**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-Q

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended March 31, 2004**

**OR**

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

**Forthe transition period from                  to                  .**

**Commissionfile number: 000-50730**

**VIEWSONIC CORPORATION**

**(**Exactname of Registrant as Specified in Its Charter**)**

| **Delaware**(State or Other Jurisdiction of  Incorporation or Organization) | **95-4120606**(I.R.S. Employer  Identification No.) |
|-----------------------------------------------------------------------------|-----------------------------------------------------|

 

**381 Brea Canyon RoadWalnut, California  91789(909) 869-7976**

(Address, including ZipCode, of Registrant’s Principal Executive Officesand Registrant’s Telephone Number, including Area Code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days. Yes o No x

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes oNo x

The number of shares ofthe registrant’s common stock outstanding as of July 15, 2004 was 353,919,677 shares.

 

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**VIEWSONICCORPORATIONFORM 10-QTABLE OF CONTENTS**
|                                         | ** **                                                                                                | **Page** |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------------|----------|
| **PART I:  FINANCIAL INFORMATION** |
| Item 1.                                 | Consolidated  Condensed Financial Statements (unaudited)                                                  |     | 3 |   |
|                                    | Consolidated Condensed Balance  Sheets as of March 31, 2004 and December 31, 2003          |     | 3 |   |
|                                    | Consolidated Condensed  Statements of Operations for the three-months ended March 31, 2004 and  2003 |     | 4 |   |
|                                    | Consolidated Condensed  Statements of Cash Flows for the three-months ended March 31, 2004 and  2003 |     | 5 |   |
|                                    | Notes to Consolidated Condensed  Financial Statements                                                     |     | 6 |   |
| Item  2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations          |     | 11 |   |
| Item  3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                               |     | 17 |   |
| Item 4.                                 | Controls and  Procedures                                                                                  |     | 23 |   |
| **PART II:  OTHER INFORMATION**    |
| Item  1.                                | Legal Proceedings                                                                                         |     | 24 |   |
| Item 2.                                 | Changes in Securities, Use of  Proceeds and Issuer Purchasers of Equity Securities                        |     | 24 |   |
| Item 3.                                 | Defaults Upon Senior Securities                                                                           |     | 24 |   |
| Item  4.                                | Submission of Matters to a Vote of  Securities Holders                                                    |     | 24 |   |
| Item 5.                                 | Other Information                                                                                         |     | 25 |   |
| Item 6.                                 | Exhibits  and Reports on Form 8-K                                                                    |     | 25 |   |
|                                    | Signature                                                                                                 |     | 26 |   |

 

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**PART I.FINANCIAL INFORMATION**

**ITEM1.   CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

**VIEWSONICCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED BALANCE SHEETSMARCH 31, 2004 AND DECEMBER 31, 2003(In thousands, except for share data and par value)(Unaudited)**
| ** **                                                                                                                                                                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | **2004**           | ** ** | **2003**              | ** ** |
| **ASSETS**                                                                                                                                                                                                  |       |               |       |                  |       |   |   |   |   |
| CURRENT ASSETS:                                                                                                                                                                                             |       |               |       |                  |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                  |       |               | $          | 102,439               |       |   |   | $ | 87,870 |   |   |
| Short-term  investments                                                                                                                                                                                     |       |               | 1,216      |                  |       |   | 3,687 |   |   |
| Trade receivables—net                                                                                                                                                                                  |       |               | 133,325    |                  |       |   | 132,120 |   |   |
| Other receivables                                                                                                                                                                                           |       |               | 4,205      |                  |       |   | 5,765 |   |   |
| Inventories                                                                                                                                                                                                 |       |               | 111,940    |                  |       |   | 128,718 |   |   |
| Deferred income  taxes                                                                                                                                                                                      |       |               | 12,555     |                  |       |   | 11,592 |   |   |
| Prepaids and other  current assets                                                                                                                                                                          |       |               | 5,389      |                  |       |   | 5,002 |   |   |
| Income taxes  receivable                                                                                                                                                                                    |       |               | 42         |                  |       |   | 123 |   |   |
| Total current  assets                                                                                                                                                                                       |       |               | 371,111    |                  |       |   | 374,877 |   |   |
| PROPERTY, PLANT  AND EQUIPMENT—Net                                                                                                                                                                     |       |               | 16,627     |                  |       |   | 16,015 |   |   |
| LONG-TERM  INVESTMENTS                                                                                                                                                                                      |       |               | 14,991     |                  |       |   | 13,704 |   |   |
| GOODWILL                                                                                                                                                                                                    |       |               | 7,464      |                  |       |   | 7,464 |   |   |
| OTHER ASSETS—Net                                                                                                                                                                                       |       |               | 1,483      |                  |       |   | 2,869 |   |   |
| TOTAL                                                                                                                                                                                                       |       |               | $          | 411,676               |       |   |   | $ | 414,929 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                               |       |               |       |                  |       |   |   |   |   |
| CURRENT LIABILITIES:                                                                                                                                                                                        |       |               |       |                  |       |   |   |   |   |
| Bank borrowings                                                                                                                                                                                             |       |               | $          | 4,200                 |       |   |   | $ | 6,342 |   |   |
| Accounts payable                                                                                                                                                                                            |       |               | 222,482    |                  |       |   | 237,363 |   |   |
| Accrued  promotional expenses                                                                                                                                                                               |       |               | 12,760     |                  |       |   | 15,779 |   |   |
| Accrued warranty  expense                                                                                                                                                                                   |       |               | 15,082     |                  |       |   | 14,706 |   |   |
| Other accrued  expenses                                                                                                                                                                                     |       |               | 24,025     |                  |       |   | 18,945 |   |   |
| Total current  liabilities                                                                                                                                                                                  |       |               | 278,549    |                  |       |   | 293,135 |   |   |
| SUBORDINATED NOTES  PAYABLE—Related party                                                                                                                                                              |       |               | 43,000     |                  |       |   | 43,000 |   |   |
| DEFERRED INCOME  TAXES                                                                                                                                                                                      |       |               | 1,079      |                  |       |   | 590 |   |   |
| CONVERTIBLE  MANDATORILY REDEEMABLE PREFERRED STOCK                                                                                                                                                         |       |               | 12,384     |                  |       |   | 12,056 |   |   |
| MINORITY INTEREST                                                                                                                                                                                           |       |               | 1,309      |                  |       |   | 1,441 |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                  |       |               |       |                  |       |   |   |   |   |
| Common stock, $.01 par  value:                                                                                                                                                                              |       |               |       |                  |       |   |   |   |   |
| Authorized—600,000,000  shares at March 31, 2004 and December 31, 2003 Outstanding—353,912,183  and 353,897,749 shares at March 31, 2004 and December 31, 2003,  respectively |       |               | 3,539      |                  |       |   | 3,539 |   |   |
| Additional paid-in  capital                                                                                                                                                                                 |       |               | 92,120     |                  |       |   | 92,105 |   |   |
| Accumulated  deficit                                                                                                                                                                                        |       |               | (18,807    | )                     |       |   | (28,125 | ) |   |
| Accumulated other  comprehensive loss                                                                                                                                                                       |       |               | (1,497     | )                     |       |   | (2,812 | ) |   |
| Total  stockholders’ equity                                                                                                                                                                            |       |               | 75,355     |                  |       |   | 64,707 |   |   |
| TOTAL                                                                                                                                                                                                       |       |               | $          | 411,676               |       |   |   | $ | 414,929 |   |   |

 

See accompanying notes to consolidated condensed financial statements.

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**VIEWSONICCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF OPERATIONSMARCH 31, 2004 AND 2003(In thousands, except per share data)(Unaudited)**
| ** **                                   | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                   | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| NET SALES                                    |       | $                                                | 294,235    |   | $ | 266,915 |   |
| COST OF SALES                                |       | 249,476                                          |       | 225,413 |   |
| GROSS PROFIT                                 |       | 44,759                                           |       | 41,502 |   |
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |       | 32,671                                           |       | 33,536 |   |
| INCOME FROM OPERATIONS                       |       | 12,088                                           |       | 7,966 |   |
| OTHER INCOME (EXPENSE), Net:                 |       | 926                                              |       | 1,524 |   |
| INCOME BEFORE INCOME TAXES                   |       | 13,014                                           |       | 9,490 |   |
| PROVISION FOR INCOME TAXES                   |       | 3,369                                            |       | 1,818 |   |
| NET INCOME                                   |       | 9,645                                            |       | 7,672 |   |
| PREFERRED STOCK ACCRETION                    |       | 327                                              |       | 289 |   |
| NET INCOME AVAILABLE TO COMMON STOCKHOLDERS  |       | $                                                | 9,318      |   | $ | 7,383 |   |
| BASIC EARNINGS PER SHARE                     |       | $                                                | 0.03       |   | $ | 0.02 |   |
| DILUTED EARNINGS  PER SHARE                  |       | $                                                | 0.03       |   | $ | 0.02 |   |

 

See accompanying notes to consolidated condensed financial statements

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**VIEWSONICCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSMARCH 31, 2004 AND 2003(In thousands)(Unaudited)**
| ** **                                                                                   | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                        |       |                                             |       |   |   |
| Net income                                                                                   |       | $                                                | 9,645      |   | $ | 7,672 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                             |       |   |   |
| Depreciation and  amortization                                                               |       | 1,069                                            |       | 1,007 |   |
| Minority interest in net  loss of subsidiaries                                               |       | (132                                             | )          | (213 | ) |
| Loss on disposal of  property, plant and equipment                                           |       | 148                                              |       | 31 |   |
| Provision for doubtful  accounts                                                             |       | 252                                              |       | 181 |   |
| (Gain) on sale of  long-term investments                                                     |       | (308                                             | )          |   |   |
| Deferred income taxes                                                                        |       | (962                                             | )          | 990 |   |
| Other                                                                                        |       | 16                                               |       | 16 |   |
| Changes in operating assets and liabilities:                                                 |       |                                             |       |   |   |
| Trade receivables—net                                                                   |       | (1,458                                           | )          | (20,016 | ) |
| Other receivables                                                                            |       | 1,560                                            |       | 1,872 |   |
| Inventories                                                                                  |       | 16,778                                           |       | (16,273 | ) |
| Prepaids and other  current assets                                                           |       | 1,019                                            |       | (1,897 | ) |
| Accounts payable                                                                             |       | (14,881                                          | )          | 5,704 |   |
| Accrued promotional and  other expenses                                                      |       | (467                                             | )          | 3,947 |   |
| Accrued warranty expense                                                                     |       | 376                                              |       | 1,417 |   |
| Income taxes  payable/receivable                                                             |       | 2,573                                            |       | 2,488 |   |
| Net cash provided by  (used in) operating activities                                         |       | 15,228                                           |       | (13,074 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                        |       |                                             |       |   |   |
| Net purchase of  property, plant and equipment                                               |       | (1,719                                           | )          | (834 | ) |
| Proceeds on sale of  long-term investments                                                   |       | 507                                              |       | — |   |
| (Purchases) sales of  short-term investments                                                 |       | 2,471                                            |       | — |   |
| Net cash provided by  (used in) investing activities                                         |       | 1,259                                            |       | (834 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                        |       |                                             |       |   |   |
| Proceeds from bank  borrowings                                                               |       | $                                                | 7,244      |   | $ | 14,065 |   |
| Payments on bank  borrowings                                                                 |       | (9,386                                           | )          | (8,687 | ) |
| Proceeds from issuance  of common stock                                                      |       | 15                                               |       | — |   |
| Net cash (used in)  provided by financing activities                                         |       | (2,127                                           | )          | 5,378 |   |
| NET INCREASE IN CASH AND  CASH EQUIVALENTS                                                   |       | $                                                | 14,360     |   | $ | (8,530 | ) |
| CASH AND CASH EQUIVALENTS—Beginning  of period                                          |       | 87,870                                           |       | 66,251 |   |
| EFFECT OF EXCHANGE RATE  CHANGES ON CASH AND CASH EQUIVALENTS                                |       | $                                                | 209        |   | $ | 94 |   |
| CASH AND CASH EQUIVALENTS—End of period                                                 |       | $                                                | 102,439    |   | $ | 57,815 |   |

 

See accompanying notes to consolidated condensed financial statements

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**VIEWSONICCORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Unaudited)**

**Note 1. Summary of Significant Accounting Policies**

*Basis ofPresentation*

The accompanying unaudited consolidated condensedfinancial statements have been prepared in accordance with generally acceptedaccounting principles in the United States for interim consolidated condensedfinancial information and with the instructions for Form 10-Q and Article 10of Regulation S-X.

In the opinion of management, the accompanying unauditedconsolidated condensed financial statements for ViewSonic Corporation and ourconsolidated subsidiaries contain all adjustments, consisting only of normalrecurring adjustments, necessary to present fairly our financial position as ofMarch 31, 2004, and our results of operations and cash flows for the threemonths ended March 31, 2004 and 2003. The consolidated condensed balancesheet as of December 31, 2003 is derived from the December 31, 2003audited financial statements.

The results of operations for the three months ended March 31,2004 are not necessarily indicative of the results to be expected for the fullyear. The information included in this Quarterly Report on Form 10-Qshould be read in conjunction with the audited consolidated financial statementsfor the year ended December 31, 2003 and notes thereto included in our Form 10/Afiled with the Securities and Exchange Commission on June 25, 2004.

The preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

**Note 2. Stock-Based Compensation**

We account for employee stock options in accordancewith Accounting Principles Board, or APB, Opinion No. 25, *Accounting for Stock Issued to Employees*.Under APB Opinion No. 25, we do not recognize compensation expense relatedto employee stock options, since the options are granted at the fair marketvalue on the date of grant as determined by our Board of Directors.

Statement of Financial Accounting Standards, or SFAS, No. 123,*Accounting for Stock-BasedCompensation*, encourages, but does not require, the recognition ofcompensation expense for employee stock-based compensation arrangementsusing the fair value method of accounting. We have elected the “disclosure only”alternative and have disclosed the pro forma net income per share amounts usingthe fair value method.

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Ifcompensation expense for our stock options had been recognized based on thefair value on the grant date under the methodology prescribed by SFAS No. 123,our net income from continuing operations would have been impacted as shown inthe following table for the period indicated (in thousands): 
| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| Net income                   |       |                                             |       |   |   |
| As reported                  |       | $                                                | 9,645      |   | $ | 7,672 |   |
| Pro forma                    |       | $                                                | 9,579      |   | $ | 7,619 |   |
| Basic earnings  per share:   |       |                                             |       |   |   |
| As reported                  |       | $                                                | 0.03       |   | $ | 0.02 |   |
| Pro forma                    |       | $                                                | 0.03       |   | $ | 0.02 |   |
| Diluted earnings  per share: |       |                                             |       |   |   |
| As reported                  |       | $                                                | 0.03       |   | $ | 0.02 |   |
| Pro forma                    |       | $                                                | 0.03       |   | $ | 0.02 |   |

 

Please see the assumptionsused to value stock options as reported in our registration statement on Form 10/Afor the year ended December 31, 2003 filed with the Securities andExchange Commission on June 25, 2004.

**Note 3. Comprehensive Income**

Comprehensiveincome includes foreign currency translation gains and losses and unrealizedgains and losses on marketable securities available for sale that are reflectedin stockholders’ equity instead of net income. The following table sets forththe calculation of comprehensive income for the periods indicated (inthousands):
| ** **                                                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| Net income                                                                           |       | $                                                | 9,645      |   | $ | 7,672 |   |
| Foreign currency  translation                                                        |       | $                                                | 582        |   | $ | (7 | ) |
| Unrealized  holding gains/(losses) on marketable securities—less realized gains |       | $                                                | 733        |   | $ | (819 | ) |
| Total comprehensive  income                                                          |       | $                                                | 10,960     |   | $ | 6,846 |   |

 

**Note4. Income Taxes**

The provision for incometaxes has been recorded based upon the current estimate of our annual effectivetax rate. This rate differs from the federal statutory rate primarily due tothe provision for state income taxes and the effects of our foreign operations.Our effective tax rate was approximately 25.9% and 19.2% for the three monthsended March 31, 2004 and 2003, respectively.

**Note 5. Commitments and Contingencies**

***Litigation***—Weare involved in various legal matters in the normal course of our business.Management believes that the ultimate outcome of our outstanding matters willnot have a material adverse effect on the accompanying consolidated condensedfinancial statements.

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***Services Agreements******—***In 1999, weentered into a services agreement with a logistics supplier. The agreementprovides for warehousing, shipping and freight services. The amount to be paidis based on the level of services provided as defined in the agreement. For thethree months ended March 31, 2004 and 2003, the expense was approximately$912,000, and $830,000, respectively.

During 2000, we entered into a services agreement witha repair service provider. The amount to be paid is based on the level ofservices provided as defined in the agreement. For the three months ended March 31,2004 and 2003, the expense was approximately $230,000, and $530,000,respectively.

***PurchaseCommitments******—***We havepurchase commitments for materials and supplies as part of our normal course ofbusiness. Commitments to purchase inventory at above-market prices havebeen reserved. The total amount reserved under these commitments is $2,897,000and $3,364,000 as of March 31, 2004 and December 31, 2003,respectively and is included as part of other accrued expenses.

***Other Agreements***—Wehave a licensing agreement for embedded software with a U.S.-basedhigh-technology company. The total amount reserved under this licensing agreementis $1,738,000 and $1,051,000 as of March 31, 2004 and December 31,2003, respectively. This agreement expires on June 30, 2005.

We have another purchasecommitment for material and supplies for the production of component parts. Thetotal outstanding commitment under this agreement is $678,000 as of March 31,2004.

**Note 6. Business Segments**

In accordance with SFAS No. 131, “*Disclosures about Segments of an Enterprise andRelated Information*,” we have three reportable segments: Americas,Europe and Asia Pacific. We sell similar products in each market, including CRTdisplays, LCD displays, projectors, plasma displays, HDTV technology andwireless mobile display products.

Thetypes and class of customers, primarily distributors and retailers, are alsosimilar across the product lines. We have two major products—visual displays(CRT and LCD computer monitors) and other products. Both products are sold toall of our markets. The following segmentfinancial information is for the periods indicated (in thousands):
| ** **                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| Net sales:                      |       |                                             |       |   |   |
| Americas                        |       | $                                                | 160,011    |   | $ | 171,272 |   |
| Europe                          |       | 66,774                                           |       | 44,266 |   |
| Asia Pacific                    |       | 67,450                                           |       | 51,377 |   |
| Total                           |       | $                                                | 294,235    |   | $ | 266,915 |   |
| Income (loss)  from operations: |       |                                             |       |   |   |
| Americas                        |       | $                                                | 5,519      |   | $ | 4,715 |   |
| Europe                          |       | 5,770                                            |       | 2,789 |   |
| Asia Pacific                    |       | 799                                              |       | 462 |   |
| Total                           |       | $                                                | 12,088     |   | $ | 7,966 |   |

 

**Note7. Warranty**

Weprovide product warranty programs on a worldwide basis that vary in term from12 to 36 months. The length of the warranty period and the specificwarranty coverage are based on the type of product. We accrue for estimatedwarranty costs at the time the product is sold, and such amounts are based upon

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historical experience. The historical data thatdetermines the warranty accrual and the overall estimate of the warrantyreserve includes the following key factors: net cost of repair (repair costsless reimbursements from suppliers), defective rates and total number ofproducts under warranty. The following table summarizes our activity in thewarranty reserve for the periods indicated (in thousands):
| **Three Months Ended** | ** ** | ** ** | ** ** | ** Beginning   Accrued  Warranty  Reserve** | ** ** | **Payments  for Units    Returned  ** | ** ** | **Additional  Warranty  Expense  for Units  Sold** | ** ** | **Warranty  Reserve  Adjustment** | ** ** | **Ending  Accrued  Warranty  Reserve** | ** ** |
|------------------------|------------|------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------|------------|
| March 31,  2003   |       |       | $          | 14,253                                                |       |                                                           |       | $                                                       | (2,548     | )                                 |       |                                   | $          | 2,880 |   |   |   | $ | 1,085 |   |   | $ | 15,670 |   |
| March 31, 2004    |       |       | $          | 14,706                                                |       |                                                           |       | $                                                       | (2,794     | )                                 |       |                                   | $          | 3,170 |   |   |   | — |   |   | $ | 15,082 |   |

 

**Note 8. Earnings Per Share**

We present both basic and diluted earnings per share,or EPS, amounts. Basic EPS is calculated by dividing net income by the weighted-averagenumber of common shares outstanding during the year. Diluted EPS amounts arebased upon the weighted-average number of common and potential commonshares, including warrants outstanding during the year.

Potentialcommon shares are excluded from the computation in periods in which they havean anti-dilutive effect. We use the treasury stock method to calculatethe impact of outstanding stock options. Stock options for which the exerciseprice exceeds the average market price over the period have an anti-dilutiveeffect on EPS and, accordingly, are excluded from the calculation. For March 31,2004 and 2003, options for 4,719,489 and 2,185,955 shares, respectively, wereexcluded from the diluted earnings per common share calculation because theywere anti-dilutive. Amounts are for the periods indicated (amounts inthousands, except per share information). 
| ** **                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| Basic EPS:                                                  |       |                                             |       |   |   |
| Numerator—net income available to common  stockholders |       | $                                                | 9,318      |   | $ | 7,383 |   |
| Denominator—weighted-average shares  outstanding       |       | 353,903                                          |       | 353,886 |   |
| Basic EPS                                                   |       | $                                                | 0.03       |   | $ | 0.02 |   |
| Diluted EPS:                                                |       |                                             |       |   |   |
| Numerator:                                                  |       |                                             |       |   |   |
| Net income available to common stockholders                 |       | $                                                | 9,318      |   | $ | 7,383 |   |
| Denominator:                                                |       |                                             |       |   |   |
| Weighted-average shares outstanding                         |       | 353,903                                          |       | 353,886 |   |
| Stock options                                               |       | 1,369                                            |       | 4,101 |   |
| Interest warrants                                           |       | 3,270                                            |       | 3,270 |   |
| Total shares                                                |       | 358,542                                          |       | 361,257 |   |
| Diluted EPS                                                 |       | $                                                | 0.03       |   | $ | 0.02 |   |

 

**Note 9. Rescission Shares**

Recipients of the certainoptions as well as purchasers of the shares for which registration orqualification may have been required under the Securities Act or statesecurities laws may have the right to rescind their grant of options andpurchases of shares. We concluded a rescission offer, as permitted underCalifornia state law, to the holders of these options and shares on June 24,2004. Holders of options subject to the rescission were offered an amount equalto 10% of the strike price plus 7% per annum interest from the date of grant.Holders of stock subject to rescission were offered 100% of the exercise priceplus 7% 

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perannum interest from the date of exercise. As a result, approximately 469,000options and 15,000 common stock shares were tendered back to and accepted byViewSonic and an expense of $79,000 was recorded for the rescission of thesesecurities.

**Note 10. Subsequent Event**

During the second quarter of 2004, we entered intonegotiations to sell ADO, one of our majority owned subsidiaries. We closed thesale and recorded a $4,400,000 gain in the third quarter of 2004. The purchaseprice and the cost basis of the sale were $8,800,000 and $4,100,000 lessexpenses of $300,000. As of June 30, 2004, the net assets of ADO wereclassified as held for sale. Ten percent of the gross proceeds payable to us,as well as ten percent from the other principal shareholders of ADO, shallremain in an escrow for one year to facilitate recourse by the buyer in theevent of a breach of representations and warranties. In accordance with SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*, the results of operations of this business willbe reported as discontinued operations for the second quarter 2004.

 

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**ITEM 2.**   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*The following discussion contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934, which are subjectto the “safe harbor” created by those sections. These forward-lookingstatements include but are not limited to: statements related to industrytrends and future growth in the markets for visual display technology products;our product development efforts; the timing of our introduction of newproducts; industry and consumer acceptance of our products; and futureprofitability. These forward-looking statements involve risks and uncertaintiesthat could cause our actual results to differ materially from those in theforward-looking statements. We undertake no obligation to publicly release anyrevisions to the forward-looking statements or reflect events or circumstancesafter the date of this document. The “Quantitative and Qualitative DisclosuresAbout Market Risk” section, among other things, should be considered inevaluating our prospects and future financial performance.*

**Overview**

***Our Company***

ViewSonic Corporation is a leading global provider ofvisual display technology products. We develop, market and support a broadrange of display technology products including liquid crystal displays, or LCD,monitors, cathode ray tube, or CRT, monitors, projectors, LCD TVs, plasmadisplays and our wireless mobile display products.

Our ViewSonic brandedproducts are sold through distributors, retailers and other resellers tocommercial businesses, including Fortune 1000 companies, small and medium sizedbusinesses, and consumer electronics markets. We sell our products globally andare managed geographically in three regions: the Americas, Europe and AsiaPacific.

***Recent Trends in Our Business***

During the first quarter of 2004, the competitiveenvironment remained challenging in terms of pricing and margin pressures, butwe continued to see a gradual improvement in the economic climate whichresulted in a modest increase in corporate spending on information technologyrelated purchases as well as an increase in consumer purchases of displayrelated technology. Our results of operations were principally driven by anincrease in unit sales. Our net sales increased to $294.2 million in March 31,2004 from $266.9 million in March 31, 2003 and we sold approximately 1.1million display products in the first quarter of 2004 compared to approximately1.0 million display products in the first quarter of 2003.

Our industry experiencescyclical market conditions where we could experience a shortage of products dueto a surge in demand exceeding production capacities to periods of oversupplydue to our manufacturers expanding production capacity. Currently we arebeginning to experience this transition from a shortage of key LCD products toa potential oversupply of LCD products due to an increase in manufacturingcapacity in our LCD monitor supply base. LCD manufacturers have announced thatthey will be increasing manufacturing capacity for LCD monitors in the secondhalf of 2004, thereby increasing the availability of certain LCD monitors inthe later part of the year. As we head into our slowest sales periods, thesecond and third quarters, we need to effectively manage our inventory levelsduring such oversupply cycles. If we are not able to effectively manage thetransition between these cycles from a shortage to oversupply, we could be leftwith excess inventory. This may force us to reduce prices and write downinventory, in turn lowering our gross margins.

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**Results of Operations**

Thefollowing table sets forth, for the periods indicated, our consolidated condensedstatements of operations expressed as a percentage of net sales. 
| ** **                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **   2004   **     | ** ** | **   2003   ** | ** ** |
| Net sales                                           |       |                                             | 100.0      | % |   |   | 100.0 | % |   |
| Cost of Sales                                       |       |                                             | 84.8       | % |   |   | 84.5 | % |   |
| Gross profit                                        |       |                                             | 15.2       | % |   |   | 15.5 | % |   |
| Selling,  general and administrative           |       |                                             | 11.1       | % |   |   | 12.5 | % |   |
| Income (loss)  from operations                      |       |                                             | 4.1        | % |   |   | 3.0 | % |   |
| Other income  (expense), net:                       |       |                                             | 0.3        | % |   |   | 0.6 | % |   |
| Income (loss)  before taxes                         |       |                                             | 4.4        | % |   |   | 3.6 | % |   |
| Provision for  income taxes                         |       |                                             | 1.2        | % |   |   | 0.7 | % |   |
| Net income (loss)                                   |       |                                             | 3.3        | % |   |   | 2.9 | % |   |
| Preferred stock  accretion                          |       |                                             | (0.1       | )% |   |   | (0.1 | )% |   |
| Net income (loss)  available to common stockholders |       |                                             | 3.2        | % |   |   | 2.8 | % |   |

 
| ** **                 | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|
| ** **                 | ** ** | **2004**                                             | ** ** | **2003** | ** ** | **Dollar  Increase/(Decrease)** | ** ** | **Percentage  Increase/(Decrease)** | ** ** |
| ** **                 | ** ** | **(in thousands)**                              | ** ** |
| **Net Sales**              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Americas                   |       | $                                                    | 160,011    |   | $ | 171,272 |   |   | $ | (11,261 | ) |   |   | -6.6 | % |   |
| Europe                     |       | 66,774                                               |       | 44,266 |   |   | 22,508 |   |   |   | 50.8 | % |   |
| Asia Pacific               |       | 67,450                                               |       | 51,377 |   |   | 16,073 |   |   |   | 31.3 | % |   |
| Total                      |       | $                                                    | 294,235    |   | $ | 266,915 |   |   | $ | 27,320 |   |   |   | 10.2 | % |   |
| **Income from operations** |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Americas                   |       | $                                                    | 5,519      |   | $ | 4,715 |   |   | $ | 804 |   |   |   | 17.1 | % |   |
| Europe                     |       | 5,770                                                |       | 2,789 |   |   | 2,981 |   |   |   | 106.9 | % |   |
| Asia Pacific               |       | 799                                                  |       | 462 |   |   | 337 |   |   |   | 72.9 | % |   |
| Total                      |       | $                                                    | 12,088     |   | $ | 7,966 |   |   | $ | 4,122 |   |   |   | 51.7 | % |   |

 

**Consolidated Results of Operations—March 31, 2004Compared to March 31, 2003**

*Net Sales*

Our consolidated net sales increased$27.3 million, or 10.2%, to $294.2 million in the first quarter of2004 from $266.9 million in the first quarter of 2003 despite thecontinued shortage of LCD panels. Net sales outside of the Americas regionaccounted for 45.6% and 35.8% of net sales in the first quarters of 2004 and2003, respectively. The growth in net sales outside of the Americas waspredominantly driven by higher net sales in Russia, the United Kingdom andChina. The increase in unit volume was offset by a decline in the averageselling price per unit of 3.3% due to the greater percentage of revenue fromsales of CRTs. Additionally, due to the continued LCD product shortage in thefirst quarter of 2004, we reduced the number of sales allowance programsoffered worldwide, which resulted in a reduction of sales allowances ascompared to the first quarter of 2003. Returns and sales incentive allowancescharged against gross sales were $21.1 million and $29.0 million in the firstquarter of 2004 and 2003, respectively.

We sold approximately 1.1 million display products inthe first quarter of 2004 compared to approximately 1.0 million displayproducts during the first quarter of 2003. Of the display product units sold inthe first quarter of 2004, CRT accounted for 51.1%, LCD accounted for 37.4%,and other products 

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accounted for 11.5% ascompared to 49.4%, 41.5%, and 9.1%, respectively, in the first quarter of 2003.The increase in units sold was primarily due to continued expansion in China aswell stronger unit sales in Europe.

*Americas**—*In our Americas region, net sales decreased$11.3 million, or 6.6%, to $160.0 million in the first quarter of2004 from $171.3 million in the first quarter of 2003. The decrease in netsales was primarily due to lower unit sales of LCD displays as a result of theLCD panel shortage partially offset by an increase in CRT sales, however atlower average selling price, or ASPs. The decrease in net sales was partiallyoffset by lower sales allowances in the first quarter of 2004 as compared tothe first quarter of 2003.

*Europe**—*In our Europe region, net sales increased$22.5 million, or 50.8%, to $66.8 million in the first quarter of2004 from $44.3 million in the first quarter of 2003. The increase in netsales was primarily due to the region’s continued expansion in Russia, Norway,France, and the United Kingdom. Net sales also increased due to the shift inthe ratio of sales from CRT to LCD products. In addition, the increase in netsales was aided by lower sales allowances in the first quarter of 2004 ascompared to the first quarter of 2003.

*Asia Pacific**—*In our Asia Pacific region, net sales increased$16.1 million, or 31.3%, to $67.5 million in the first quarter of2004 from $51.4 million in the first quarter of 2003. The primary reasonfor the increase in net sales was due to our continued growth in the Chinamarket, largely as a result of increased unit shipments in the CRT productcategory. In addition, net sales also increased due to higher unit sales inexisting markets such as Australia, New Zealand and Southeast Asia as a resultof expanding our customer base.

*Cost of Sales*

Cost of sales increased$24.1 million, or 10.7%, to $249.5 million in the first quarter of 2004 from$225.4 million in the first quarter of 2003. As a percentage of net sales, costof sales increased to 84.8% in the first quarter of 2004 from 84.5% in thefirst quarter of 2003. The main reason for the increase in cost of sales was theincrease in our product costs. As a percentage of net sales, product costsincreased to 81.1% in the first quarter of 2004 from 80.4% in the first quarterof 2003. The factor driving the increase in product costs between the firstquarters of 2004 and 2003 were higher LCD product costs, which increased by14.9% in the first quarter of 2004 as compared to the first quarter of 2003. Theincrease in product costs was partially offset by lower warranty expenses of $505,000primarily due to lower product defective rates and lower repair costs in thefirst quarter of 2004 compared to the first quarter 2003. As a percentage ofnet sales, warranty costs decreased to 1.1% in the first quarter of 2004 from1.4% in the first quarter of 2003. Overall, gross margin declined to 15.2% inthe first quarter of 2004 from 15.5% in the first quarter of 2003.

*Selling, Generaland Administrative*

Selling, general andadministrative expenses decreased $865,000, or 2.6%, to $32.7 million inthe first quarter of 2004 from $33.5 million in the first quarter of 2003.As a percentage of net sales, selling, general and administrative expensesdecreased to 11.1% in the first quarter of 2004 from 12.5% in the first quarterof 2003. The decrease was a result of our continued focus on cost controlmeasures. The decrease was mainly attributable to lower product developmentexpenses of $2.2 million. Lower advertising costs of $636,000 and lower sellingexpenses of $573,000 due to the continued LCD product supply constraints andthe timing of some of our product launches also contributed to the decrease inexpenses. The decrease was partially offset by higher personnel costs of $2.5million incurred to support regional expansion in our existing markets such asChina, Russia and other key regional markets as well as to support expansion ofour existing and new product categories such as LCD TVs, plasma displays andTablet PCs.

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*Income fromOperations*

Income from operations increased $4.1 million, or51.7 %, to $12.1 million in the first quarter of 2004 from$8.0 million in the first quarter of 2003. As a percentage of net sales,income from operations increased to 4.1% in the first quarter of 2004 from 3.0%in the first quarter of 2003.

*Americas*—Inour Americas region, income from operations increased $803,000, or 17.1%, to$5.5 million in the first quarter of 2004 from $4.7 million in thefirst quarter of 2003. The increase was mainly due to lower advertisement andmarketing expenses as a result of the LCD panel shortage and lower productdevelopment expenses. The increase was partially offset by higher LCD productcosts in the first quarter of 2004 compared to the first quarter of 2003.

*Europe**—*In our Europe region, income from operations increased$3.0 million, or 106.9%, to $5.8 million in the first quarter of 2004from $2.8 million in the first quarter of 2003. The increase was primarilydue to the increase in net sales. The increase was partially offset by higherLCD product costs in the first quarter of 2004 compared to the first quarter of2003 as well an increase in selling, general and administrative expensesprimarily as a result of higher advertising and marketing expenses and higherpersonnel related expenses to support increased sales volume in existingmarkets.

*Asia Pacific*—Inour Asia Pacific region, income from operations increased $337,000, or 72.9%,to $799,000 in the first quarter of 2004 from $462,000 in the first quarter of2003. The increase was due to the increase in net sales in the China marketpartially offset by higher advertising and marketing expenses and higherpersonnel related costs related to supporting the increasing marketing effortsin China.

***OtherIncome (Expense), Net***

Net other income was $926,000for 2004 compared to $1.5 million in 2003. The decrease was mainly relatedto lower foreign currency transaction gains, which totaled $789,000 in thefirst quarter of 2004 partially offset by gains on sale of investments whichtotaled $308,000 in the first quarter of 2004.

***Provisionfor Income Taxes***

Our provision for incometaxes on a consolidated basis was $3.4 million for the three months ended March 31,2004 compared to $1.8 million for the three months ended March 31, 2003. Theeffective tax rate increased to 25.9% in the three months ended March 31,2004 from 19.2% in the three months ended March 31, 2003. This increaseresulted primarily from the utilization of larger loss carryforwards during thethree months ended March 31, 2003 from non-U.S. jurisdictions where no taxbenefit had previously been provided compared to the three months ended March 31,2004.

**Liquidity andCapital Resources**
| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                          | ** ** |
| Net cash provided by (used in) operating activities  |       | $                                                | 15,228     |   | $ | (13,074 | ) |
| Net cash provided  by (used in) investing activities |       | 1,259                                            |       | (834 | ) |
| Net cash (used  in) provided by financing activities |       | (2,127                                           | )          | 5,378 |   |
| Net increase in  cash and cash equivalents           |       | $                                                | 14,360     |   | $ | (8,530 | ) |

 

As of March 31, 2004,we had cash, cash equivalents and short-term investments of$103.7 million. Our cash balances are held in numerous locationsthroughout the world. Most of the amounts held outside the United States couldbe repatriated to the United States, but, under current law, would be subjectto 

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UnitedStates federal income taxes, less applicable foreign tax credits. In certaincountries, foreign exchange limitations limit the amount of cash that can berepatriated. We have accounted for the United States federal tax liability onthese amounts for financial statement purposes except for foreign earnings thatare considered indefinitely reinvested outside the United States. Repatriationcould result in additional United States federal income tax payments in futureyears. Where local restrictions prevent an efficient inter-companytransfer of funds, our intent is that cash balances would remain in the foreigncountry and we would meet United States liquidity needs through ongoing cashflows from operations, external borrowings, or both. We utilize a variety oftax planning and financing strategies in an effort to ensure that our worldwidecash is available in the locations in which it is needed. We expect to meetexpected and unexpected cash flow needs by accessing our credit lines in theAmericas and Asia Pacific.

*OperatingActivities*

Cash flow provided by operating activities was$15.2 million in the first quarter of 2004 compared to cash flow used inoperating activities of $(13.1) million in the first quarter of 2003. Theincrease in the first quarter of 2004 from the first quarter of 2003 wasprimarily due to higher earnings as well as a decrease in inventory, partiallyoffset by an increase in accounts receivable and a decrease in accountspayable.

Accounts receivable increased by $1.2 million to$133.3 million at March 31, 2004 from $132.1 million at December 31,2003 primarily due to a 10.2% increase in net sales over the first quarter of2003 and the timing of sales. Days sales outstanding remained relatively stablefrom 41 days at March 31, 2004 compared to 40 days at March 31,2003. As of March 31, 2004, we had no major collection or billing problemsthat had not already been accounted for in our allowance for doubtful accounts.We have not materially changed our payment terms or delinquency policiesbetween 2003 and 2004.

Inventories decreased by $16.8 million to$111.9 million at March 31, 2004 compared to $128.7 million at December 31,2003. The decrease was primarily due to the continued shortage of key LCDproducts in early 2004. Our inventory turns have remained relatively stable attwo times during the first quarter of 2004 and the first quarter of 2003.

Accounts payable decreasedapproximately $1.3 million to $222.5 million at March 31, 2004compared to $237.4 million at December 31, 2003. The decrease waslargely due to the decrease in inventory balances and timing of our payments toour suppliers.

*InvestingActivities*

Cash flow provided by investingactivities was $1.3 million in the first quarter of 2004 compared to cashflow used in investing activities of $(834,000) in the first quarter of 2003.The primary reason for the variance between periods was the sale of short-termand long-term investments in 2004.

*FinancingActivities*

Cash flow used in financingactivities was $(2.1) million in the first quarter of 2004 compared tocash flow provided by financing activities of $5.4 million in the firstquarter of 2003. The primary reason for the variance was the net decrease ofbank borrowings in the first quarter of 2004 compared to a net increase of bankborrowings in the first quarter of 2003 to fund operations in our Asia Pacificregion.

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**Contractual Obligations and Commitments**

At March 31, 2004, wehad contractual obligations and commercial commitments of $74.1 million asshown in the table below. The table below excludes obligations related toaccounts payable and accrued liabilities incurred in the ordinary course ofbusiness.
| ** **                                        | ** ** | ** **              | ** ** | **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                      |       | $                       | 6,552      |                                      |       | $ | 2,057 |   |   | $ | 3,487 |   | $ | 1,008 |   |   | $ | — |   |   |
| Materials and supplies—purchase  commitments |       | 3,575                   |       |                                      | 3,575      |   |   | — |   | — |   |   | — |   |   |
| Licensing agreements                              |       | 1,738                   |       |                                      |       |   |   | 1,738 |   | — |   |   | — |   |   |
| Bank Borrowings                                   |       | 4,200                   |       |                                      | 4,200      |   |   | — |   | — |   |   | — |   |   |
| Subordinated notes  payable                       |       | 43,000                  |       |                                      | —     |   |   | — |   | 43,000 |   |   | — |   |   |
| Preferred stock  mandatory redemption             |       | 15,000                  |       |                                      | —     |   |   | 15,000 |   | — |   |   | — |   |   |
| Total                                             |       | $                       | 74,065     |                                      |       | $ | 9,832 |   |   | $ | 20,225 |   | $ | 44,008 |   |   | $ | — |   |   |
|                                                   |            |                         |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**CreditFacilities**

As of March 31, 2004,we had no outstanding balance on our line of credit with CIT Group/BusinessCredit, Inc. As of March 31, 2004, the Asia Pacific region had outstandingcash advances of approximately $3.3 million under its line of credit. Inaddition, as of March 31, 2004 the Asia Pacific region had term loans of approximately$857,000 outstanding.

**Off-Balance Sheet Arrangements**

As of March 31, 2004and 2003, we did not have any off-balance sheet arrangements or relationshipswith unconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purposes entities, which aretypically established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes.

**Seasonality**

The market for our productshistorically has experienced seasonal shifts in demand due to changes in buyingpatterns by our customers. Buying patterns vary geographically, and the impacton our operating results in a given period may vary depending on our actual oranticipated level of activity in the relevant region. We generally experience adecline in net sales from the first quarter to the second quarter of each yearand we tend to experience the highest net sales in the fourth quarter of theyear due to a strong buying season in the fourth quarter by large wholesaledistribution partners and retailers due to the holiday season in the Americas.Our seasonality is moderated through slightly different seasonal variations inthe three regions.

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**Operating Capital and Capital Expenditure Requirements**

We believe that ourexisting cash balances, credit facilities and anticipated cash flows fromoperations will be sufficient to meet our operating, acquisition and capitalrequirements for at least the next 12 months. However, there is no assurancethat we will not need to raise additional equity or debt financing within thistime frame. We also may require additional capital for other purposes notpresently contemplated. If we are unable to obtain sufficient capital, we couldbe required to curtail capital equipment purchases or research and developmentexpenditures, which could harm our business. Factors that could affect our cashused or generated from operations and, as a result, our need to seek additionalborrowings or capital include:

·       decreaseddemand and market acceptance for our products;

·       inabilityto successfully develop our next-generation products;

·       competitivepressures resulting in lower than expected average selling prices; and

·       new product announcementsor product introductions by our competitors.

**Critical Accounting Policies and Estimates**

Our critical accountingpolicies reflecting our estimates and judgments are described in Item 2Financial Information of our registration statement on Form 10/A for the yearended December 31, 2003, filed with the Securities and Exchange Commissionon June 25, 2004. We have not changed those policies since such date.Investors should therefore read this Item 2 in conjunction with suchdescription.

**ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

Our financial market risk arises from fluctuations inforeign currencies. A majority of our net sales, expense and capital purchasingactivities are transacted in U.S. Dollars. However, we do enter into thesetransactions in other currencies, primarily the Euro and certain Asiancurrencies. Our net sales and purchasing transactions denominated in currenciesother than the U.S. Dollar are subject to exchange rate fluctuations and couldpotentially negatively impact our financial results.

We have significant European net sales denominated inthe Euro. Product shipping, and selling, general and administrative costsassociated with a portion of these sales are U.S. Dollar-denominated.During the first quarter of 2004, the Euro-to-U.S. Dollar foreign currencyexchange rate continued to strengthen against the U.S. Dollar increasing 3.5%compared to the year-end rate of 2003. During the first quarter of 2003, theEuro-to-U.S. Dollar increased by 8.2% compared to the year-end rate of 2002. Thestrengthening of the Euro positively impacted our first quarter 2004 net salesand income from operations by $1.5 million and $1.1 million,respectively, assuming all other factors remain constant. We currently estimatethat a 1% change in value of the Euro-to-U.S. Dollar exchange rates couldimpact net sales by $0.4 million. We cannot determine the ultimate impactof future changes to these and other currency exchange rates on our 2004 netsales, income from operations, net income, equity, and comprehensive income.

We have a portfolio ofinvestments that includes marketable securities classified asavailable-for-sale long-term investments. To the extent that these investmentscontinue to have strategic value, we typically do not attempt to reduce oreliminate our market exposure. For those securities that are no longerconsidered strategic, management will evaluate market and economic factors inits decision on the timing of disposal. Our investments are generally incompanies in the high-technology industry.

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**Factors that May Affect ViewSonic’s Business andFinancial Results**

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

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

·       Theintroduction and market acceptance of new technologies, products, and services;

·       Variationsin product costs and the mix of products sold;

·       Thesize and timing of customer orders, which, in turn, will often depend upon thesuccess of our customers’ business or specific products or services;

·       Adversechanges in the conditions in the markets for display products;

·       Thesize and timing of capital expenditures by our customers;

·       Inventorypractices of our customers;

·       Conditionsin the broader markets for information technology and communications;

·       Adversechanges in the credit quality of our customers and suppliers;

·       Adversechanges in the supply of components such as LCD panels; and

·       Theimpact of acquired businesses and technologies.

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

*If we fail to maintain and/or expand our saleschannels, our revenue may decline.*

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

Retailers have limited shelf space and promotionalbudgets, and competition is intense for these resources. A competitor with moreextensive product lines and stronger brand identity may have greater bargainingpower with these retailers. The competition for retail shelf space mayincrease, which would require us to increase our marketing expenditures tomaintain current levels of retail shelf space.

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

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

We sell our products through wholesale distributorssuch as Ingram Micro, Tech Data Corporation and Synnex Corporation and nationalretailers such as Best Buy Co., Inc. and Comp USA, Inc. We expectthat a majority of our net sales will continue to come from sales to a smallnumber of wholesale distributors and national retailers for the foreseeablefuture. We have no minimum purchase commitments or long-term contracts with anyof these customers. The wholesale distributors and retailers could decide atany time to discontinue, decrease or delay their purchases of our products. Inaddition, the prices that 

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wholesale distributors andretailers pay for our products are subject to negotiation and could changefrequently. If any of our major wholesale distributors or retailers changetheir purchasing patterns or refuse to pay the prices that we set for ourproducts, our net sales and operating results could be negatively impacted. Ifour wholesale distributors and retailers increase the size of their productorders without sufficient lead-time for us to process the order, our ability tofulfill product demands would be compromised. In addition, because our accountsreceivable are concentrated within a small group of wholesale distributors andretailers, 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 channelinventory and product mix, we may incur costs associated with excess inventoryor lose sales from having too few products or the wrong mix of products.*

If we are unable to properly monitor, control andmanage our sales channel inventory and maintain an appropriate level and mix ofproducts with our customers and within our sales channels, we may incurincreased and unexpected costs associated with this inventory. We generallyallow wholesale distributors and retailers to return a limited amount of ourproducts in exchange for other products. Under our price protection policy,subject to certain conditions, if we reduce the list price of a product, weissue a credit in an amount equal to the reduction for each of the productsheld in inventory by our wholesale distributors and retailers. If our wholesaledistributors and retailers are unable to sell their inventory in a timelymanner, we may under our policy lower the price of the products, or theseparties may exchange the products for newer products. If we improperly forecastdemand for our products we could end up with too many products and be unable tosell the excess inventory in a timely manner, if at all, or, alternatively wecould end up with too few products and not be able to satisfy demand. If theseevents occur, we could incur increased expenses associated with writing offexcessive or obsolete inventory or lose sales and therefore suffer declininggross margins.

*The average selling price of our products typicallydecreases rapidly over the life of the product, which negatively affects ourgross margins.*

The market in which we compete is subject totechnological advances with yearly new product releases and price competition.As a result, the price at which we can sell our products typically declinesover the life of the product. The price at which a product may be sold isgenerally referred to as the average selling price. For example, the averageselling price of our CRT monitors declined approximately 12.8% from first quarterof 2003 to first quarter of 2004 and the average selling price of our LCDmonitors increased approximately 9.5% from first quarter of 2003 to firstquarter of 2004. In order to sell products that have a declining averageselling price and still maintain our gross margins, we need to continuallyreduce our product costs. To manage product sourcing costs, we must collaboratewith our contract manufacturers to engineer the most cost-effective design forour products. In addition, we must carefully manage the price paid forcomponents used in our products. We must also successfully manage our freightand inventory holding costs to reduce overall product costs. We also need tocontinually introduce new products with higher sales prices and gross marginsin order to maintain our overall gross margins. If we are unable to manage thecost of older products or successfully introduce new products with higher grossmargins, our net sales will decrease and our gross margins will decline.

*We depend on third-party contract manufacturers tomanufacture our products. If these contract manufacturers experience any delay,disruption or quality control problems in their operations, we could losemarket 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 contractmanufacturers to procure components and, in some cases, subcontract engineeringwork. Some of our products are manufactured by a single contract manufacturer.Our contract manufacturers are primarily located in mainland China, Taiwan,Korea, Japan and Thailand and may be subject to disruption by earthquakes,typhoons and other natural disasters, as well as political, social or 

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economic instability. Wedo not have any long-term contracts with any of our third-party contractmanufacturers. All of our contracts with our contract manufacturers areterminable by either party with 90 days notice for any reason or noreason. Our four largest contract manufacturers in the first quarter of 2004were Delta Electronics, Inc., Jean Company Ltd., Coretronic Corporationand Sampo Corporation. The loss of the services of any of our primary contractmanufacturers could cause a significant disruption in operations and delays inproduct shipments. Qualifying a new contract manufacturer and commencing volumeproduction is expensive and time consuming.

Our reliance oncontract manufacturers also exposes us to the following risks over which wehave limited control:

·       Unexpectedincreases in manufacturing and repair costs;

·       Interruptionsin shipments if one of our manufacturers is unable to complete production;

·       Inabilityto control the quality of finished products;

·       Inabilityto control delivery schedules;

·       Unpredictabilityof manufacturing yields; and

·       Potentiallack of adequate capacity to manufacture all or a part of the products werequire.

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

We rely on third parties to obtain non-exclusivesoftware license rights to technologies that are incorporated into and necessaryfor the operation and functionality of our products. Because the intellectualproperty we license is available from third parties, barriers to entry for ourcompetitors may be lower than if we owned exclusive rights to the technology welicense and use. On the other hand, if a competitor enters into an exclusivearrangement with any of our third-party technology providers, our ability todevelop and sell products containing that technology could be severely limited.Our licenses often require royalty payments or other consideration to thirdparties. Our success will depend in part on our continued ability to haveaccess to these technologies on commercially reasonable terms. If we are unableto license the necessary technology, we may be forced to acquire or developalternative technology of lower quality or performance standards. This couldlimit and delay our ability to offer competitive products and increase ourcosts of production. As a result, our gross margins, market share, andoperating results could be harmed.

*If we are unable to provide our third-party contractmanufacturers with an accurate forecast of our component and materialrequirements, we may experience delays in the manufacturing of our products andthe costs of our products may increase.*

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

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

We are highly dependent upon the transportationsystems we use to ship our products, including surface, ocean and air freight.Our attempt to closely match our inventory levels to our product demandintensifies the need for our transportation systems to function effectively andwithout delay. The transportation network is subject to disruption from avariety of causes, including labor disputes or port strikes, acts of war orterrorism and natural disasters. If our delivery times increase unexpectedlyfor these or any other reasons, our ability to deliver products on time couldresult in delayed or lost revenue. In addition, if the recent increases in fuelprices were to continue, our transportation costs would likely increase. Aprolonged transportation disruption or a significant increase in the cost offreight could severely disrupt our business and harm our operating results.

*If we fail to continue to introduce new products thatachieve broad market acceptance on a timely basis, we will not be able tocompete effectively and we will be unable to increase or maintain net sales andgross margins.*

We operate in ahighly competitive, quickly changing environment, and our future successdepends on our ability to develop and introduce new products and productenhancements that achieve broad market acceptance in the business and homemarkets. Our future success will depend in large part upon our ability to:

·       Identifydemand trends in the business and home display markets and quickly develop, manufactureand sell products that satisfy these demands;

·       Manageour cost structure to enable us to bring new products to market at competitiveprices;

·       Respondeffectively to new product announcements by our competitors by designing,either internally or through third parties, competitive products; and

·       Providecompatibility and interoperability of our products with products offered byother vendors and new technologies as they emerge.

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

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

We not have employment agreements with any of ourofficers. Each of our officers may terminate their employment without noticeand without cause or good reason. We currently are not aware that any officeris planning to leave or retire.

*If we do not succeed in executing our growthstrategies within our markets, our revenues may not increase.*

Our strategiesinclude further expanding our business in markets in which we currentlyoperate, including China, Russia, Eastern and Western Europe. In many of thesemarkets, we face barriers in the form of long-standing relationships betweenour potential customers and their local suppliers, as well as protectiveregulations. In addition, pursuing international growth opportunities mayrequire us to make significant investments long before we realize returns onthe investments, if any. Increased investments may result in expenses growingat a faster rate than revenues. Our overseas investments could be adverselyaffected by:

·       Reversalsor delays in the opening of foreign markets to new participants;

·       Exchangecontrols;

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·       Restrictionson foreign investment or the repatriation of profits or invested capital;

·       Nationalizationof local industry;

·       Changesin export or import restrictions;

·       Changesin 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 financialmarkets, economies and foreign financial institutions, particularly in emergingmarkets, could adversely affect demand from customers in the affectedcountries. Because of these factors, we may not succeed in expanding ourbusiness in international markets. This could hurt our business growthprospects and results of operations.

*Intellectual property litigation and infringementclaims could cause us to incur significant expenses or prevent us from sellingour products.*

Many of our products are designed to include softwareor other intellectual property licenses from third parties. Competitors’protected technology may be unavailable to us or be made available to us onlyon unfavorable terms and conditions. While it may be necessary in the future toseek or renew licenses relating to various aspects of our products, we believethat, based upon past experience and standard industry practice, these licensesgenerally can be obtained on commercially reasonable terms. There can be noassurances, however, that we will be able to obtain, on commercially reasonableterms or at all, from third parties the licenses that we will need. Due to theexistence of a large number of patents in our field and the rapid rate ofissuance of new patents, it is not practical to determine in advance whether aproduct or any of its components infringe the patent rights of others.

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

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

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

*We rely on our contract manufacturers for assistancein new product development, and our new product introduction efforts could be harmedby any adverse change in these relationships.*

We work with our contract manufacturers to developand/or incorporate new technologies and products. Our contract manufacturersdesign the electronic and mechanical systems of a display product around ourchoice of major components and our specific industrial design. Aside from thesemajor specifications mandated by us, the contract manufacturers chooseelectronic and mechanical solutions of standard design to reduce thedevelopment time, engineering cost and procurement risk associated with morecustomized designs. Our relationships with these contract manufacturersgenerally do not include a long-term commitment on behalf of either party. Ifour contract manufacturers encounter financial or other business difficulties,if their strategic objectives change, or if they perceive us to no longer be an

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attractive customer, theymay no longer assist us in our product development efforts. Our business couldbe harmed if we were unable to continue one or more of our contractmanufacturing relationships.

*Impairment of our investment portfolio could harm ournet earnings.*

We have an investmentportfolio that includes a variety of investments. In most cases, we do notattempt to reduce or eliminate our market exposure on these investments. Wecould incur losses related to the impairment of these investments, which couldresult in charges to net earnings. Some of our investments are in public andprivately-held companies that are still in the start-up or development stage,which have inherent risks because the technologies or products they have underdevelopment are typically in the early stages and may never become successful.Furthermore, the values of our investments in publicly-traded companies aresubject to significant market price volatility. We often couple our investmentsin technology companies with a strategic commercial relationship. Ourcommercial agreements with these companies may not be sufficient to allow us toobtain and integrate such products and services into our offerings or otherwisebenefit from the relationship, and third parties, including competitors, maysubsequently acquire these companies. Economic weakness could further impactour investment portfolio.

**Item 4.   Controls and Procedures**

*Evaluation ofDisclosure Controls and Procedures*

Based on their evaluation as of March 31, 2004, ourchief executive officer and chief financial officer have concluded that, ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended)were sufficiently effective to ensure that the information required to bedisclosed by us in this Quarterly Report on Form 10-Q was recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.

Our management, includingour Chief Executive Officer and Chief Financial Officer, does not expect thatour disclosure controls and procedures or our internal controls will preventall error and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that the objectivesof the control system are met. Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs. These inherent limitationsinclude the realities that judgments in decision-making can be faulty, and thatbreakdowns can occur because of a simple error or mistake. Additionally,controls can be circumvented by the individual acts of some persons, bycollusion of two or more people, or by management override of the control. Thedesign of any system of controls also is based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions; over time, control may become inadequate because of changes inconditions, or the degree of compliance with the policies or procedures maydeteriorate.

*Changes in InternalControls*

There were no changes in our internal controls overfinancial reporting during the quarter ended March 31, 2004 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

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**PART II—OTHER INFORMATION**

**ITEM1.   LEGAL PROCEEDINGS**

In the ordinary course ofbusiness, we are involved in lawsuits, claims, investigations, proceedings, andthreats of litigation consisting of intellectual property, commercial,employment and other matters. In accordance with SFAS No. 5, “*Accounting for Contingencies*,” we make aprovision for a liability when it is both probable that a liability has beenincurred and the amount of the loss can be reasonably estimated. Theseprovisions are reviewed at least quarterly and adjusted to reflect the impactsof negotiations, settlements, rulings, advice of legal counsel and otherinformation and events pertaining to a particular case. Litigation isinherently unpredictable. However, we believe that we have valid defenses withrespect to the legal matters pending against us, as well as adequate provisionsfor any probable and estimable losses. If an unfavorable ruling were to occurin any specific period, there exists the possibility of a material adverseimpact on our results of operations for that period. We believe that, given ourcurrent liquidity and cash and investment balances, even were we to receive anadverse judgment with respect to litigation that we are currently a party to,it is likely that such a judgment would not have a material impact on ourfinancial condition, results of operations or liquidity.

**ITEM 2.   CHANGES INSECURITIES, USE OF PROCEEDS AND ISSUER PURPOSES OF EQUITY SECURITIES**

From January 1,2004 through March 31, 2004, we sold and issued the following unregisteredsecurities:

(1)   From January 1,2004 through March 31, 2004, we did not grant any stock options topurchase shares of our common stock, to employees, consultants and directorspursuant to our 1999 Stock Plan. During this period, stock options to purchasean aggregate of 436,607 shares of our common stock were canceled without beingexercised.

(2)   From January 1,2004 through March 31, 2004, we issued an aggregate of 14,437 shares ofour common stock, at an exercise price of $1.09 per share, pursuant to theexercise of outstanding stock options to purchase shares of our common stockgranted pursuant to our 1999 Stock Plan.

The securities describedin (1) and (2) above may not have been exempt from eitherregistration under the Securities Act or qualification under state securitieslaws. Consequently, recipients of the options and purchasers of the shares forwhich registration or qualification may have been required under the SecuritiesAct or state securities laws may have the right to rescind their grant ofoptions and purchases of shares. We concluded a rescission offer, as permittedunder California state law, to the holders of these options and shares on June 24,2004. As a result approximately 469,000 options and 15,000 common stock shareswere tendered back to and accepted by ViewSonic. There are no assurances thatwe will not be subject to penalties or fines relating to these issuances. Webelieve our rescission offer could provide us with additional meritoriousdefenses against any future claims relating to these shares. See Part 1,Item 1 Note 9 to our consolidated condensed financial statements formore information.

**ITEM3.   DEFAULTS UPON SENIOR SECURITIES**

Not applicable.

**ITEM4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS**

Not applicable.

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**ITEM 5.   OTHER INFORMATION**

Consistent with Section 10A(i)(2) ofthe Securities Exchange Act of 1934, as added by Section 202 of the PublicCompany Accounting Reform and Investor Protection Act of 2002, we areresponsible for disclosing the nature of the non-audit services approved by ourAudit Committee during a quarter to be performed by our independent auditor.Non-audit services are services other than those provided by our independentauditor in connection with an audit or a review of our financial statements. Duringthe first quarter of fiscal 2004, our Audit Committee did not approve any newor recurring non-audit services.

**ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K**

(a)   Exhibits
| 31.1  | Certification of Chief Executive Officer furnished  pursuant to Rule 13a-14(a) or Rule 15d-14(a) of  the Exchange Act.                                                                                                              |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2  | Certification of Chief  Financial Officer furnished pursuant to Rule 13a-14(a) or  Rule 15d-14(a) of the Exchange Act.                                                                                                              |
| 32.1* | Certification of Chief  Executive Officer and Chief Financial Officer furnished pursuant to  Rule 13a-14(b) or Rule 15d-14(b) of the  Exchange Act and Section 1350 of Chapter 63 of Title 18 of the  United States Code. |

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*                    Thecertification attached as Exhibit 32.1, accompanies this Quarterly Reporton Form 10-Q, is not deemed filed with the Securities and ExchangeCommission and is not to be incorporated by reference into any filing ofViewSonic Corporation under the Securities Act of 1933, as amended, or theSecurities Exchange Act of 1934, as amended, whether made before or after thedate of this Form 10-Q, irrespective of any general incorporationlanguage contained in such filing.

(b)   Reports on Form 8-K

None.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized, on August 12, 2004.
|        | **ViewSonic Corporation** |
|--------|---------------------------|
|   | By:                       | /s/ James A. Morlan |
|   |                      | James A. Morlan |
|   |                      | *Chief Financial Officer* |
|   |                      | *(Principal Financial and Accounting Officer)* |

 

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