
   
Chief Financial Officer
   
(Principal Financial and Accounting Officer)
 

 

EXHIBIT INDEX
 
Exhibit No.
Description of Exhibits
 
10.18 (1)
Director’s Service Agreement, by and between Jan Jensen and ViewSonic Netherlands, dated January 10, 2006.

10.19 (2)
Director’s Service Agreement, by and between Jan Jensen and ViewSonic Europe Limited, dated January 10, 2006.

10.20(3)
Director’s Service Agreement, by and between Jan Jensen and ViewSonic SARL, dated January 10, 2006.

Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
 
Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

Certification of Chief Executive Officer and Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.
 
(1)
Incorporated by reference to Exhibit 10.18 to ViewSonic Corporation’s Annual Report on Form 10-K, (000-50730) filed with the Securities and Exchange Commission on April 3, 2006.
(2)
Incorporated by reference to Exhibit 10.19 to ViewSonic Corporation’s Annual Report on Form 10-K, (000-50730) filed with the Securities and Exchange Commission on April 3, 2006.
(3)
Incorporated by reference to Exhibit 10.20 to ViewSonic Corporation’s Annual Report on Form 10-K, (000-50730) filed with the Securities and Exchange Commission on April 3, 2006.

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