**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
DC 20549**
 ________________________
 **FORM** **10-K**
 ________________________
 
 **[x]**  **ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934**
 ****
 **For
the** **year
ended December 31, 2004**
 **OR**
 
 **[_]**  **TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT**
 **OF
1934**
 **Commission
file number: 000-50730**
 ________________
 **VIEWSONIC
CORPORATION**
 (Exact
Name of Registrant as Specified in Its Charter)
 
 **Delaware**
    **94-3177549**(State
      or Other Jurisdiction of Incorporation or Organization)
    (I.R.S.
      Employer Identification No.)
 **381
Brea Canyon Road**
 **Walnut,
California 91789**
 **(909)
444-8800**
 (Address
of principal executive offices, including zip code and t elephone
number, including area code)
 
 **Securities
registered pursuant to Section 12(b) of the Act:**
 None
 
 **Securities
registered pursuant to Section 12(g) of the Act:**
 Options
to purchase common stock,
 $0.01 par
value per share
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days.   Yes ý  No  ̈
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K  ̈
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in the
Exchange Rule 12b-2) Yes  ̈ No ý
 
 The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2004 was approximately $47,537,820 (based on the price
per share of $1.09, as determined by the Board of Directors on May 1, 2003,
in connection with a grant of stock options on May 1, 2003). Common stock
held by each current executive officer and director and by each person who is
known by the registrant to own 5% or more of the outstanding common stock has
been excluded from this computation in that such persons may be deemed to be
affiliates of the registrant. Share ownership information of certain persons
known by the registrant to own greater than 5% of the outstanding common stock
for purposes of the preceding calculation is based solely on information on the
registrant’s records and is as of June 30, 2004. This determination of affiliate
status is not a conclusive determination for other purposes.
 
 The
number of shares of common stock outstanding was 353,959,176 and the
number of shares of Series B  preferred
stock outstanding was 7,500,000, each as of March 15, 2005.
 ****
 **DOCUMENTS
INCORPORATED BY REFERENCE**
  Exhibits
previously filed as noted on the Exhibit Index.
  
 ****
 
 **VIEWSONIC
CORPORATION**
 **ANNUAL
REPORT ON FORM 10-K**
 **TABLE
OF CONTENTS**
 **Page
      No.****Part
      I**Item
      1.
    Business
    1Item
      2.
    Properties
    6Item
      3.
    Legal
      Proceedings
    7Item
      4.
    Submission
      of Matters to a Vote of Security Holders
    7**Part
      II**Item
      5.
    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
    7Item
      6.
    Selected
      Financial Data
    8Item
      7.
    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
    10Item
      7A.
    Quantitative
      and Qualitative Disclosures About Market Risk
    29Item
      8.
    Financial
      Statements and Supplementary Data
    30Item
      9.
    Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosures
    49Item
      9A.
    Controls
      and Procedures
    49Item
      9B.
    Other
      Information
    49**Part
      III**Item
      10.
    Directors
      and Executive Officers of the Registrant
    50Item
      11.
    Executive
      Compensation
    52Item
      12.
    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Transactions
    54Item
      13.
    Certain
      Relationships and Related Transactions
    55Item
      14.
    Principal
      Accountant Fees and Services
    56**Part
      IV**Item
      15.
    Exhibits
      and Financial Statement Schedules
    56Signatures
    58Exhibit
      Index
    59
  
 **FORWARD-LOOKING
STATEMENTS**
 
 This
report on Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are subject to the "safe harbor" created by those
sections. These forward-looking statements include but are not limited to:
statements related to industry trends and future growth in the markets for
visual display technology products; our product development efforts; the timing
of our introduction of new products; industry and consumer acceptance of our
products; and future profitability. Discussions containing these forward-looking
statements may be found in "Business" and "Management’s Discussion and Analysis
of Financial Condition and Results of Operations." These forward-looking
statements involve risks and uncertainties that could cause our actual results
to differ materially from those in the forward-looking statements. We undertake
no obligation to publicly release any revisions to the forward-looking
statements or reflect events or circumstances after the date of this document.
The "Business Risks" section, among other things, should be considered in
evaluating our prospects and future financial performance.
 
                               
 **Part
I**
 **Item
1.**  **Business**
 
 **Overview**
 
 ViewSonic
Corporation is a leading global provider of visual display technology products.
We develop, market and support a broad range of award winning visual display
technology products including liquid crystal displays (“LCD”) monitors, cathode
ray tube, or CRT, monitors, projectors, LCD TVs, plasma displays and the latest
in mobile products, including wireless displays. Our goal is to become one of
the world's leading brands of visual display technology products.
 
 According
to an International Data Corporation, or IDC, December 2004 research report, we
ranked seventh in worldwide LCD monitor shipments for the first three quarters
of 2004.
 
 Through a
technology integration business model, we collaborate with a network of
industry-leading software providers, key component suppliers and contract
manufacturers. Rather than depending upon a single proprietary technology, our
business model allows us to combine together industry leading technologies into
products marketed under the ViewSonic brand. We believe our model shortens the
time to market for our products by reducing the product development cycle. Our
extensive product lines offer a wide array of display sizes, features and
price/performance levels to meet customer needs.
 
 Our
products are sold through distributors, retailers and other resellers to
businesses, including Fortune 1000 companies, small and medium sized businesses,
and consumer electronics markets. We sell our products globally and are managed
geographically in three regional segments: the Americas, Europe and Asia
Pacific.
 
 We were
incorporated in the State of California as a S corporation in July 1987 and
reincorporated in the State of Delaware as a S corporation in August 1998.
In April 1999, we elected to convert from a S corporation to a
C corporation.
 
 **Industry
Background**
 
 According
to an IDC December 2004 research report, worldwide desktop monitor
shipments are expected to increase from 111 million units in 2003 to
155 million units in 2008. IDC estimates that total LCD monitor shipments
are expected to increase from 46 million units in 2003 to 127 million
units in 2008, while total CRT monitor shipments are expected to decrease from
65 million units in 2003 to 28 million in 2008. IDC estimates that
worldwide revenue from LCD monitors will increase from $21 billion in 2003
to $36 billion in 2008, while revenue from CRT monitors will decline from
$11 billion in 2003 to $3 billion in 2008.
 
 *LCD
Panel Development for Desktop Monitor Applications*
 
 The
display industry is currently experiencing a shift from CRT technology to flat
panel LCD technology in multiple applications, including desktop computing and
TV products. A significant increase in LCD manufacturing capacity in various
Asian countries has led to lower panel costs and larger panel sizes, enabling
more affordable LCD products for both desktop monitors and TV systems. The rapid
increase in the amount of LCD monitors bundled with PCs has also driven
adoption.
 
 *CRT
Monitor Trends*
 
 Although
the demand for CRTs is projected to decrease, its price advantage over LCDs
makes its demand continue to remain strong in emerging markets such as China,
Eastern Europe, and Latin America. In addition, in developed markets, CRTs are
still favored in certain market segments such as education, which are subject to
budget constraints, and high-end graphic design, due to the CRT's superior color
performance over LCDs. Furthermore, among the available CRT technologies, end
users generally favor flat screen CRTs instead of the more traditional curved
CRTs because flat CRTs reduce glare and are viewed as a cost effective
alternative to higher priced flat LCDs.
 
 *LCD
Panel Development for TV and Presentation Applications*
 
 The newer
and larger LCD panel fabrications allow LCD technology to be applied to TV
applications. As LCD panels become available in larger sizes, commercial
applications for LCD TVs are expected to grow. The commercial information
display market is expected to transition to large screen (30"+) LCD monitors and
TVs.
 
  1
 *TV
Industry Trends and
Opportunities*******
 
 In
addition to LCD TVs, plasma displays also present a high growth opportunity in
the overall market. Both LCD TVs and Plasma Displays are considered "Advanced
Televisions" due to their unique form factors. Of these key technologies, we
believe LCD TVs represent the highest growth opportunity for displays less than
40", while plasma displays present growth opportunities for screen sizes greater
than 40". While LCD TVs are for the consumer sector, Plasma displays have
applications for both consumer usage and commercial applications with growth
expected to occur in both end-user segments.
 
 Worldwide,
governments are supporting the growth of digital systems through a series of
mandates and deadlines to convert all analog transmission to digital. In the
United States, all TV stations must transmit digitally by 2007, while worldwide
deadlines for digital transmission range from 2007 to 2015. These regulatory
changes are being implemented to promote more efficient use of transmission
bandwidth than is currently provided by conventional analog TVs, freeing
broadcast spectrum for other purposes.
 
 *Front
Projector Trends and Opportunities*
 
 In
addition to traditional desktop displays, front projection technology has shown
rapid growth over the past several years, replacing traditional overhead
projectors as the presentation display of choice. Projectors offer several
distinct advantages that include portability and versatility. Today, multimedia
projectors deliver PC and video content for business or consumer use. In the
fourth quarter of 2004, retail prices for projectors broke the sub $800 barrier,
making them more affordable for mainstream users.
 
 **Products**
 
 We offer
a wide range of visual display technology products worldwide under the ViewSonic
brand name. Our product categories include: desktop CRT and LCD monitors, LCD
TVs, plasma displays, projectors, and peripherals such as TV/Video processors,
keyboards, mice and speakers. Each product category is targeted at specific
applications and offers a wide array of sizes and features over a broad range of
price and performance levels.
 
 **Product
Categories**
 
 We sell
two principal product categories: computer monitors and all other products, in
all three of our regional segments. Within computer monitors, we sell and market
both CRT and LCD monitors. Our other products include projectors, plasma
displays, and peripherals, as described in the table below. We believe that the
market for CRTs is currently in the mature stage of its life cycle trending
towards the decline stage. Our decrease in unit shipments of CRTs over the past
three years is consistent with the overall trends in the worldwide CRT market.
On the other hand, we believe that the market for LCDs is currently in the
growth stage of its life cycle and is expected to replace CRTs as the technology
of choice in the display market for the foreseeable future. Our increase in
LCD unit shipments over the past three years is in line with the overall trends
in the worldwide LCD market. Many of our other products, specifically LCD TVs
and plasma TVs, are currently in the introductory stage of their respective
product life cycle. The demand for these products at this stage is primarily
from early adopters, but is expected to grow. We believe that the LCD and plasma
TV categories represent opportunities for future growth. The following table
identifies our principal product categories as of December 31, 2004:
 
 **Product
      Type**
    **Series**
    **Size/**
      **Additional
      Attributes**Liquid
      Crystal Displays
    E2
    15”,
      17”Graphics
    15”
      through 19”X
    15”,
      17”, 19”, 20”Pro
    17”
      through 23”A
    15”,
      17”Liquid
      Crystal Display TVs
    N
    13”,
      17”, 20”, 27”, 30”, 32”, 40”Cathode
      Ray Tube Displays
    E2
    15”,
      17”, 19”Graphics
    17”,
      19”, 21”Pro
    17”,
      19”, 22”A
    17”,
      19”Projectors
    —
    Under
      3 Lbs. to 14+ Lbs.Plasma
      Displays
    VPW
    42”,
      55”Peripherals
      & Accessories
    KU,
      KC, KW, MC, MU, MW, CP, CC, CW
    TV/Video
      Processor, Keyboards, Mice, Speakers, Etc.Visual
      Devices
    V
    10”
      Wireless Displays
 **
 2
 *Desktop
LCD and CRT Monitors*
 
 ViewSonic
desktop monitors offer both LCD flat panel technology and CRT technology. We
design our products to meet the demanding requirements of sophisticated and
quality conscious end users. There are several series of products in each of our
desktop LCD and CRT monitor portfolios. Each series incorporates
price/performance characteristics targeted at key market segments.
 
 As a
percentage of our total unit shipments, LCD monitor shipments comprised 40.3%,
42.4% and 32.0% of our total unit shipments in 2004, 2003, and 2002,
respectively. CRT monitor shipments comprised 45.8%, 48.5% and 66.1% of our
total unit shipments in 2004, 2003 and 2002, respectively.
 
 The
market in which we compete is subject to technological advances with yearly new
product releases and price competition. As a result, the price at which we can
sell our product typically declines over the life of the product. The price at
which a product may be sold is generally referred to as the average selling
price. For example, the average selling price of our CRT monitors declined
approximately 23.2% from 2002 to 2004 and the average selling price of our LCD
monitors declined approximately 16.4% from 2002 to 2004.
 
 *Other
Products*
 
 Other
products comprised 13.9%, 9.2%, and 1.8% of our total unit shipments in 2004,
2003 and 2002, respectively.
 
 *TV
Products*
 
 We offer
both plasma and LCD TV products for the digital television market. Our LCD TV
product offerings include 13", 17", 20", 27", 30”, 32” and 40” products. Our
plasma products represent large size offerings (42" and 55") to support home
theater usage and commercial applications, including signage.
 
 *Projectors*
 
 We design
our projectors to meet the various needs of the presentation market which
include delivering clear images and ease-of-use at competitive prices. Our
projector line offers a wide range of form factors in various weight categories.
This segmentation helps end users select an appropriate model for usage on the
road, in the office, or at home.
 
 *Peripheral
Products*
 
 We offer
peripherals, including TV/Video processors, keyboards, mice and speakers, which
are designed to compliment the look and feel of ViewSonic display
products.
 
 *Visual
Devices*
 
 Visual devices are embedded solutions
that target system integrators and value-added resellers, or VARs.
 
 **Sales
and Marketing**
 
 We sell
our products through retail channels, distributors and through a variety of
reseller arrangements. We have no minimum purchase commitments or long-term
contracts with any of these third parties. As a result of our channel strategy,
our sales are focused on a small number of distributors and national retailers.
Our largest distributors are Ingram Micro Inc. and Tech Data Corporation,
which accounted for 14% and 13%, respectively, of our net sales in 2004, and 12%
and 11%, respectively, of our net sales in 2003 and 10% and 11%, respectively,
of our net sales in 2002.
 
 *Distributors*
 
 We use
distributors to ship our products to various resellers. We believe that with
product proliferation and increasingly complex technologies, resellers are
becoming more dependent on distributors to provide additional value-added
services. As a result, distributors increasingly are expanding their core
competencies beyond product distribution to include offerings such as
configuration, channel assembly, financial services, training, marketing
services, telemarketing and electronic commerce services. By providing these
additional services, we believe that distributors are obtaining greater
influence over the products selected by resellers.
 
 
  3
 *Resellers*
 
 We use
resellers to sell to end users, such as large corporate accounts, small to
mid-sized businesses and home users. We categorize our resellers as follows:
 
 *VARs.*VARs
  target businesses and add value by combining proprietary software and/or other
  integration support with off-the-shelf hardware and software.*Commercial
  or Enterprise Resellers*.    Commercial
  or enterprise resellers target and sell to Fortune 500 companies and provide
  worldwide, national and regional information technology configuration and
  support services.*Direct
  Marketing/e-Retailers*.    Direct
  marketing/e-Retailers target and sell to businesses and home users via direct
  mail catalogs, and telemarketing and online marketing/services. Our direct
  marketing/e-Retailers include CDW Logistics Inc., PC
  Connections, Inc., TigerDirect, Inc., Amazon.com, Inc., PCNation and
  Multiple Zones International, Inc.*Retailers*.    Retailers,
  such as computer superstore chains, consumer electronic stores and mass
  merchants, target and sell to the walk-in retail market through an extensive
  network of retail-store fronts. Our products are sold at CompUSA Inc.,
  Best Buy Co., Inc., Fry's Electronics, Inc., Office Depot, Inc., among
  others.*System
  Integrators*.    System
  integrators purchase individual components, including computer display
  products and assemble unbranded computer systems. Our system integrators'
  value proposition is to provide low-cost technology and services to a wide
  array of customers.*ViewSonic
  Online Sales*.    We
  leverage the Internet to market and drive demand for ViewSonic technology
  through our website and online stores. Our online store allows consumers to
  purchase many of our products directly from ViewSonic. Our store also allows
  end users to shop for ViewSonic products and buy them from our resellers
  through links on the ViewSonic website. Our sales
force supports sales opportunities through our worldwide network of channel
partners, corporate accounts and online stores. Our sales department is based in
Walnut, California with sales offices in the Americas, Europe and Asia Pacific.
  Our marketing
group generates demand, product sales and brand awareness throughout sales
channels, to corporate enterprise end users, and to consumers. In each worldwide
region, the marketing department works with the sales department to foster
channel development and product penetration.
 
 **End
User Support and Service**
 
 We offer
comprehensive service options for all customers, distributors, resellers,
retailers, system integrators, corporations, educators, governments and
consumers. Various support and service programs are tailored to meet each
region's demands. The ViewSonic support team is available to assist customers
via phone, fax, email and regular mail. In addition to a multi-language user
guide packed with each product, self-support is also available via a
user-friendly online interactive web tool on our website. Support is provided by
professional customer service representatives, technicians and engineers.
 
 Various
service options including repair, replacement, and advance replacement are
offered for most products in most parts of the world. Services options such as
extended warranty, express exchange, expedited repair and onsite repair are also
available for most of our products in many countries.
 
 **Sourcing
and Operations**
 
 Our
component sourcing and product development staff researches, develops and tests
the latest display technologies with our component suppliers and contract
manufacturers, and is charged with designing and developing the highest quality
display products at selected price points. We have established relationships
with multiple sources of display components and multiple display manufacturers,
and qualify additional component suppliers and contract manufacturers when
advantageous to us. We currently obtain display components from multiple
suppliers, including Hitachi, Intel, LG-Philips, Samsung, Quanta and Chi-Mei.
 
  4
 **Seasonality**
 
 Our
industry is largely focused on the consumer products market. Due to the
seasonality in this market, we typically expect to see stronger revenue growth
in the second half of the calendar year related to the back-to-school and
holiday seasons.
 
 **Manufacturing
and Logistics**
 
 We use
the services of several contract manufacturers including Coretronic Corporation,
Delta Electronics Inc., Hitachi America Ltd., Jean Company Ltd,
NanChang Nesonic Corporation, TechView International Technology, Inc., Sampo
Technology Corporation, and Top Victory Technology. In some instances, the
companies that develop and manufacture key technology components and the
companies that take these components and manufacture the finished products are
different divisions of large, integrated organizations, while, in other
instances, they are independent entities. Our contract manufacturers design the
electronic and mechanical systems of a display product around our choice of
major components and our specific industrial design. Aside from these major
specifications mandated by us, the contract manufacturers choose electronic and
mechanical solutions of standard design to reduce the development time,
engineering cost and procurement risk associated with more customized designs.
 
 ViewSonic's
global distribution centers are strategically located in the United States, Asia
Pacific and Europe. From our distribution centers, we ship to our channel
partners, which include the distribution, VAR and retail channels. Distribution
centers are operated by ViewSonic or, where appropriate, in conjunction with
third-party logistic partners.
  **Research
and Product Development**
 
 Our
product development efforts are focused on analyzing technology trends,
designing and developing standards-based, competitively priced products that
incorporate the technologies and features that we believe are most desired by
customers today and into the future. In addition, we collaborate with the
world's most advanced technology companies for research, development, and
engineering to evaluate the latest display and visual solutions related
technologies. Working with these companies, ViewSonic engineers integrate new
technologies, design product and system architectures, and manage quality.
 
 We
believe our cooperative approach allows ViewSonic to determine the best method
and timing for delivering new products and technologies to the market. Research
and development expense was $1.9 million, $8.2 million, and
$7.7 million for 2004, 2003 and 2002, respectively.
  ****
 **Competition**
 
 The
market for our display products is highly competitive. Competitive factors
include product features, price, product quality, breadth and reliability,
price/performance characteristics, end user support, marketing and channel
capability, as well as, corporate reputation and brand strength. We believe that
we compete favorably with respect to all of these factors in the monitor market.
However, we are a new entrant to the home entertainment market, and, therefore,
we are just beginning to establish our competitive position. Many of our
competitors in our markets have significantly greater financial, technical,
manufacturing and marketing resources than we have. We believe that competition
will have the effect of continually reducing the average selling prices of our
products over time. We expect price competition to increase in future periods
and such price competition may substantially reduce our revenues and profits in
such periods.
 
 Our
competitors include:
  Established
  consumer electronic companies such as Mitsubishi, Matsushita Electric
  Industrial Co., Ltd., RoyalPhilips
  Electronics of the Netherlands, Samsung Electronics Co., Ltd., Sharp
  Corporation and Sony Corporation;Personal
  computer manufacturers such as Dell Inc., Gateway and Hewlett-Packard
  Company; andAsian
  manufacturers interested in building a U.S. brand presence for their goods,
  such as Acer, BenQ, DaewooInternational
  Corporation, LG-Philips, Sampo Group (using the Syntax brand) and Chi-Mei
  (using theWestinghouse
  brand).
  5
 **Intellectual
Property**
 
 We rely
on a combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to protect our proprietary rights in our products. We
have no patented technology. We generally enter into confidentiality and
invention assignment agreements with our employees and contractors, and
nondisclosure agreements with our channel partners, suppliers and appropriate
end users to limit access to, and disclosure of, our proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy and use our products or technology. Policing unauthorized use of
our products is difficult. The steps we have taken may not prevent
misappropriation of our technology, particularly in countries where the laws may
not protect our proprietary rights as fully as in the United States.
 
 Third
parties currently claim and have in the past claimed patent infringement with
respect to our current products. We expect that additional infringement claims
will be made against display manufacturers as the market becomes more
competitive and mature. An infringement claim, whether meritorious or not, could
be time consuming, result in costly litigation, cause delays in product
availability or require us to utilize alternative technology, possibly of lower
quality or higher cost, or to enter into royalty or licensing agreements with
unfavorable terms.
 
 Our
registered trademarks, among others, include ViewSonic®, ViewSonic's distinctive
three bird logo, product names such as Optiquest® and key phrases such as "See
the Difference"®. Our registered trademarks expire between April 2005 and August
2014. We intend to continue to protect our trademarks against possible
intellectual property infringement.
 
 In the
future, it may be necessary or desirable for us to seek additional licenses of
intellectual property rights held by third parties. If the availability of these
third party technology licenses ceases, we may have to obtain substitute
technology of lower quality or performance standards or at a higher cost. There
can be no assurance that such licenses will continue to be available on
favorable terms or at all.
 
 **Backlog**
 
 There is
generally a short cycle between the order and shipment of our products and the
majority of our orders are cancelable at our customers' discretion. Therefore,
we do not believe that our backlog at any particular date is indicative of our
future net sales.
 
 **Employees**
 
 As of
December 31, 2004, we had 807 employees worldwide. None of our employees
are represented by a labor union, and we believe that our employee relations are
good.
 
 **Financial
Information by Business Segment and Geographic Data**
  We operate in
three segments: Americas, Europe and Asia Pacific. The information included in
Note 13 of Notes to the Consolidated Financial Statements, is incorporated
herein by reference from Item 8 thereof.
 
 **Item
2. Properties**
 
 **Americas**
 
 We lease
facilities in Walnut, California of approximately 300,000 usable square feet
that serve our corporate headquarters as well as a warehouse, testing and
after-sales service facility, under a lease that expires in June 2007. In
addition, we have sales offices in Atlanta, Georgia, Miami, Florida and in
Toronto, Canada.
 
 **Europe**
 
 In
Europe, we lease facilities in Crawley, West Sussex, United Kingdom that serve
as our European headquarters and provides space for northern Europe sales
operations and after sales service activity. This lease expires in 2012. In
addition, we lease space in Belgium, Denmark, Finland, France, Germany, Italy,
Norway, Russia, Spain, Sweden, and United Arab Emirates for marketing, sales and
after sales service operations.
  6
 **Asia
Pacific**
 
 In Asia
Pacific, we own a main office in Taiwan and lease offices in Shanghai, Guangzhou
and Beijing. We also lease warehouses in Shanghai, Beijing, Guangzhou, Chengdu
and Xi’an, Taoyuan, Taiwan and own an additional warehouse in Taipei, Taiwan. We
lease sales offices in Hong Kong, Kaoshiung, Taiwan, Singapore Tokyo, Japan and
Australia.
 
 We
believe our properties are adequately maintained and suitable for their intended
use and that our facilities have adequate capacity for our current needs.
 
 **Item
3. Legal Proceedings**
 
 In the
ordinary course of business, we are involved in lawsuits, claims,
investigations, proceedings, and threats of litigation consisting of
intellectual property, commercial, employment and other matters. In accordance
with SFAS No. 5, “Accounting for Contingencies”, we make a provision
for a liability when it is both probable that a liability has been incurred and
the amount of the loss can be reasonably estimated. These provisions are
reviewed at least quarterly and adjusted to reflect the impacts of negotiations,
settlements, rulings, advice of legal counsel and other information and events
pertaining to a particular case. Litigation is inherently unpredictable.
However, we believe that we have valid defenses with respect to the legal
matters pending against us, as well as adequate provisions for any probable and
estimable losses. While the outcome of these proceedings and claims cannot be
predicted with certainty, management does not believe that the outcome of any
pending legal matters will have a material adverse effect on our consolidated
financial position, although results of operations or cash flows could be
affected in a particular period.
 
 **Item
4. Submission of Matters to a Vote of Security Holders**
 
 No
matters were submitted for a vote of security holders during the fourth quarter
of 2004.
 
 **Part
II**
 
 **Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.**
  **Market
Information**
 
 There is
no public market for our common stock, preferred stock or stock options.
 
 **Holders**
 
 As of
March 1, 2005, there were 72 holders of record of our common stock and there was
one holder of record of our Series B preferred stock and warrants to
purchase Series C preferred stock. As of March 1, 2005, we had 499 holders
of stock options exercisable for shares of our common stock.
  ****
 **Dividends**
 
 There
were no cash dividends declared or paid in 2004, 2003 or 2002 and we do not
anticipate declaring cash dividends in the foreseeable future. ViewSonic
America's credit facility with The CIT Group/Business Credit, Inc. prohibits the
payment of dividends in excess of $250,000 per year without the consent of The
CIT Group/Business Credit, Inc.
 
 **Equity
Compensation Plan Information**
 
 We have
two stockholder approved equity compensation plans, the 1999 Stock Plan and the
2004 Equity Incentive Plan. Under the terms of the 1999 Stock Plan and the 2004
Equity Incentive Plan, officers, directors, consultants and our employees may be
granted options to purchase our common stock at the fair market value on the
date the option is granted as determined by our Board of Directors. Options
generally vest over three to four years and may be exercised for up to
10 years from the date of grant.
  7
 The
following table provides certain information regarding our equity incentive
plans as of December 31, 2004.
 **Plan
      Category**
    **Number
      of Securities to be**
      **Issued
      upon Exercise of**
      **Outstanding
      Options,**
      **Warrants
      and Rights**
      **(a)**
    **Weighted-Average**
      **Exercise
      Price of**
      **Outstanding**
      **Options,
      Warrants**
      **and
      Rights**
      **(b)**
    **Number
      of Securities**
      **Remaining
      Available for**
      **Future
      Issuance under**
      **Equity
      Compensation Plans**
      **(excluding
      Securities**
      **Reflected
      in Column (a))**
      **(c)**Equity
      compensation plans approved by security holders
    27,889,493
    $1.08
    15,092,674Equity
      compensation plans not approved by security holders
    —
    —
    —Total
    27,889,493
    $1.08
    15,092,674
 **Recent
Sales of Unregistered Securities**
 
 None.
 ****
 **Issuer
Repurchases of Equity Securities**
 
 None.
 
 **Item
6. Selected Financial Data**
 
 The
following selected financial data should be read in conjunction with our
financial statements and the notes thereto, and with "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The consolidated
statement of operations data for the years ended December 31, 2004,
December 31, 2003 and December 31, 2002 and the consolidated balance
sheet data as of December 31, 2004 and December 31, 2003 have been
derived from, and should be read in conjunction with, our audited consolidated
financial statements and the notes thereto included herein. The consolidated
statement of operations data for the years ended December 31, 2001 and
December 31, 2000 is derived from audited consolidated financial statements
and the notes thereto which are not included in this Form 10-K. The
consolidated balance sheet data as of December 31, 2002, December 31,
2001 and December 31, 2000 is derived from audited consolidated financial
statements and the notes thereto which are not included in this Form 10-K.
 8
  **Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000****(in
      thousands, except per share data)**Net
      sales
    $
    1,104,333
    
    $
    1,060,691
    
    $
    876,121
    
    $
    962,359
    
    $
    1,371,196Cost
      of sales
    
    995,177
    
    
    918,561
    
    
    739,799
    
    
    863,800
    
    
    1,216,749Gross
      profit
    
    109,156
    
    
    142,130
    
    
    136,322
    
    
    98,559
    
    
    154,447Selling,
      general and administrative expenses
    
    126,121
    
    
    133,820
    
    
    108,216
    
    
    116,352
    
    
    147,771(Loss)
      income from operations
    
    (16,965)
    
    
    8,310
    
    
    28,106
    
    
    (17,793)
    
    
    6,676Other
      income (expense)—net:Interest
      expense
    
    (2,473)
    
    
    (2,297)
    
    
    (2,614)
    
    
    (8,076)
    
    
    (9,336)Other
      income—net
    
    3,724
    
    
    3,655
    
    
    7,664
    
    
    9,441
    
    
    4,549Other
      income (expense)—net
    
    1,251
    
    
    1,358
    
    
    5,050
    
    
    1,365
    
    
    (4,787)(Loss)
      income from continuing operations before income taxes
    
    (15,714)
    
    
    9,668
    
    
    33,156
    
    
    (16,428)
    
    
    1,889(Benefit)
      provision for income taxes
    
    (3,293)
    
    
    2,333
    
    
    11,500
    
    
    558
    
    
    285(Loss)
      income from continuing operations
    
    (12,421)
    
    
    7,335
    
    
    21,656
    
    
    (16,986)
    
    
    1,604(Loss)
      from discontinued operations (1)
    
    (5,989)
    
    
    (2,853)
    
    
    (2,465)
    
    
    (847)
    
    
    —Gain
      on discontinued operations, net of tax (1)
    
    2,153
    
    
    —
    
    
    —
    
    
    —
    
    
    —Net
      (loss) income
    
    (16,257)
    
    
    4,482
    
    
    19,191
    
    
    (17,833)
    
    
    1,604Preferred
      stock accretion
    
    (1,372)
    
    
    (1,229)
    
    
    (1,078)
    
    
    (1,364)
    
    
    (865)Net
      (loss) income available to common stockholders
    $
    (17,629)
    
    $
    3,253
    
    $
    18,113
    
    $
    (19,197)
    
    $
    739Basic
      (loss) earnings per shareContinuing operations
    $
    (0.04)
    
    $
    0.02
    
    $
    0.06
    
    $
    (0.05)
    
    $
    —Discontinued operations (1)
    $
    (0.02)
    
    $
    (0.01)
    
    $
    (0.01)
    
    $
    —
    
    $
    —Gain (loss) on discontinued operations
    $
    0.01
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    —Total
      Basic (loss) earnings per share
    $
    (0.05)
    
    $
    0.01
    
    $
    0.05
    
    $
    (0.05)
    
    $
    —Diluted
      earnings (loss) per shareContinuing operations
    $
    (0.04)
    
    $
    0.02
    
    $
    0.06
    
    $
    (0.05)
    
    $
    —Discontinued operations (1)
    $
    (0.02)
    
    $
    (0.01)
    
    $
    (0.01)
    
    $
    —
    
    $
    —Gain on discontinued operations
    $
    0.01
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    —Total
      Diluted earnings (loss) per share
    $
    (0.05)
    
    $
    0.01
    
    $
    0.05
    
    $
    (0.05)
    
    $
    —Basic
      weighted average sharesoutstanding
    
    353,917
    
    
    353,891
    
    
    353,322
    
    
    342,799
    
    
    323,977Diluted
      weighted average sharesoutstanding
    
    353,917
    
    
    358,538
    
    
    362,344
    
    
    342,799
    
    
    323,977
 (1) Two
of our majority-owned subsidiaries were discontinued during 2004. (See Note 17
to the consolidated financial statements, which is incorporated herein by
reference).
 **Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000****(in
      thousands)****Balance
      Sheet Data:**Working
      capital
    $
    71,404
    
    $
    81,742
    
    $
    60,061
    
    $
    31,962
    
    $
    53,763Total
      assets
    $
    458,523
    
    $
    414,929
    
    $
    376,898
    
    $
    338,923
    
    $
    500,659Short-term
      debt
    $
    3,529
    
    $
    1,475
    
    $
    —
    
    $
    14,752
    
    $
    51,658Subordinated
      notes payable
    $
    43,000
    
    $
    43,000
    
    $
    43,000
    
    $
    43,000
    
    $
    63,000Convertible
      mandatorily redeemable preferred stock
    $
    13,428
    
    $
    12,056
    
    $
    10,828
    
    $
    11,242
    
    $
    9,878Stockholder's
      equity
    $
    46,967
    
    $
    64,707
    
    $
    52,609
    
    $
    26,840
    
    $
    28,828
 9
  **Item
7.**  **Management's
Discussion and Analysis of Financial Condition and Results of Operations**
 *Certain
statements contained in this Management's Discussion and Analysis including,
without limitation, statements containing the words "anticipate," "believe,"
"may," "should," "will" and similar expressions constitute "forward-looking
statements." Persons should not place undue reliance on these forward-looking
statements. Our actual results could differ materially from those anticipated in
these forward-looking statements for many reasons, including risks described in
Business—* **** *Factors
that May Affect Our Business and Financial Results* *and
elsewhere in this Form 10-K. The following discussion should be read in
conjunction with our financial statements and the related
notes.*
 
 **Overview**
 
 ***Our
Company***
  ViewSonic
Corporation is a leading global provider of visual display technology products.
We develop, market and support a broad range of display technology products
including liquid crystal displays, or LCD, monitors, cathode ray tube, or CRT,
monitors, projectors, LCD TVs, plasma displays and the latest in mobile products
including wireless monitors.
  Our ViewSonic
branded products are sold through distributors, retailers and other resellers to
businesses, including Fortune 1000 companies, small and medium sized businesses,
and consumer electronics markets. We sell our products globally and are managed
geographically in three regional segments: the Americas, Europe and Asia
Pacific.
  We were
incorporated in the State of California as a S corporation in July 1987. We
reincorporated in the State of Delaware as an S corporation in August 1998 and,
in April 1999, we elected to convert from a S corporation to a C corporation.
 
 ***Recent
Trends in Our Business***
  Fiscal year
2004 continued to be challenging for us and the display industry. Despite the
positive revenue growth during 2004, rapidly declining average selling prices
(“ASPs”) and volatility of supply negatively impacted our profitability. The
display industry was characterized by intense competition and significant price
fluctuations. The volatility in price and increased competition was intensified
by the inconsistent supply of key components, including LCD panels.
 
 For the
first half of 2004, the industry experienced a supply shortage of key LCD
products due to LCD panel shortages and the manufacturing capacity constraints
of contract manufacturers. These capacity constraints were due to contract
manufacturers allocating more of their production capacity to higher margin LCD
televisions, or LCD TVs, and computer notebooks, product categories where demand
was expected to grow at a high rate in the future. During this shortage
timeframe, our LCD panel costs experienced a rapid increase, resulting in an
increase in the average selling price of our LCD monitors.
 
 In the
second half 2004, the display industry saw a very rapid shift from a shortage of
display panels to one of oversupply, which continued through the end of 2004. We
believe this shift was primarily due to two factors. First, LCD TV and notebook
demand did not reach forecasted levels allowing for additional production
capacity of LCD displays, including LCD monitors. Second, a number of new LCD
fabrication facilities were opened. As a result, competition between LCD display
panel makers as well as LCD display panel availability increased much sooner
than we anticipated.
 
 Given the
shift in increased production and slower demand, we experienced a build up of
inventory as LCD panel prices began to decrease significantly during the third
quarter of 2004 and continued into the fourth quarter. The increase in LCD
display panel inventory coupled with weaker than expected demand caused rapidly
declining LCD monitor prices while the market cycled through existing, older and
higher cost inventory. **** As a
consequence, our average selling prices for LCD monitors decreased by 8.9% in
the second half of 2004 compared to the first half of 2004. As the market
adjusted to the new lower prices, we implemented strategies to sell our older
and higher cost inventory, including inventory write-downs and higher sales
incentives. As a result, our gross margins decreased during the second half of
the year. We expect the oversupply situation to continue into 2005 and put
continuous pressure on our gross margins.
 
 Overall,
we have observed the following trends relating to our business in 2004:
 
 *Product
shift.* The
display industry continues to experience a shift from older technologies, such
as CRT, to newer technologies, such as LCDs and plasma displays, as well as a
broadening of application from PC monitors to TVs and other digital media
applications. As a result, our product mix has been shifting from CRTs, where
demand has been steadily declining, to LCDs, where demand has been growing. CRT
unit shipments were 45.8% of our total units shipped in 2004 as compared to
48.5% in 2003, while LCD unit shipments were 40.3% of our total units shipped in
2004 as compared to 42.4% in 2003 due to the industry wide LCD shortage in the
first half of 2004.
 
 10
 *Shift
to large screen size.* The
display industry continues to experience a shift to larger screen sizes for
monitors and TV products. As a result, our product screen size mix has been
shifting in our LCD monitors from mainly 15” and 17” to 17” and 19” products. In
addition, a majority of our LCD TV sales are shifting to screen sizes greater
than 20”.
 
 *Other
products.* We
have taken steps to diversify our product portfolio by introducing products
other than CRT and LCD computer monitors such as projectors, LCD TVs, plasma
displays and the wireless displays. In general, these products are based on
newer technologies and have higher selling prices and therefore, have higher
gross margins. Our other product unit shipments were 13.9% of total units
shipped in 2004 as compared to 9.2% in 2003.
 
 ***Future
Objectives and Challenges***
 
 There are
several factors that we believe will drive and/or affect our future performance:
 
 ***Improve
Profitability:***
 
 *Concentrate
on our core products.* We
are working to improve profitability by refocusing our resources on our core
products. We are taking various initiatives to maintain and grow our LCD market
share. Specifically, we are reducing the number of product lines, utilizing a
common platform on our products, and eliminating unprofitable products.
 **
 *Efficient
supply chain and logistics.* ** We are
commencing an extensive review of our entire supply chain and logistics
processes. We are implementing initiatives to centralize our supply chain
management to allow greater flexibility in responding to changes in market
conditions. In addition, we are exploring other initiatives to consolidate
suppliers and logistics providers.
 
 *Cost
structure improvements* . We have
made efforts to improve profitability by reducing our overall operating expenses
in response to factors affecting earnings, such as declines in sales price
levels and changes in the product mix. Our business environment is being
transformed due to intense price competition. In this climate, we believe that
our ability to adapt to new competitive realities as early as possible will have
a significant bearing on our competitiveness.
 **
 *Expand
sales in regional markets.* We need
to continue to expand our presence in our existing regional markets, while
exploring new geographic market opportunities, and continue to develop and
market a broad range of display and related products which satisfy a wide range
of consumer and commercial applications. In our existing regional markets, we
need to continue to actively manage our relationships with our wholesale
distributors and national retailers as the majority of our net sales are
expected to continue to come from these sales channels. In our new regional
markets such as China, Russia, Eastern and Western Europe, we may need to make
significant investments before being able to realize returns on these
investments. These investments may result in expenses growing at a faster rate
than revenues.
 
 *Expand
core product offerings.* We have
introduced an expanded line of LCD TV products to complement our CRT and LCD
computer monitors. We believe that this product category will be an area of
opportunity for growth as LCD TVs become more widely accepted in the
marketplace. We need to continue to introduce new products that achieve broad
market acceptance on a timely basis, in order to increase or maintain our net
sales and gross margins.
 
 We
believe our future success will depend in large part upon our ability to:
 
 Identify
  demand trends in the business and home display markets and quickly develop and
  sell productsthat
  satisfy these demands;Manage
  our cost structure to enable us to bring new products to market at competitive
  prices;Respond
  effectively to new product announcements by our competitors by designing,
  either internally or through third parties, competitive products; andProvide
  compatibility and interoperability of our products with products offered by
  other vendors and new technologies as they emerge. 
 11
 ***Manage
Foreign Currency Fluctuations*** *.* We must
manage the effect of foreign currency fluctuations on our operational results.
We buy a majority of our products from our suppliers in U.S. Dollars and sell a
significant amount of our products in other foreign currencies. Historically,
sales of our products have benefited from effects of the weakness of the U.S.
Dollar, which made our products more affordable in several markets. We therefore
need to manage our account receivables and inventory balances in order to limit
our foreign currency exposure to a weakening U.S. Dollar.
 
 ***Manage
Relationships with Contract Manufacturers and Sales Channel Partners.*** Our
ability to effectively manage our inventory levels depends on our ability to
accurately anticipate demand from our sales channel partners and on our ability
to secure sufficient finished products from our contract manufacturers at
reasonable prices and in a timely manner to meet our customer demands.
 
 ***Manage
Imposition of Additional Duties and Taxes.*** Another challenge we face is the new tariff classification for LCD monitors that
incorporate a digital video interface (DVI connector). The European Union
countries with the exception of Germany have issued notices stating that
effective October 1, 2004, LCD monitors with DVI connectors would incur a 14%
import duty tax.  This change in tariff classification will make it
more difficult for us to compete in the European Union and will result in a
negative impact on our gross margins.    Thus far, this change in
classification has been applied prospectively.  However, we believe it is
possible that the tariff could be applied retroactively.  We will continue
to monitor this situation and will work to change our business process
to minimize the negative impacts of this new tariff.
 
 **Results
of Operations**
 
 *Net
Sales*
 
 We
generate revenues primarily from the sale of our visual display technology
products to our channel partners, including distributors, resellers and
retailers, as well as to end users. We sell to a geographically diversified
customer base with more than 44.7% of our revenue in 2004 generated outside of
the Americas, primarily in Europe and in Asia Pacific. We extend price
reductions and sales incentive offerings to our customers including price
protection, promotions, other volume-based sales incentives and expected
returns.
 
 Our
largest distributors are Ingram Micro Inc. and Tech Data Corporation, which
accounted for 14% and 13%, respectively, of our net sales in 2004, and 12% and
11%, respectively, of our net sales in 2003 and 10% and 11%, respectively, of
our net sales in 2002.
 
 *Cost
of Sales*
 
 Our cost
of sales consists primarily of cost of inventory purchased from our contract
manufacturers, manufacturing support costs, inventory provisions, warranty and
shipping costs. We maintain relationships with third-party contract
manufacturers, which we believe will be able to provide us with sufficient
quantities of product during 2005. However, we expect to continue to face price
fluctuations for our products. Fluctuations in gross profit as a percentage of
revenue, or gross margin, primarily result from changes in product mix and
geographic mix as well as general pricing dynamics.
 
 *Selling,
General and Administrative Expenses*
 
 Our
selling, general and administrative expenses consist primarily of salaries,
commissions and bonuses, promotional tradeshow and advertising expenses,
research and development, travel and entertainment expenses, and legal and
accounting expenses.
  **
 *Other
Income (Expense)-Net*
 
 Other
income (expense) - net primarily includes interest income, interest expense,
gains and losses on sales of investments and transaction related foreign
currency gains and losses.
 
 *Discontinued
Operations*
 
 The loss
for discontinued operations represents the net gain from the sale of a
majority-owned subsidiary, and the closure of another majority-owned subsidiary
during 2004.
 ****
 *Preferred
Stock Accretion*
 
 Preferred
stock accretion represents the accretion value of our Series B convertible
mandatorily redeemable preferred stock from its initial value to the redemption
price.
 
 12
 The
following table sets forth, for the periods indicated, our consolidated
statements of operations expressed as a percentage of net sales.
  **Year
      Ended December 31,****2004**
    **2003**
    **2002**Net
      sales
    
    100.0%
    
    100.0%
    
    100.0%Cost
      of sales
    
    90.1
    
    86.6
    
    84.4Gross
      profit
    
    9.9
    
    13.4
    
    15.6Selling,
      general and administrative expenses
    
    11.4
    
    12.6
    
    12.4(Loss)
      income from operations
    
    (1.5)
    
    0.8
    
    3.2Other
      income (expense) - net:Interest
      expense
    
    (0.2)
    
    (0.2)
    
    (0.3)Other
      Income
    
    0.3
    
    0.3
    
    0.9Other
      income - net
    
    0.1
    
    0.1
    
    0.6(Loss)
      income from continuing operations before income taxes
    
    (1.4)
    
    0.9
    
    3.8(Benefit)
      provision for income taxes
    
    (0.3)
    
    0.2
    
    1.3(Loss)
      income from continuing operations
    
    (1.1)
    
    0.7
    
    2.5(Loss)
      from discontinued operations
    
    (0.5)
    
    (0.3)
    
    (0.3)Net
      gain on disposal of discontinued operations, net of tax
    
    0.2
    
    0.0
    
    0.0Net
      (loss) income
    
    (1.4)
    
    0.4
    
    2.2Preferred
      stock accretion
    
    (0.1)
    
    (0.1)
    
    (0.1)Net
      Income (loss) available to common stockholders
    
    (1.5)%
    
    0.3%
    
    2.1%
 
  **Consolidated
Results of Operations—December 31, 2004 Compared to December 31, 2003**
 
 *Net
Sales*
 
 Net sales
increased $43.6 million, or 4.1%, to $1,104.3 million in 2004 from
$1,060.7 million in 2003. The increase was primarily due to an increase in
unit sales although we did experience a decline in the average selling price per
unit of approximately 2.8%. The decline in average selling price per unit
reflects the effects of competition, our pricing initiatives to compensate for
the oversupply of LCD panels **** and
reduced selling price associated with advances in display technology.
 
 We sold
approximately 4.5 million display products in 2004 compared to
approximately 4.0 million display products during 2003. The increase in
units sold was mainly due to continued expansion in China as well stronger unit
sales in Europe. Although, unit sales increased it was partially offset by
higher sales allowances in 2004 of $110.9 million compared to $81.7 million in
2003 due to aggressive promotions to meet competition. Due to the LCD product
oversupply situation in the second half of 2004, we increased the number of
sales allowance programs offered which resulted in increased sales allowances as
a percentage of net sales from 2003 to 2004. Of the display product units sold
in 2004, CRT accounted for 45.8%, LCD accounted for 40.3%, and other products
accounted for 13.9% as compared to 48.5%, 42.4%, and 9.2%, respectively, in
2003. Returns and sales incentive allowances charged against gross sales were
$126.9 million and $110.1 million in 2004 and 2003, respectively. As a
percentage of net sales, sales allowances increased from 7.7% in 2003 to 10.0%
in 2004 largely due to the increase in the number of sales allowances offered
during the LCD product oversupply period.
 
 *Cost
of Sales*
 
 Our
consolidated cost of sales increased $76.6 million, or 8.3%, to
$995.2 million in 2004 from $918.6 million in 2003. As a
percentage of net sales, cost of sales increased to 90.1% in 2004 from 86.6% in
2003 partially due to rapidly
decreasing average selling prices as we sold our higher cost inventory of LCD
panel displays in the third and fourth quarters of 2004, additional duty on
20” and above DVI connectors in the
Europe region of $3.0 million in 2004, and inventory write-downs of $9.8 million
in 2004 as compared to $9.5 million in 2003. The increase was partially
offset by $3.9 million of promotional pricing incentives from our vendors and
the forgiveness of a software royalty commitment of $1.7 million in the fourth
quarter of 2004. The inventory write-downs in 2004
were related to LCD products that experienced a drastic drop in product costs in
the third and fourth quarters of 2004. The written down inventory in 2004 and
2003 were either sold or abandoned within two or three months. In the subsequent
periods after the write-downs, the average product margins were reduced only
slightly due to little or no margin being earned on these written down
inventories. Overall, gross margin declined to 9.9% in 2004 from 13.4% in 2003.
 
 13
 *Selling,
General and Administrative Expenses*
 
 Selling,
general and administrative expenses decreased $7.7 million, or 5.8%, to
$126.1 million in 2004 from $133.8 million in 2003. The decrease was
primarily due to lower product development expenses of $5.2 million and lower
bad debt expense of $1.5 million due to a bad debt recovery of $1.1 million in
2004. In addition, in the fourth quarter of 2003, we incurred a charge of
$9.8 million due to the transfer of nine million shares by James Chu, our
Chairman of the Board and Chief Executive Officer and our majority stockholder,
to certain other stockholders in connection with the settlement of a stockholder
complaint. The decrease was partially offset by higher professional fees for
patent infringement lawsuits of $3.9 million and higher personnel costs of $6.1
million to support regional and product expansion and expenses related to the
translation effects of the strengthening of the Euro against the U.S. dollar in
the Europe region.
 
 *Other
Income - Net*
 
 Other
income - net was $1.3 million for 2004 compared to $1.4 million in 2003. The
primary reason for the decrease was due to lower foreign currency transaction
gains of $5.3 million in 2004 as compared to $6.0 million in 2003,
foreign currency option and forward contracts gains of $0 in 2004 as compared to
foreign currency option and forward contracts gains of $200,000 in 2003, and
interest expense of $2.5 million in 2004 as compared $2.3 million in 2003 as a
result of higher bank borrowings in Asia Pacific to fund operations. The option
contracts expired during 2003. In addition, investment losses of
$2.8 million in 2004 were lower as compared to losses of $3.7 million
in 2003.
 
 *Provision
for Income Taxes*
 
 Our
benefit for income taxes was $(3.3) million for 2004 compared to a provision for
income taxes of $2.3 million for 2003. Our effective tax rate decreased
from 24.1% provision for 2003 to a (20.9)% benefit for 2004. The decrease in the
provision for income taxes and the effective tax rate in the current year were
primarily driven by the significant decrease in pre-tax income in 2004 compared
to 2003. The change in the mix of domestic and foreign earnings also contributed
to the year-to-year variance in the effective tax rate.
 
 *Discontinued
Operations*
 
 The loss
from discontinued operations represents the gain on sale of a majority-owned
subsidiary in the third quarter of 2004 and the closure of another
majority-owned subsidiary during late 2004. See Note 17 of our Consolidated
Financial Statements under Item 8 for more information.
 
 **Consolidated
Results of Operations—December 31, 2003 Compared to December 31, 2002**
 
 *Net
Sales*
 
 Net sales
increased $184.6 million, or 21.1%, to $1,060.7 million in 2003 from
$876.1 million in 2002. The increase was primarily due to an increase in
unit sales, although we did experience a decline in the average selling price
per unit of approximately 7.5%. The decline in average selling price per unit
reflected the effects of competition, our pricing initiatives and reduced
product costs associated with advances in display technology.
 
 We sold
approximately four million display products in 2003 compared to
approximately three million display products during 2002. The increase in
units sold was mainly due to continued expansion in China as well as stronger
unit sales in Europe. The display industry does experience shortages of key
components and/or production capacity challenges from time to time. In 2003,
there was a significant amount of demand for LCD products relative to supply
among the display manufacturers. Due to this LCD product shortage, we reduced
the number of sales allowance programs offered which resulted in reduced sales
allowances as a percentage of net sales from 2002 to 2003. Of the display
product units sold in 2003, CRT accounted for 48.5%, LCD accounted for 42.4%,
and other products accounted for 9.2% as compared to 66.1%, 32.0%, and 1.8%,
respectively, in 2002. Returns and sales incentive allowances charged against
gross sales were $110.1 million and $104.0 million in 2003 and 2002,
respectively. As a percentage of net sales, sales allowances decreased by 1.8%
from 9.5% in 2002 to 7.7% in 2003 largely due to a reduction in the number of
sales allowances offered during the LCD product shortage period.
 
 14
 *Cost
of Sales*
 
 Our
consolidated cost of sales increased $178.8 million, or 24.2%, to $918.6 million
in 2003 from $739.8 million in 2002.  As a
percentage of net sales, cost of sales increased to 86.6% in 2003 from 84.4% in
2002 partially due to inventory write-downs of $9.5 million in 2003 as
compared to $20,000 in 2002. The inventory write-downs in 2003 were related to
new products such as Pocket PCs, Tablet PCs, the Digital Media Center and Smart
Displays that experienced lower than expected sales during 2003 and, as a
result, we wrote down the inventory values for these new products. In contrast,
the inventory write-downs in 2002 were lower than 2003 because we focused on
selling our core CRT and LCD monitor products for which we experienced steady
demand at prices in line with our inventory costs. As a result, fewer inventory
write-downs were required. The write-downs that were recorded in 2003 and 2002
were either sold or abandoned within two or three months. In the subsequent
periods after the write-downs, the average product margins were reduced only
slightly due to little or no margin being earned on the inventories written
down. In addition, we recorded a warranty expense of $1.2 million in 2003
as compared to a warranty benefit of $13.3 million in 2002. The warranty
benefit realized in 2002 was primarily due to the implementation of our supplier
managed repair program. Overall, gross margin declined to 13.4% in 2003 from
15.6% in 2002.
 
 *Selling,
General and Administrative Expenses*
 
 Selling,
general and administrative expenses increased $25.6 million, or 23.7%, to
$133.8 million in 2003 from $108.2 million in 2002. The increase was
primarily due to additional personnel costs of $8.8 million and advertising
costs of $4.3 million incurred to support regional and product expansion
and expenses related to the translation effects of the strengthening of the Euro
against the U.S. dollar in the Europe region. In addition, in the fourth quarter
of 2003 we incurred a charge of $9.8 million due to the transfer of nine
million shares by James Chu, our Chairman of the Board and Chief Executive
Officer and our majority stockholder, to certain other stockholders in
connection with the settlement of a stockholder complaint.
 
 *Other
Income - Net*
 
 Other
income - net was $1.4 million for 2003 compared to $5.1 million in 2002.
The primary reason for the decrease was due to investment losses of
$3.7 million in 2003 as compared to investment gains of $5.7 million
in 2002. The decrease in 2003 was partially offset by foreign currency option
and forward contracts gains of $200,000 in 2003 compared to foreign currency
option and forward contract losses of approximately $3.2 million in 2002.
These contracts expired during 2003. In addition, the decrease was partially
offset by foreign currency transaction gains of $6.0 million in 2003
compared to foreign currency transaction gains of approximately
$3.2 million in 2002.
 
 *Provision
for Income Taxes*
 
 Our
provision for income tax was $2.3 million for 2003 compared to a provision for
income tax of $11.5 million for 2002. Our effective tax rate decreased from
34.7% provision for 2002 to 24.1% provision for 2003. The decrease in the
provision for income taxes and the effective tax rate in the current year were
primarily driven by the significant decrease in pre-tax income compared to 2002
and the utilization of foreign net operating loss carryforwards in 2003 for
which no tax benefit had previously been provided.
 
 *Discontinued
Operations*
  The loss
from discontinued operations represents the operations of two majority-owned
subsidiaries. See Note 17 of Consolidated Financial Statements under Item 8 for
more information.
 
 15
 **Segment
Information**
 
 Our
management evaluates and monitors segment performance primarily through net
sales and income (loss) from operations. Management believes that this segment
information provides useful information for analyzing the underlying business
results.
 **Year
      Ended December 31,****2004**
    
    **Percentage**
      **Increase/(Decrease)**
    
    **2003**
    **Percentage**
      **Increase/(Decrease)**
    
    **2002****(in
      thousands)**Net
      sales:Americas
    $
    610,644
    
    
    (8.2)%
    
    $
    665,450
    
    8.5%
    
    $
    613,090Europe
    
    237,727
    
    
    32.1%
    
    
    179,909
    
    42.8%
    
    
    126,009Asia
      Pacific
    
    255,962
    
    
    18.8%
    
    
    215,332
    
    57.2%
    
    
    137,022$
    1,104,333
    
    
    4.1%
    
    $
    1,060,691
    
    21.1%
    
    $
    876,121Income
      (loss) from operations:Americas
    $
    (9,510
    )
    
    (250.4)%
    
    $
    6,320
    
    (74.2)%
    
    $
    24,498Europe
    
    (502
    )
    
    (105.5)%
    
    
    9,010
    
    169.3%
    
    
    3,346Asia
      Pacific
    
    (6,953
    )
    
    (349.2)%
    
    
    2,790
    
    964.8%
    
    
    262Stockholders'
      complaint settlement
    
    —
    
    
    100%
    
    
    (9,810)
    
    —
    
    
    —$
    (16,965
    )
    
    (304.1)%
    
    $
    8,310
    
    (70.4)%
    
    $
    28,106
 **December 31,
2004 Compared to December 31, 2003**
 
 **Americas**
 
 *Net
Sales*
 
 The
decrease in net sales in the Americas was primarily due to lower unit sales
across the LCD and CRT products combined with rapidly declining average selling
prices in the second half of 2004 and the weakening of demand. Net sales in the
Americas were also negatively impacted by higher sales allowances in 2004
compared to 2003 due to aggressive promotions to meet the competition. The
decrease was partially offset by lower product returns in 2004 compared to
2003.
  *Income
(loss) from Operations*
 
 The
decrease in income from operations in the Americas was partially due to rapidly
decreasing average selling prices as we sold our higher cost inventory of LCD
panel displays in the third and fourth quarters of 2004 and higher
personnel related expenses in support of our marketing and operational efforts
to increase current markets and expand into new product categories. This
decrease was partially offset by lower advertising and marketing expenses, the
recovery of a bad debt and the promotional pricing incentives from our vendors
in 2004.
 
 **Europe**
 
 *Net
Sales*
 
 The
increase in net sales in Europe was primarily due to the region's continued
expansion in the United Kingdom, France, Benelux and Russia partially offset by
a decrease in net sales in Eastern Europe, the Middle East and the
Mediterranean. In addition, the strengthening of the Euro against the U.S.
dollar was a major contributor to the overall increase in net sales. In
addition, net sales increased due to the shift in the product mix to larger
screen sizes and from the shift in the ratio of sales from CRT to LCD products.
However, net sales were partially offset by higher sales allowance and product
returns in 2004 compared to 2003 due to aggressive promotion to meet the
competition.
 
 *Income
(loss) from Operations*
 
 The
decrease in income from operations in Europe was partially due to higher
inventory write-downs in 2004 compared to 2003, higher warranty expense in 2004
compared to 2003, and the additional duty on monitors larger than 20” with DVI
connectors in 2004. The decrease was partially offset by the effects of the
improvements in the Euro against the U.S. dollar resulting in higher Euro list
prices relative to cost of goods sold in the U.S. dollar, and promotional pricing incentives from our vendors recorded
in 2004. Selling, general and administrative expenses increased in 2004 from
2003 primarily as a result of the strengthening of the Euro against the U.S.
dollar and from higher advertising and marketing expenses and higher personnel
related expenses to support increased marketing efforts in additional markets.
 
 16
 **Asia
Pacific**
 
 *Net
Sales*
 
 The
primary reason for the increase in net sales in Asia Pacific was our continued
expansion into the China market. Net sales also increased due to higher unit
sales in Taiwan and emerging markets such as Australia, New Zealand and
Southeast Asia. The increase in unit sales was a result of expanding our
customer base. However, net sales were partially offset by higher sales
allowance in 2004 compared to 2003 due to aggressive promotion to meet the
competition.
 
 *Income
(loss) from Operations*
 
 The
decrease in income from operations in Asia Pacific was partially due to rapidly
decreasing average selling prices as we sold our higher cost inventory of LCD
panel displays in the third and fourth quarters of 2004 and higher inventory
write-downs. The decrease is also due to higher
advertising and marketing expenses and higher personnel related costs related to
supporting the increasing marketing efforts in China and increased staffing
levels. The decrease was partially offset by promotional pricing incentives from our vendors recorded
in 2004.
 
 **December 31,
2003 Compared to December 31, 2002**
 
 **Americas**
 
 *Net
Sales*
 
 The
increase in net sales in the Americas was primarily due to higher unit sales
across the LCD and other product lines such as LCD TVs, plasma displays,
wireless displays, Pocket PCs, high definition LCDs, and new products, which was
partially offset by the decrease in sales of CRT products. Net sales also
increased due to the shift in the product mix to higher priced products such as
plasma displays and projectors and the shift in the ratio of sales from CRT to
LCD products. From time to time, the display industry experiences shortages of
key components and/or production capacity challenges. In 2003, there was a
significant amount of demand for LCD products relative to supply among the
display manufacturers. Due to the shortage of key LCD products during the later
part of 2003, we reduced the number of sales allowance programs offered, which
resulted in a reduction of sales allowances from the prior year.
 
 *Income
(loss) from Operations*
 
 The
decrease in income from operations in the Americas was partially due to
additional warranty expense in 2003 compared to a benefit in 2002 and higher
inventory write-downs related to other products in 2003. The decrease was also
attributable to higher advertising and marketing expenses and higher personnel
related expenses due an increase in advertising efforts related to our new
product categories and increased staffing to support our higher volumes.
 
 **Europe**
 
 *Net
Sales*
 
 The
increase in net sales in Europe was primarily due to the region's continued
expansion in Russia, Norway, France, the United Kingdom, certain Mediterranean
countries and the Middle East. In addition, the strengthening of the Euro
against the U.S. Dollar was a major contributor to the overall increase in net
sales. In addition, net sales increased due to the shift in the product mix to
larger screen sizes and higher priced products such as projectors and from the
shift in the ratio of sales from CRT to LCD products.
 
 *Income
(loss) from Operations*
 
 The
increase in income from operations in Europe was partially due to the effects of
the improvements in the Euro against the U.S. Dollar resulting in higher Euro
list prices relative to cost of goods sold in the U.S., offset by higher
inventory write-downs in 2003 compared to 2002. In addition, no warranty
benefits were recorded in 2003 compared to a warranty benefit in 2002. Selling,
general and administrative expenses increased in 2003 from 2002 primarily as a
result of the strengthening of the Euro against the U.S. Dollar. In addition,
the dollar increases came from higher advertising and marketing expenses and
higher personnel related expenses to support increased marketing efforts in
additional markets.
 
  17
 **Asia
Pacific**
 
 *Net
Sales*
 
 The
primary reason for the increase in net sales in Asia Pacific was our continued
expansion into the China market. Net sales also increased due to higher unit
sales in Taiwan and emerging markets such as Australia, New Zealand and
Southeast Asia. The increase in unit sales was a result of expanding our
customer base as well as increasing unit sales of new product categories such as
LCD TVs, plasma displays, wireless displays, Tablet PCs, Pocket PCs and other
new products.
 
 *Income
(loss) from Operations*
 
 The
decrease in loss from operations in Asia Pacific was partially due to faster
growth in the China market partially offset by higher advertising and marketing
expenses and higher personnel related costs related to supporting the increasing
marketing efforts in China and increased staffing levels.
 
 **Liquidity
and Capital Resources**
 
 **Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****(in
      thousands)**Net
      cash provided by operating activities
    $
    9,778
    
    $
    21,199
    
    $
    42,185Net
      cash provided by (used in) investing activities
    $
    1,909
    
    $
    (1,570)
    
    $
    2,509Net
      cash provided by (used in) financing activities
    $
    2,099
    
    $
    1,488
    
    $
    (10,157)Net
      increase in cash and cash equivalents
    $
    13,786
    
    $
    21,117
    
    $
    34,537
 
 Since our
inception, we have financed our growth and cash needs largely through cash from
operations, issuance of stock and borrowings. As of December 31, 2004, we
had cash, cash equivalents and short-term investments of $102.8 million.
Our cash balances are held in numerous locations throughout the world. Most of
the amounts held outside the United States could be repatriated to the United
States, but, under current law, would be subject to United States federal income
taxes, less applicable foreign tax credits. In certain countries, foreign
exchange limitations limit the amount of cash that can be repatriated. We have
accounted for the United States federal tax liability on these amounts for
financial statement purposes except for foreign earnings that are considered
indefinitely reinvested outside the United States. Repatriation could result in
additional United States federal income tax payments in future years. Where
local restrictions prevent an efficient inter-company transfer of funds, our
intent is that cash balances would remain in the foreign country and we would
meet United States liquidity needs through ongoing cash flows from operations,
external borrowings, or both. We utilize a variety of tax planning and financing
strategies in an effort to ensure that our worldwide cash is available in the
locations in which it is needed. We expect to meet expected and unexpected cash
flow needs by accessing our credit lines in the Americas, Europe and Asia
Pacific.
 
 In
October 2004, the “American Jobs Creation Act of 2004” was passed.  We are
currently assessing the impact of this law on our operations and expect this
assessment to be completed by December 31, 2005, particularly relative to
provisions on repatriation of foreign earnings.  We do not expect this act
to have a material impact on our financial position or results of
operations.
 
 *Operating
Activities*
 
 Cash flow
provided by operating activities was $9.8 million in 2004, $21.2 million in
2003 and $42.2 million in 2002. The decrease in net cash provided by operations
in 2004 compared to 2003 resulted primarily from the loss from continuing
operations incurred of $12.4 million from continuing operations in 2004 compared
to income from continuing operations of $7.3 million in 2003 as well as an
increase in inventory partially offset by a large increase in accounts payable
and accrued promotional expenses. The decrease in net cash provided by
operations in 2003 compared to 2002 resulted primarily from lower earnings in
2003 compared to 2002 as well as an increase in accounts receivable and
inventory partially offset by an increase in accounts payable.
 
 Accounts
receivable increased $22.4 million to $153.2 million at
December 31, 2004 from $130.8 million at December 31, 2003 due to a
4.1% increase in net sales over 2003 and days sales outstanding increased to
46 days at December 31, 2004 compared to 41 days at
December 31, 2003. Accounts receivable increased $21.7 million to
$130.8 million at December 31, 2003 from $109.1 million at
December 31, 2002 primarily due to a 21.0% increase in net sales over 2002.
Days sales outstanding improved to 41 days at December 31, 2003
compared to 44 days at December 31, 2002. We currently do not factor
our receivables. As of December 31, 2004 we had no major collection or
billing problems that had not already been accounted for in our allowance for
doubtful accounts. Payment terms vary by geographic location and in some cases a
cash discount option is offered in addition to the standard payment terms. We
have not materially changed our payment terms or delinquency policies between
2002 and 2004.
 
 18
 Inventories
increased $22.4 million to $148.2 million at December 31, 2004 compared to
$125.8 million at December 31, 2003. The increase was primarily due to
the build up of inventory to meet our higher level of sales in 2004 compared to
2003 as well as selling through higher cost inventory. As a result, our
inventory turns decreased to seven times during 2004 from eight times during
2003. Inventories
increased $7.5 million to $125.8 million at December 31, 2003
compared to $118.3 million at December 31, 2002. The increase was
primarily due to the build up of inventory to meet our higher level of sales in
2003 compared to 2002. Despite the increase in inventory levels, our inventory
turns improved to eight times during 2003 from seven times during
2002.
 
 Accounts
payable increased approximately $47.6 million to $281.6 million at
December 31, 2004 compared to $234.0 million at December 31,
2003. The increase was largely due to the increase in inventory balances and
timing of our payments to our suppliers. Accounts payable increased
approximately $17.7 million to $234.0 million at December 31,
2003 compared to $216.3 million at December 31, 2002. The increase was
largely due to the increase in inventory balances and timing of our payments to
our suppliers.
 
 *Investing
Activities*
 
 Cash flow
provided by investing activities was $1.9 million and $2.5 million in 2004
and 2002, respectively compared to cash flow used in investing activities of
$1.6 million in 2003. The primary reason for the variance between periods was
the timing of sales and purchases of investments and the impact of discontinued
operations.
 
 *Financing
Activities*
 
 Cash flow
provided by financing activities was $2.1 million and $1.5 in 2004 and
2003, respectively compared to cash flow used in financing activities of
$10.2 million in 2002. The primary reason for the variance between 2004 and
2003 was the higher increase of net bank borrowings in 2004 compared 2003 to
fund operations in Asia Pacific. The primary reason for the variance between
2003 and 2002 was the net increase of bank borrowings in 2003 compared to a net
decrease of bank borrowings in 2002 to fund operations in Asia Pacific. The
variance was also due to the issuance of common stock, preferred stock and
warrants in 2002.
 
 **Contractual
Obligations and Commitments**
 
 At
December 31, 2004, we had contractual obligations and commercial
commitments of $71.2 million as shown in the table below. The table below
excludes obligations related to accounts payable and accrued liabilities
incurred in the ordinary course of business.
 **Payments
      due by period****Contractual
      Obligations**
    **Total**
    
    **Less
      than**
      **1
      year**
    
    **1-3
      years**
    
    **3-5
      years**
    
    **More
      than**
      **5
      years****(in
      thousands)**Operating
      lease obligations
    $
    4,016
    
    $
    1,725
    
    $
    2,276
    
    $
    15
    
    $
    —Bank
      borrowings
    
    3,529
    
    
    3,529
    
    
    —
    
    
    —
    
    
    —Subordinated
      notes payable (1)
    
    48,619
    
    
    1,707
    
    
    46,912
    
    
    —
    
    
    —Preferred
      stock mandatory redemption
    
    15,000
    
    
    —
    
    
    15,000
    
    
    —
    
    
    —Total
    $
    71,164
    
    $
    6,961
    
    $
    64,188
    
    $
    15
    
    $
    —
 
 (1)  Includes
interest payable of $1.7 million and $3.9 million for the respective periods
presented above.
 
 **Credit
Facilities**
 
 Effective March
16, 2005, we renewed our $50.0 million line of credit with CIT
Group/Business Credit, Inc. with a new $60.0 million credit line that
expires in March 2008. Advances bear interest at the prime rate plus 0.75% (5.9%
at December 31, 2004) with interest payable monthly. As of
December 31, 2004 and 2003, there was no outstanding balance on the line of
credit. All advances under the agreement are collateralized by substantially all
of the assets of ViewSonic America. In June 2004, ViewSonic Europe Limited
entered into a $20.0 million line of credit facility with Burdale
Financial Limited. This line of credit is secured by trade receivables and
inventory of ViewSonic Europe Limited. Advances bare interest at Libor plus a
margin. There were no borrowings against this facility as of December 31,
2004.  Certain
of our other international subsidiaries also have separate lines of credit,
which are secured by certain of their assets. As of December 31, 2004 and
2003, an aggregate of $3.5 million and $1.5 was outstanding under these
credit facilities.
 
 19
 **Off-Balance
Sheet Arrangements**
 
 At
December 31, 2004 and 2003, we did not have any off-balance sheet
arrangements or relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
variable interest entities, which are typically established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
 
 **Seasonality**
 
 The
market for our products historically has experienced seasonal shifts in demand
due to changes in buying patterns by our customers. Buying patterns vary
geographically, and the impact on our operating results in a given period may
vary depending on our actual or anticipated level of activity in the relevant
region. We generally experience a decline in net sales from the first quarter to
the second quarter of each year and we tend to experience the highest net sales
in the fourth quarter of the year due to a strong buying season in the fourth
quarter by large wholesale distribution partners and retailers due to the
holiday season in the Americas. For the years 2003 through 2004, the average
range of decline in net sales from the first quarter to the second quarter has
been 10.8%. Our seasonality is moderated through slightly different seasonal
variations in the three regions.
 
 **Operating
Capital and Capital Expenditure Requirements**
 
 We
believe that our existing cash balances, credit facilities and anticipated cash
flows from operations will be sufficient to meet our operating, acquisition and
capital requirements for at least the next 12 months. However, there is no
assurance that we will not need to raise additional equity or debt financing
within this time frame. We also may require additional capital for other
purposes not presently contemplated. If we are unable to obtain sufficient
capital, we could be required to curtail capital equipment purchases or research
and development expenditures, which could harm our business. Factors that could
affect our cash used or generated from operations and, as a result, our need to
seek additional borrowings or capital include:
 Decreased
  demand and market acceptance for our products;Inability
  to successfully develop our next-generation products;Competitive
  pressures resulting in lower than expected average selling prices; andNew
  product announcements or product introductions by our
competitors.
 **Critical
Accounting Policies and Estimates**
 
 *General*
 
 Management's
Discussion and Analysis of Financial Condition and Results of Operations are
based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Management has discussed the development, selection and
disclosure of these estimates with the Audit Committee of our Board of
Directors. Actual results may differ from these estimates under different
assumptions or conditions.
 
 An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at the
time the estimate is made, and if different estimates that reasonably could have
been used, or changes in the accounting estimates that are reasonably likely to
occur periodically, could materially impact the financial statements. Management
believes the following critical accounting policies reflect its more significant
estimates and assumptions used in the preparation of the consolidated financial
statements.
 
  20
 *Revenue
Recognition and Promotional Expenses*
 
 Revenues
are recognized when products are shipped and risk of loss is transferred,
evidence of an arrangement exists, the price is fixed or readily determinable,
and collectability is probable. We extend rights of return to our customers,
which are accrued for based on estimated future returns determined by using
estimates and historical experience.
 
 We record
estimated reductions to revenue for customer and distributor programs and
incentive offerings, including price protection, rebates, promotions, other
volume-based incentives and expected returns. Future market conditions and
product transitions may require us to take actions to increase customer
incentive offerings, possibly resulting in an incremental reduction of revenue
at the time the incentive is offered. Additionally, certain incentive programs
require us to estimate, based on historical experience, the number of customers
who will actually redeem the incentive.
 
 In
accordance with EITF 01-9, *Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products* ), we
estimate our promotions based on our historical experience and consider these
sales allowances reasonably estimable and as such we record these sales
allowances as a reduction of our revenue in our statement of operations. We
offer sales allowance programs, which can generally be categorized as rebates,
price protection and other "meet the competition" discounts ( *i.e.,* discounts offered to meet our competition's prices on comparable products). We
consider these sales incentives to be an adjustment of the selling price to our
customers. In accordance with EITF 01-9, we recognize the maximum potential
liability for our sales promotions in our statement of operations unless the
estimated liability can be reduced based on relevant historical experience. We
monitor our various sales incentive programs by customer on a monthly basis and
assess the adequacy of our accruals for such programs as necessary. Over the
past three years, such programs have averaged 9.1% of our net sales per year.
Therefore, if our estimates were understated by 1% for 2004, the negative impact
to our net sales would approximate $12.2 million. As a percentage of net
sales, sales allowances increased by 2.3% from 7.7% in 2003 to 10.0% in 2004
largely due to a reduction in the number of sales allowances offered during the
LCD product shortage period in 2003.
 
 We
estimate returns allowances based upon our historical experience. With regard to
returns, the primary factors affecting our estimates include the estimated
return rate and the number of units shipped that still have a specified right of
return as of the balance sheet date. During the last three years, our customer
returns have approximated 2.2% of net sales.
 
 *Allowance
for Doubtful Accounts*
 
 Our
allowance for doubtful accounts is determined using an analysis to determine
whether the balance of the account sufficiently adjusts the accounts receivable
balance to its net realizable value. The analysis consists of applying a
historical write-off percentage against the accounts receivable aging balance to
determine whether the allowance for doubtful accounts balance is sufficient to
cover expected future write-offs. We maintain an allowance for all customers
based on a variety of factors, including the length of time receivables are past
due, trends in overall rating of the total portfolio, macroeconomic conditions,
significant one-time events and historical experience. Also, we record
additional allowance for individual accounts when we become aware of a
customer's inability to meet its financial obligations to us, such as in the
case of bankruptcy filings or deterioration in the customer's operating results
or financial position. If circumstances related to customers change, our
estimates of the recoverability of receivables would be further adjusted. If our
estimates for future bad debts are higher than recorded, this could result in
higher bad debt expenses.
  
 Historically
our allowance for doubtful accounts has represented less than 3.0% of our gross
receivables and the only significant past losses or write-offs have resulted
from customer bankruptcies. We monitor customer credit limits on a monthly basis
and review historical payment history. As of December 31, 2004, we had
recorded $153.2 million in net accounts receivable and our write-offs subsequent
to that date have been in line with our historical experience.
 
 *Inventory
Valuation*
 
 Our
inventory is stated at the lower of cost or market. Adjustments to inventory are
made via specific identification for estimated excess, obsolete or impaired
balances, to reflect inventory at the lower of cost or market. Factors
influencing these adjustments include: changes in demand, rapid technological
changes, product life cycle and development plans, component cost trends,
product pricing, physical deterioration and quality issues. Revisions to these
adjustments would be required if any of these factors differ from our estimates.
 
 If we are
unable to properly monitor and manage our sales channel inventory and maintain
an appropriate level and mix of products with our customers, we may experience
inventory losses. On a monthly basis, we review the amount of inventory in the
various sales channels, sales forecasts, and historical trends such as sell
through activity as well as price trends and other relevant data. Based upon
this market information, we adjust our related inventory values. Major changes
in inventory values usually relate to technological changes and market
acceptance of new products, which are difficult to predict. Our inventory
write-downs as a percentage of cost of sales have averaged approximately 1% for
the years ended December 31, 2004, 2003 and 2002.
 
 21
 We have
short-term purchase commitments for materials and supplies as part of the normal
course of business. Any commitments to purchase inventory at above-market prices
have been reserved. The total amount reserved under these commitments was $0
million and $3.4 million as of December 31, 2004 and 2003, and is
included as part of other accrued expenses.
 
 *Promotional
Pricing Incentives from our Vendors*
 
 We
receive promotional pricing incentives from several of our product vendors. The
amount of the pricing incentives is based on the volatility of the price on our
key product components and the quantity of historical purchases of these
components from such vendors. The pricing incentives have no impact on future
component purchases from these vendors. We record the reimbursement from our
vendors for these promotional pricing incentives when we are released of the
legal liability for the payment of the product purchases by our vendors.
Promotional pricing incentives from our vendors totaled $3.9 million, $0 and $0
in 2004, 2003, and 2002, respectively.
 
 *Warranty
Provision*
 
 We
provide product warranty programs on a worldwide basis that vary in term from 12
to 36 months. The length of the warranty period and the specific warranty
coverage are based on the type of product. We accrue for estimated warranty
costs at the time the product is sold, and such amounts are based upon
historical experience. The historical data that determines the warranty accrual
and the overall estimate of the warranty reserve includes the following key
factors: net cost of repair (repair costs less reimbursements from suppliers),
defective rates, and total number of products under warranty. If our estimates
for net cost of repair and defective rates are higher than recorded, this could
result in higher future warranty expenses.
 
 Prior to
late 2001, we internally managed our warranty program; however, our program
costs were greater than the amount we were reimbursed by our contract
manufacturers. In late 2001, we introduced the supplier managed repair program,
or SMRP, under which we outsourced our repair process. The program has reduced
our overall costs for warranty repair. In late 2001, we also increased our
collection efforts with regard to reimbursements from our contract
manufacturers, which decreased our warranty reserve. Under SMRP, warranted units
are repaired by third-party repair centers, who are able to utilize their
operating efficiencies to perform our warranty repairs at a lower cost than we
have historically been able. The repair centers are directly reimbursed by our
contract manufacturers. As a result, our average cost of warranty repairs were
lower in 2003 than in 2002 and were lower in 2004 than in 2003. Further, the
SMRP was adopted retroactively and, therefore, we were able to reduce our
warranty reserve in 2002 and decrease our warranty expense accrual, resulting in
a benefit of $13.3 million in 2002. Warranty
expense has averaged 1% of net sales over the past two years.
 
 *Patent
Litigation Expenses*
 
 There are
certain claims against us that are related to patent infringement cases. We
accrue for these claims whenever we determine an unfavorable outcome is
probable. The amount of the accrual is estimated based on each individual claim,
including past history with the vendor and type of claim.
 **
 *Long-Term
Investments*
 
 For our
publicly-traded investments, we follow SFAS No. 115, *Accounting
for Certain Investments in Debt and Equity Securities* , and
accounts for such investments as available for sale. Unrealized gains (losses)
are recorded in other comprehensive income, net of tax. Any realized gains
(losses) are recorded in other income (expense) and cost is determined by
specific identification.
 
 We
account for our investments in privately-held companies under the cost method.
When events dictate, we perform an impairment analysis to determine whether the
loss, if any, is other than temporary. During 2004, 2003 and 2002 we recorded
impairment losses of $4.3 million, $3.7 million and $0, respectively. In
determining whether an impairment exists, our impairment policy is to evaluate
the latest financial operating results of the investment, review projections on
a discounted cash flow model and perform an overall analysis of our original
cost. The actual amount of impairment is based on the difference between the
discounted cash flows versus the recorded value. Our investments in
privately-held companies were valued at $2.4 million, $4.7 million and $16.4
million as of December 31, 2004, 2003 and 2002, respectively. We are under
no contractual obligation to provide additional funding to these privately-held
companies and do not exercise significant influence over them.
 
  22
 *Income
Taxes*
 
 Income
taxes are accounted for under the asset and liability method in accordance with
SFAS No. 109, “Accounting for Income Taxes.”  Deferred income taxes are
recognized for the tax consequences of temporary differences by applying enacted
statutory tax rates to the differences between financial statement carrying
amounts and the income tax basis of assets and liabilities. Income taxes, which
would be due upon the repatriation of foreign subsidiary earnings, have not been
provided where the undistributed earnings are considered indefinitely invested.
We record a valuation allowance when it is more likely than not that the
deferred income tax asset will not be realized. Loss contingencies resulting
from tax audits or certain tax positions are accrued when the potential loss can
be reasonably estimated and where occurrence is probable.
 
 In the
event we were to determine that we would not be able to realize all or part of
our net deferred tax assets in the future, an adjustment to the deferred tax
assets would be charged to earnings in the period such determination is made.
Likewise, if we later determine that it is more likely than not that the net
deferred tax assets would be realized, the previously provided valuation
allowance would be reversed.
 
 On
October 22, 2004, the President of the United States signed the American Jobs
Creation Act of 2004 (the "Act").  The Act creates a temporary incentive
for U.S. corporations to repatriate accumulated income earned abroad by
providing an 85 percent dividends received deduction for certain dividends from
controlled foreign corporations.  The deduction is subject to a number of
limitations and, as of today, uncertainty remains as to how to interpret
numerous provisions of the Act.  As such, we are not in a position to
decide on whether, and to what extent, we might repatriate foreign earnings that
have not yet been remitted to the United States.  We are currently
conducting an evaluation of the effects of the repatriation provisions of the
Act and will complete this evaluation by December 31, 2005.  We do not
expect the Act to have a material impact on our financial position or results of
operations.
 
 **New
Accounting Pronouncements**
 
 In
December 2004, the FASB issued SFAS 123(R), “Share-Based Payment,” which revises
SFAS 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion
No. 25, “Accounting for Stock Issued to Employees.”  SFAS 123(R) requires
fair value recognition of stock option grants in the income statement as an
expense and is effective for the first interim and annual reporting period that
begins after June 15, 2005.  This pronouncement would become effective for
us as of the third quarter of 2005 and may have a material impact on our
operating results.  We are in the process of evaluating the impact of this
pronouncement the financial statements and how it may change the way we provide
incentive compensation to our employees in the future.
 
 **Factors
that May Affect Our Business and Financial Results**
 
 *Our
revenues and profitability can fluctuate from period to period and are often
difficult to predict for particular periods due to factors beyond our
control.*
 
 Our
results of operations for any quarter or year are not necessarily indicative of
results to be expected in future periods. Please see Item 8 "Financial
Statements and Supplementary Data" for quarterly financial information for 2004
and 2003. Our operating results have historically been, and are expected to
continue to be, subject to quarterly and yearly fluctuations as a result of a
number of factors, including:
 The
  introduction and market acceptance of new technologies, products, and
  services;Variations
  in product costs and the mix of products sold;The
  size and timing of customer orders, which, in turn, will often depend upon the
  success of our customers’business or specific products or services;Adverse
  changes in the conditions in the markets for display products;The
  size and timing of capital expenditures by our customers;Inventory
  practices of our customers;Conditions
  in the broader markets for information technology and communications;Adverse
  changes in the credit quality of our customers and suppliers;Adverse
  changes in the supply of components such as LCD panels, including oversupply
  and undersupply; andThe
  impact of acquired businesses and technologies. These trends and
factors could harm our business, operating results and financial
condition.
  23
 
 *Our
operating expenses are relatively fixed and we may have limited ability to
reduce expenses quickly in response to any revenue shortfalls.*
 
 As a
percentage of net sales, selling, general and administrative expenses represent
11.4% and 12.6% for the years ended December 31, 2004 and 2003, respectively. We
expect sales, general and administrative expenses to continue to increase in
absolute dollars as we continue to support our operations, launch our new
products and protect our business interests. Additionally, because we typically
recognize a substantial portion of our revenues in the last month of each
quarter, we may not be able to adjust our operating expenses in a timely manner
in response to any revenue shortfalls. If we are unable to reduce operating
expenses quickly in response to any revenue shortfalls, it would negatively
impact our financial results.
 
 *Our
failure to anticipate changes in the supply of product components or customer
demand may result in excess or obsolete inventory that could adversely affect
our gross margins.*
 
 Inventory
purchases are based upon future demand forecasts. These forecasts are based upon
assumptions about future demand which might prove to be inaccurate. If there
were to be a sudden and significant decrease in demand for our products, or if
there were a higher incidence of inventory obsolescence because of rapidly
changing prices of product components, rapidly changing technology and customer
requirements or an increase in the supply of products in the marketplace, we
could be required to write-down our inventory and our gross margins could be
adversely affected.
 
 *We
order materials in advance of anticipated customer demand. Therefore, we have
limited ability to reduce our inventory purchase commitments quickly in response
to any revenue shortfalls.*
 
 Substantially
all of our sales are made on the basis of purchase orders rather than long-term
agreements. As a result, we may commit to purchase products without having
received advance purchase commitments from customers. Any inability to sell
products to which we have devoted significant resources could harm our business.
Additionally, because we typically need sufficient lead-time in purchasing our
products, we may not be able to reduce our inventory purchase commitments in a
timely manner in response to any revenue shortfalls. We could be subject to
excess or obsolete inventories and be required to take corresponding inventory
write-downs if growth slows or if we incorrectly forecast product demand. A
reduction in demand could negatively impact our gross margins and financial
results.
 
 *We
are subject to risks associated with our international operations, which
may harm our business.*
 
 We
generated 44.7% of our total net sales to customers outside of the United States
and other Americas during 2004. Sales to these customers outside of the United
States and other Americas subjects us to a number of risks associated with
conducting business outside of the United States and other Americas, including
the following:
 International
  economic and political conditions;Unexpected
  changes in, or impositions of, legislative or regulatory requirements;Increases
  or decreases in the U.S. dollar as compared to other currencies;Inadequate
  local infrastructure;Delays
  resulting from difficulty in obtaining export licenses for certain technology,
  tariffs, quotas and other trade barriers and restrictions;Transportation
  delays;Longer
  payment cycles;Tax
  laws (including U.S. taxes on foreign operations);Foreign
  currency exchange rates;Imposition
  of additional taxes and penalties; andThe
  burdens of complying with a variety of foreign laws.  Any
one of the foregoing factors could cause our business, operating
results and financial condition to suffer.
 24
  *If we
fail to maintain and/or expand our sales channels, our revenue may
decline.*
 
 To
maintain and grow our market share, net sales and brand, we must maintain and
expand our sales channels. We currently sell our products through distributors,
retailers, VARs, system integrators, commercial or enterprise resellers, direct
marketing/e-retailers, and ViewSonic online stores. These entities purchase our
products directly from us or through our distributors. We have no minimum
purchase commitments or long-term contracts with any of these third parties. Our
agreements are generally non-exclusive and generally may be terminated by either
party for any reason or no reason with 30 days notice.
 
 Retailers
have limited shelf space and promotional budgets, and competition is intense for
these resources. A competitor with more extensive product lines and stronger
brand identity may have greater bargaining power with these retailers. The
competition for retail shelf space may increase, which would require us to
increase our marketing expenditures to maintain current levels of retail shelf
space.
 
 We must
also continuously monitor and evaluate emerging sales channels. If we fail to
establish a presence in an important developing sales channel, our business
could be harmed. If we are unable to establish relationships in emerging sales
channels, our sales could decline and we would lose market share.
 
 *We
rely on a limited number of wholesale distributors and national retailers for
most of our sales, and changes in price or purchasing patterns could lower our
revenue or gross margins.*
 
 We sell
our products through wholesale distributors such as Ingram Micro, Tech Data
Corporation and Synnex Corporation and national retailers such as Comp
USA, Inc. We expect that a majority of our net sales will continue to come
from sales to a small number of wholesale distributors and national retailers
for the foreseeable future. We have no minimum purchase commitments or long-term
contracts with any of these customers. The wholesale distributors and retailers
could decide at any time to discontinue, decrease or delay their purchases of
our products. In addition, the prices that wholesale distributors and retailers
pay for our products are subject to negotiation and could change frequently. If
any of our major wholesale distributors or retailers change their purchasing
patterns or refuse to pay the prices that we set for our products, our net sales
and operating results could be negatively impacted. If our wholesale
distributors and retailers increase the size of their product orders without
sufficient lead-time for us to process the order, our ability to fulfill product
demands would be compromised. In addition, because our accounts receivable are
concentrated within a small group of wholesale distributors and retailers, the
failure of any of them to pay on a timely basis, or at all, would reduce our
cash flow.
 
 *If we
do not effectively manage our sales channel inventory and product mix, we may
incur costs associated with excess inventory or lose sales from having too few
products or the wrong mix of products.*
 
 If we are
unable to properly monitor, control and manage our sales channel inventory and
maintain an appropriate level and mix of products with our customers and within
our sales channels, we may incur increased and unexpected costs associated with
our inventory. We generally allow wholesale distributors and retailers to return
a limited amount of our products in exchange for other products. Under our price
protection policy, subject to certain conditions, if we reduce the list price of
a product, we issue a credit in an amount equal to the reduction for each of the
products held in inventory by our wholesale distributors and retailers. If our
wholesale distributors and retailers are unable to sell their inventory in a
timely manner, we may under our policy lower the price of the products, or these
parties may exchange the products for newer products. If we improperly forecast
demand for our products we could end up with too many products and be unable to
sell the excess inventory in a timely manner, if at all, or, alternatively we
could end up with too few products and not be able to satisfy demand. If these
events occur, we could incur increased expenses associated with writing off
excessive or obsolete inventory or lose sales and therefore suffer declining
gross margins.
 
 25
 *The
average selling price of our products typically decreases rapidly over the life
of the product, which negatively affects our gross margins.*
 
 The
market in which we compete is subject to technological advances with yearly new
product releases and price competition. As a result, the price at which we can
sell our products typically declines over the life of the product. The price at
which a product may be sold is generally referred to as the average selling
price. For example, the average selling price of our CRT monitors declined
approximately 7.5% from 2003 to 2004 and although the average selling price of
our LCD monitors increased approximately 1.1% from 2003 to 2004 due to a mix
shift to larger size screens. Of the total product units sold for 2004, CRT
monitors accounted for 45.8%, LCD monitors accounted for 40.3%, and other
products accounted for 13.9% as compared to 48.5%, 42.4%, and 9.2%,
respectively, for 2003. In order to sell products that have a declining average
selling price and still maintain our gross margins, we need to continually
reduce our product costs. To manage product-sourcing costs, we must collaborate
with our contract manufacturers to engineer the most cost-effective design for
our products. In addition, we must carefully manage the price paid for
components used in our products. We must also successfully manage our freight
and inventory holding costs to reduce overall product costs. We also need to
continually introduce new products with higher sales prices and gross margins in
order to maintain our overall gross margins. If we are unable to manage the cost
of older products or successfully introduce new products with higher gross
margins, our net sales will decrease and our gross margins will
decline.
 
 *We
depend on third-party contract manufacturers to manufacture our products. If
these contract manufacturers experience any delay, disruption or quality control
problems in their operations, we could lose market share and revenues, and our
reputation may be harmed.*
 
 All of
our products are manufactured, assembled, tested and packaged by contract
manufacturers. We rely on several contract manufacturers to procure components
and, in some cases, subcontract engineering work. Some of our products are
manufactured by a single contract manufacturer. Our contract manufacturers are
primarily located in mainland China, Taiwan, and Thailand and may be subject to
disruption by earthquakes, typhoons and other natural disasters, as well as
political, social or economic instability. We do not have any long-term
contracts with any of our third-party contract manufacturers. All of our
contracts with our contract manufacturers are terminable by either party with
90 days notice for any reason or no reason. Our four largest contract
manufacturers in 2004 were Delta Electronics, Inc, Techview International
Technology Inc., Coretronic Corporation and Jean Co. Ltd. The loss of the
services of any of our primary contract manufacturers could cause a significant
disruption in operations and delays in product shipments. Qualifying a new
contract manufacturer and commencing volume production is expensive and time
consuming.
 
 Our
reliance on contract manufacturers also exposes us to the following risks over
which we have limited control:
 Our
  reliance on contract manufacturers also exposes us to the following risks over
  which we have limited control:Inability
  to procure key required components for our finished products to meet our
  customer’s demandUnexpected
  increases in manufacturing and repair costs;Interruptions
  in shipments if one of our manufacturers is unable to complete
  production;Inability
  to control the quality of finished products;Inability
  to control delivery schedules;Unpredictability
  of manufacturing yields; andPotential
  lack of adequate capacity to manufacture all or a part of the products we
  require.
 **
 26
 *We
rely upon third parties for technology that is critical to our products, and if
we are unable to continue to license this technology and future technology, our
ability to offer competitive products could be harmed and our costs of
production could increase.*
 
 We rely
on third parties to obtain non-exclusive software license rights to technologies
that are incorporated into and necessary for the operation and functionality of
our products. Because the intellectual property we license is available from
third parties, barriers to entry for our competitors may be lower than if we
owned exclusive rights to the technology we license and use. On the other hand,
if a competitor enters into an exclusive arrangement with any of our third-party
technology providers, our ability to develop and sell products containing that
technology could be severely limited. Our licenses often require royalty
payments or other consideration to third parties. Our success will depend in
part on our continued ability to have access to these technologies on
commercially reasonable terms. If we are unable to license the necessary
technology, we may be forced to acquire or develop alternative technology of
lower quality or performance standards. This could limit and delay our ability
to offer competitive products and increase our costs of production. As a result,
our gross margins, market share, and operating results could be
harmed.
  *If we
are unable to provide our third-party contract manufacturers with an accurate
forecast of our component and material requirements, we may experience delays in
the manufacturing of our products and the costs of our products may
increase.*
 
 We
provide our third-party contract manufacturers with a rolling forecast of demand
which they use to determine their material and component requirements. Lead
times for ordering materials and components vary significantly and depend on
various factors, such as the specific supplier, contract terms and demand and
supply for a component at a given time. Some of our components have long lead
times. If our forecasts are less than our actual requirements, our contract
manufacturers may be unable to manufacture products in a timely manner. If our
forecasts are too high, our contract manufacturers will be unable to use the
components they have purchased. The cost of the components used in our products
tends to drop rapidly as volumes increase and the technologies mature.
Therefore, if our contract manufacturers are unable to promptly use components
purchased on our behalf, our cost of producing products may be higher than our
competitors due to an over-supply of higher-priced components. Moreover, if they
are unable to use certain components, we may need to reimburse them for any
losses they incur.
 
 *If
disruptions in our transportation network occur or our shipping costs
substantially increase, our operating expense could increase and our financial
results could be negatively impacted.*
 
 We are
highly dependent upon the transportation systems we use to ship our products,
including surface, ocean and air freight. Our attempt to closely match our
inventory levels to our product demand intensifies the need for our
transportation systems to function effectively and without delay. The
transportation network is subject to disruption from a variety of causes,
including labor disputes or port strikes, acts of war or terrorism and natural
disasters. If our delivery times increase unexpectedly for these or any other
reasons, our ability to deliver products on time could result in delayed or lost
revenue. In addition, if the recent increases in fuel prices were to continue,
our transportation costs would likely increase. A prolonged transportation
disruption or a significant increase in the cost of freight could severely
disrupt our business and harm our operating results.
 
 *If we
fail to continue to introduce new products that achieve broad market acceptance
on a timely basis, we will not be able to compete effectively and we will be
unable to increase or maintain net sales and gross margins.*
 
 We
operate in a highly competitive, quickly changing environment, and our future
success depends on our ability to develop and introduce new products and product
enhancements that achieve broad market acceptance in the business and home
markets. Our future success will depend in large part upon our ability
to:
 Identify
  demand trends in the business and home display markets and quickly develop
  manufacture and sell products that satisfy these demands;Manage
  our cost structure to enable us to bring new products to market at competitive
  prices;Respond
  effectively to new product announcements by our competitors by designing,
  either internally or through third parties, competitive products; andProvide
  compatibility and interoperability of our products with products offered by
  other vendors and new technologies as they emerge.
 *We
depend on our officers, and if we are not able to retain them, our business will
suffer.*
 
 We are
highly dependent on James Chu, our Chairman of the Board and Chief Executive
Officer and majority stockholder, and other officers. Due to the specialized
knowledge each of our officers possesses with respect to our business and our
operations, the loss of service of any of our officers could adversely affect
our business. We do not carry key man life insurance on our
officers.
 
 Each of
our officers may terminate their employment without notice and without cause or
good reason. We currently are not aware that any officer is planning to leave or
retire. ****
 
  27
 *If we
do not succeed in executing our growth strategies within our markets, our
revenues may not increase.*
 
 Our
strategies include further expanding our business in markets in which we
currently operate, including China, Russia, Eastern and Western Europe. In many
of these markets, we face barriers in the form of long-standing relationships
between our potential customers and their local suppliers, as well as protective
regulations. In addition, pursuing international growth opportunities may
require us to make significant investments long before we realize returns on the
investments, if any. Increased investments may result in expenses growing at a
faster rate than revenues. Our overseas investments could be adversely affected
by:
  Reversals
  or delays in the opening of foreign markets to new participants;Exchange
  controls;Restrictions
  on foreign investment or the repatriation of profits or invested
  capital;Nationalization
  of local industry;Changes
  in export or import restrictions;Changes
  in the tax system or rate of taxation in the countries where we do business;
  andEconomic,
  social, and political risks. In
addition, difficulties in foreign financial markets, economies and foreign
financial institutions, particularly in emerging markets, could adversely affect
demand from customers in the affected countries. Because of these factors, we
may not succeed in expanding our business in international markets. This could
hurt our business growth prospects and results of operations.
 
 *Intellectual
property litigation and infringement claims could cause us to incur significant
expenses or prevent us from selling our products.*
 
 Many of
our products are designed to include software or other intellectual property
licenses from third parties. Competitors’ protected technology may be
unavailable to us or be made available to us only on unfavorable terms and
conditions. While it may be necessary in the future to seek or renew licenses
relating to various aspects of our products, we believe that, based upon past
experience and standard industry practice, these licenses generally can be
obtained on commercially reasonable terms. There can be no assurances, however,
that we will be able to obtain, on commercially reasonable terms or at all, from
third parties the licenses that we will need. Due to the existence of a large
number of patents in our field and the rapid rate of issuance of new patents, it
is not practical to determine in advance whether a product or any of its
components infringe the patent rights of others.
 
 We
routinely receive claims regarding patent and other intellectual property
matters. Pursuant to our agreements with our suppliers, we generally seek
indemnification from our suppliers in connection with such claims. Whether or
not these claims have merit, they may require significant resources to defend.
To date, none of these claims have had a material impact on our business. We are
currently involved in several such proceedings, none of which we believe are
material to our business. If an infringement claim is successful and we are
unable to obtain the license for the infringed technology or substitute similar
non-infringing technology, our business could be harmed.
 
 *We
may be subject to product liability claims that could result in significant
direct or indirect costs to us.*
 
 There is
a risk that defects may occur in our products and services. The occurrence of
these defects could make us liable for damages caused by these defects,
including consequential damages. To date, none of these claims have had a
material impact on our business. Negative publicity concerning these problems
could also make it more difficult to convince customers to buy our products and
services. Both could hurt our business, operating results, and financial
condition.
 
 *We
rely on our contract manufacturers for assistance in new product development,
and our new product introduction efforts could be harmed by any adverse change
in these relationships.*
 
 We work
with our contract manufacturers to develop and/or incorporate new technologies
and products. Our contract manufacturers design the electronic and mechanical
systems of a display product around our choice of major components and our
specific industrial design. Aside from these major specifications mandated by
us, the contract manufacturers choose electronic and mechanical solutions of
standard design to reduce the development time, engineering cost and procurement
risk associated with more customized designs. Our relationships with these
contract manufacturers generally do not include a long-term commitment on behalf
of either party. If our contract manufacturers encounter financial or other
business difficulties, if their strategic objectives change, or if they perceive
us to no longer be an attractive customer, they may no longer assist us in our
product development efforts. Our business could be harmed if we were unable to
continue one or more of our contract manufacturing relationships.
 
 28
 *Impairment
of our investment portfolio could harm our net earnings.*
 
 We have
an investment portfolio that includes a variety of investments. In most cases,
we do not attempt to reduce or eliminate our market exposure on these
investments. We could incur losses related to the impairment of these
investments, which could result in charges to net earnings. Some of our
investments are in public and privately-held companies that are still in the
start-up or development stage, which have inherent risks because the
technologies or products they have under development are typically in the early
stages and may never become successful. Furthermore, the values of our
investments in publicly-traded companies are subject to significant market price
volatility. We often couple our investments in technology companies with a
strategic commercial relationship. Our commercial agreements with these
companies may not be sufficient to allow us to obtain and integrate such
products and services into our offerings or otherwise benefit from the
relationship, and third parties, including competitors, may subsequently acquire
these companies. Economic weakness could further impact our investment
portfolio. Our investments in privately-held companies were valued at $2.4
million as of December 31, 2004. For the years ended December 31,
2004, 2003 and 2002, we recorded impairments on our public and private-
securities investments of $4.3 million, $3.7 million and $0,
respectively.
 
 **Item
7A. Quantitative and Qualitative Disclosures About Market Risk**
 
 Our
financial market risk arises from fluctuations in foreign currencies. A majority
of our net sales, expense and capital purchasing activities are transacted in
U.S. Dollars. However, we do enter into these transactions in other currencies,
primarily the Euro and certain other Asian currencies. Our net sales
and purchasing transactions denominated in currencies other than the U.S. Dollar
are subject to exchange rate fluctuations and could potentially negatively
impact our financial results.
 
 We have
significant European net sales denominated in the Euro. Product shipping, and
selling, general and administrative costs associated with a portion of these
sales are U.S. Dollar-denominated. During 2004, the Euro-to-U.S. Dollar foreign
currency exchange rate strengthened against the U.S. Dollar increasing 9.8% on
an average annual basis compared to the average in 2003. The strengthening of
the Euro positively impacted our 2004 net sales and income from operations by
$5.4 million and $4.0 million, respectively, assuming all other
factors remain constant. We currently estimate that a 10% change in value of the
Euro-to-U.S. Dollar exchange rates could impact net sales by $5.5 million.
The ultimate impact of future changes to these and other currency exchange rates
on 2005 net sales, income from operations, net income, equity, and comprehensive
income is not determinable at this time.
 
 We have a
portfolio of investments that includes marketable securities classified as
available-for-sale long-term investments. To the extent that these investments
continue to have strategic value, we typically do not attempt to reduce or
eliminate our market exposure. For those securities that are no longer
considered strategic, management will evaluate market and economic factors in
its decision on the timing of disposal. Our investments are generally in
companies in the high-technology industry.
  29
 **Item
8. Financial Statements and Supplementary Data**
 
 **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 Stockholders
 ViewSonic
Corporation
 Walnut,
California
 
 We have
audited the accompanying consolidated balance sheets of ViewSonic Corporation
and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2004.
Our audits also included the financial statement schedule listed in Index at
Item 15. These financial statements and the financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
 In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2004 and 2003, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
 
 
 /s/
Deloitte & Touche LLP
 
 
 Los
Angeles, California
 March 25,
2005
  30
 **VIEWSONIC
CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
BALANCE SHEETS**
 **DECEMBER
31, 2004 AND 2003**
 **(Amounts
in thousands, except share amounts)**
 **ASSETS**
    **2004**
    
    **2003**CURRENT
      ASSETS:Cash
      and cash equivalents
    $100,497
    
    $86,828Short-term
      investments
    2,268
    
    3,687Trade
      receivables—net
    
    153,159
    
    
    130,773Other
      receivables
    
    7,296
    
    
    5,439Inventories
    
    148,224
    
    
    125,767Deferred
      income taxes
    
    9,665
    
    
    11,592Prepaids
      and other current assets
    
    3,095
    
    
    4,709Income
      taxes receivable
    
    559
    
    
    123Current
      assets of discontinued operations (Note 17)
    
    1,769
    
    
    5,959Total
      current assets
    
    426,532
    
    
    374,877PROPERTY,
      PLANT AND EQUIPMENT—Net
    
    15,163
    
    
    14,931LONG-TERM
      INVESTMENTS
    
    7,072
    
    
    13,704GOODWILL
    
    1,347
    
    
    1,347OTHER
      ASSETS—Net
    
    8,369
    
    
    2,672NON-CURRENT
      ASSETS OF DISCONTINUED OPERATIONS (Note 17)
    
    40
    
    
    7,398TOTAL
    $
    458,523
    
    $
    414,929**LIABILITIES
      AND STOCKHOLDERS' EQUITY**CURRENT
      LIABILITIES:Bank
      borrowings
    $
    3,529
    
    $
    1,475Accounts
      payable
    
    281,609
    
    
    234,018Accrued
      promotional expenses
    
    30,267
    
    
    15,779Accrued
      warranty expense
    
    17,365
    
    
    14,567Other
      accrued expenses
    
    18,702
    
    
    17,930Current
      liabilities of discontinued operations (Note 17)
    
    3,656
    
    
    9,366Total
      current liabilities
    
    355,128
    
    
    293,135SUBORDINATED
      NOTES PAYABLE—Related
      party
    
    43,000
    
    
    43,000DEFERRED
      INCOME TAXES
    
    —
    
    
    590NON-CURRENT
      LIABILITIES OF DISCONTINUED OPERATIONS (Note 17)
    
    —
    
    
    1,441CONVERTIBLE
      MANDATORILY REDEEMABLE PREFERRED STOCK
    
    13,428
    
    
    12,056STOCKHOLDERS'
      EQUITY:Common
      stock, $.01 par value:Authorized—600,000,000
      shares at December 31, 2004 and 2003Outstanding—353,959,176and
      353,897,749 shares at December 31, 2004 and 2003,
      respectively
    
    3,540
    
    
    3,539Additional
      paid-in capital
    
    92,149
    
    
    92,105Accumulated
      deficit
    
    (45,754
    )
    
    (28,125)Accumulated
      other comprehensive loss
    
    (2,968
    )
    
    (2,812)Total
      stockholders' equity
    
    46,967
    
    
    64,707TOTAL
    $
    458,523
    
    $
    414,929

The
accompanying notes are an integral part of these consolidated financial
statements.
  31
 
 **VIEWSONIC
CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF OPERATIONS**
 **YEARS
ENDED DECEMBER 31, 2004, 2003 AND 2002**
 **(Amounts
in thousands, except per share information)**
 
 **2004**
    
    **2003**
    
    **2002**Net
      sales
    $
    1,104,333
    
    $
    1,060,691
    
    $
    876,121Cost
      of sales
    
    995,177
    
    
    918,561
    
    
    739,799Gross
      profit
    
    109,156
    
    
    142,130
    
    
    136,322Selling,
      general and administrative expenses
    
    126,121
    
    
    133,820
    
    
    108,216(Loss)
      income from operations
    
    (16,965)
    
    
    8,310
    
    
    28,106Other
      income (expense)—net:Interest
      expense
    
    (2,473)
    
    
    (2,297)
    
    
    (2,614)Other
      income—net
    
    3,724
    
    
    3,655
    
    
    7,664Other
      income—net
    
    1,251
    
    
    1,358
    
    
    5,050(Loss)
      income from continuing operations before income taxes
    
    (15,714)
    
    
    9,668
    
    
    33,156(Benefit)
      provision for income taxes
    
    (3,293)
    
    
    2,333
    
    
    11,500(Loss)
      income from continuing operations
    
    (12,421)
    
    
    7,335
    
    
    21,656Loss
      from discontinued operations (Note 17)
    
    (5,989)
    
    
    (2,853)
    
    
    (2,465)Net
      gain on disposal of discontinued operations, net of tax (Note
      17)
    
    2,153
    
    
    —
    
    
    —Net
      (loss) income
    
    (16,257)
    
    
    4,482
    
    
    19,191Preferred
      stock accretion
    
    (1,372)
    
    
    (1,229)
    
    
    (1,078)Net
      (loss) income available to common stockholders
    $
    (17,629)
    
    $
    3,253
    
    $
    18,113Basic
      (loss) earnings per shareContinuing operations
    $
    (0.04)
    
    $
    0.02
    
    $
    0.06Discontinued operations (Note 17)
    $
    (0.02)
    
    $
    (0.01)
    
    $
    (0.01)Gain on disposal of discontinued operations
    $
    0.01
    
    $
    —
    
    $
    —Total
      basic (loss) earnings per share
    $
    (0.05)
    
    $
    0.01
    
    $
    0.05Diluted
      (loss) earnings per shareContinuing operations
    $
    (0.04)
    
    $
    0.02
    
    $
    0.06Discontinued operations
    $
    (0.02)
    
    $
    (0.01)
    
    $
    (0.01)Gain on disposal of discontinued operations
    $
    0.01
    
    $
    —
    
    $
    —Total
      diluted (loss) earnings per share
    
    ($0.05)
    
    $
    0.01
    
    $
    0.05Basic
      weighted average shares outstanding
    
    353,917
    
    
    353,891
    
    
    353,322Diluted
      weighted average shares outstanding
    
    353,917
    
    
    358,538
    
    
    362,344
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 32
  **VIEWSONIC
      CORPORATION AND SUBSIDIARIES**
    ****
    
    ****
    
    ****
    
    ****
    
    ****
    
    ****
    
    ******CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**
    ****
    
    ****
    
    ****
    
    ****
    
    ****
    
    ****
    
    ******YEARS
      ENDED DECEMBER 31, 2004, 2003 AND 2002**
    ****
    
    ****
    
    ****
    
    ****
    
    ****
    
    ****
    
    ******(Amounts
      in thousands, except for share
information)**
    ****
    
    ****
    
    ****
    
    ****
    
    ****
    
    ****
    
    ********
    
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    **Accumulated**
    ****
    ****
    ****
    ********
    ****
    ****
    ****
    ****
    Additional
    ****
    ****
    ****
    **Other**
    ****
    **Total**
    ****
    **Comprehensive******
    Common
      Stock
    ****
    **Paid-In**
    ****
    **Accumulated**
    ****
    **Comprehensive**
    ****
    **Stockholders’**
    ****
    **Income******
    **Shares**
    ****
    **Amount**
    ****
    **Capital**
    ****
    **Deficit**
    ****
    **Income (Loss)**
    ****
    **Equity**
    ****
    **(Loss)**BALANCE—January
      1, 2002
    
    351,966,108
    
    $
    3,520
    
    $
    73,315
    
    $
    (49,491)
    
    $
    (504)
    
    $
    26,840Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    19,191
    
    
    
    
    
    19,191
    
    $
    19,191Other comprehensive loss—net of tax:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    (348)
    
    
    (348)
    
    
    (348Unrealized
      holding losses on marketable securities—less realized
gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    (982)
    
    
    (982)
    
    
    (982)Comprehensive
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    17,861Preferred stock accretion
    
    
    
    
    
    
    
    
    
    
    (1,078)
    
    
    
    
    
    (1,078)Issuance of common stock and warrants
    
    1,919,717
    
    
    19
    
    
    8,967
    
    
    —
    
    
    —
    
    
    8,986BALANCE—December
      31, 2002
    
    353,885,825
    
    
    3,539
    
    
    82,282
    
    
    (31,378)
    
    
    (1,834)
    
    
    52,609Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    4,482
    
    
    
    
    
    4,482
    
    $
    4,482Other comprehensive income (loss)—net of tax:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    223
    
    
    223
    
    
    223Unrealized
      holding losses on marketable securities—less realized
gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,201)
    
    
    (1,201)
    
    
    (1,201)Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,504Stockholders’ complaint settlement (Note 10)
    
    
    
    
    
    
    
    9,810
    
    
    
    
    
    
    
    
    9,810Preferred stock accretion
    
    
    
    
    
    
    
    
    
    
    (1,229)
    
    
    
    
    
    (1,229)Issuance of common stock
    
    11,924
    
    
    —
    
    
    13
    
    
    —
    
    
    —
    
    
    13BALANCE—December
      31, 2003
    
    353,897,749
    
    
    3,539
    
    
    92,105
    
    
    (28,125)
    
    
    (2,812)
    
    
    64,707Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (16,257)
    
    
    
    
    
    (16,257)
    
    $
    (16,257)Other comprehensive income (loss)—net of tax:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    706
    
    
    706
    
    
    706Unrealized
      holding losses on marketable securities—less realized
gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    (862)
    
    
    (862)
    
    
    (862)Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (16,413Preferred stock accretion
    
    
    
    
    
    
    
    
    
    
    (1,372)
    
    
    
    
    
    (1,372)Issuance of common stock
    
    76,595
    
    
    1
    
    
    44
    
    
    
    
    
    
    
    
    45Recission of common stock (Note 16)
    
    (15,168)
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —BALANCE—December
      31, 2004
    
    353,959,176
    
    $
    3,540
    
    $
    92,149
    
    $
    (45,754)
    
    $
    (2,968)
    
    $
    46,967The
      accompanying notes are an integral part of these consolidated financial
      statements.
 33
 **VIEWSONIC
CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 **YEARS
ENDED DECEMBER 31, 2004, 2003 AND 2002**
 **(Amounts
in thousands)**
 
 **2004**
    
    **2003**
    
    **2002**CASH
      FLOWS FROM OPERATING ACTIVITIES:(Loss)
      income from continuing operations
    $
    (12,421)
    
    $
    7,335
    
    $
    21,656Adjustments to reconcile net (loss) income from continuing operations to
      net cash provided by operating activities:Depreciation
      and amortization
    
    3,555
    
    
    3,463
    
    
    5,223Loss
      on disposal of property, plant and equipment
    
    75
    
    
    103
    
    
    844Provision
      for doubtful accounts
    
    (257)
    
    
    1,228
    
    
    618Loss
      (gain) on sale and impairment of long-term investments
    
    2,773
    
    
    3,666
    
    
    (5,839)Deferred
      income taxes
    
    (3,235)
    
    
    (735)
    
    
    7,988Stockholders'
      complaint settlement
    
    —
    
    
    9,810
    
    
    —Other
    
    —
    
    
    —
    
    
    (206)Changes
      in operating assets and liabilities:Trade
      receivables—net
    
    (22,215)
    
    
    (22,913)
    
    
    (4,189Other
      receivables
    
    (1,858)
    
    
    1,832
    
    
    7,757Inventories
    
    (22,567)
    
    
    (7,509)
    
    
    (11,666)Prepaids
      and other current assets
    
    1,112
    
    
    1,800
    
    
    (383)Accounts
      payable
    
    47,516
    
    
    17,715
    
    
    34,999Accrued
      promotional and other expenses
    
    16,540
    
    
    1,080
    
    
    3,240Accrued
      warranty expense
    
    2,833
    
    
    388
    
    
    (15,359)Income
      taxes payable/receivable
    
    (2,073)
    
    
    3,936
    
    
    (2,498)Net
      cash provided by operating activities
    
    9,778
    
    
    21,199
    
    
    42,185CASH
      FLOWS FROM INVESTING ACTIVITIES:Net
      purchase of property, plant and equipment
    
    (2,981)
    
    
    (2,751)
    
    
    (2,535)Purchases
      of long-term investments
    
    —
    
    
    (214)
    
    
    (4,392)Proceeds
      on sale of long-term investments
    
    2,716
    
    
    4,504
    
    
    10,019(Purchases)
      sales of short-term investments
    
    1,419
    
    
    (3,687)
    
    
    2,076Discontinued
      operations
    
    755
    
    
    578
    
    
    (2,659)Net
      cash provided by (used in) investing activities
    
    1,909
    
    
    (1,570)
    
    
    2,509CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from bank borrowings
    
    38,932
    
    
    30,551
    
    
    27,732Payments
      on bank borrowings
    
    (36,878)
    
    
    (29,076)
    
    
    (42,891)Proceeds
      from issuance of common stock
    
    45
    
    
    13
    
    
    2Proceeds
      from issuance of preferred stock and warrants
    
    —
    
    
    —
    
    
    5,000Net
      cash provided by (used in) financing activities
    
    2,099
    
    
    1,488
    
    
    (10,157)NET
      INCREASE IN CASH AND CASH EQUIVALENTS
    
    13,786
    
    
    21,117
    
    
    34,537CASH
      AND CASH EQUIVALENTS—Beginning
      of year
    
    86,828
    
    
    65,641
    
    
    31,219EFFECT
      OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    
    (117)
    
    
    70
    
    
    (115)CASH
      AND CASH EQUIVALENTS—End
      of year
    $
    100,497
    
    $
    86,828
    
    $
    65,641SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION—Cash
      paid (refund) for:Interest
    $
    2,234
    
    $
    2,034
    
    $
    2,264Income
      taxes
    $
    2,365
    
    $
    (1,887)
    
    $
    4,654SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING ACTIVITY—Unrealized
      holding (losses) gains in 2004, 2003 and 2002 for investments available
      for sale, net of tax of $(625), $(801), and $812,
    respectively
    $
    (2,159)
    
    $
    (623)
    
    $
    1,027Acquisition
      of a long-term investment in 2002
    $
    —
    
    $
    —
    
    $
    1,000
  The
accompanying notes are an integral part of these consolidated financial
statements.
 34
 **VIEWSONIC
CORPORATION AND SUBSIDIARIES**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **YEARS
ENDED DECEMBER 31, 2004, 2003 AND 2002**
 
 **1.**  **Organization and Business**
 
 ViewSonic
Corporation, a Delaware corporation, and subsidiaries (the "Company"), was
incorporated in 1987. The Company is a leading global provider of visual display
technology, including CRT monitors, LCD displays, projectors, plasma displays,
HDTV technology and the latest in mobile products including wireless monitors.
 
 Headquartered
in Walnut, California, the Company has subsidiaries with operations in the
United States, Taiwan, China, Japan, Singapore, Hong Kong, Australia, the United
Kingdom, France and Germany.
 
 **2.**  **Summary of Significant Accounting Policies**
 
 ***Principles
of Consolidation*** —The
Company's consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries and elimination of all significant
intercompany accounts and transactions.
 
 ***Use
of Estimates*** —The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
 
 ***Cash,
Cash Equivalents and Short-Term Investments*** —Cash and
cash equivalents include currency on hand and time deposits with original
maturities of less than three months.
 
 Short-term
investments represent time deposits with original maturities of more than three
months but less than one year.
 
 ***Trade
Receivables—Net*** —Trade
receivables, net include an allowance for doubtful accounts of approximately
$5,327,000, $4,192,000 and $2,787,000 as of December 31, 2004, 2003 and
2002, respectively. The allowance amount is determined by specific review of the
receivable aging balances.
 
 ***Other
Receivables*** —This
balance includes related party receivables (see Note 9) and other
receivables.
 
 ***Inventories*** —Inventories
consist primarily of finished goods and are stated at the lower of cost or
market. Cost is determined using the first-in, first-out method of accounting.
The Company writes down its inventory for estimated lower of cost or market,
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the net realizable value based upon assumptions about future
demand and market conditions. Other factors influencing these write downs
include: rapid technological changes, product life cycle and product pricing.
The Company evaluates its inventory on a monthly basis and makes necessary
adjustments. Inventory write downs totaled, $9,800,000, $9,500,000, and $20,000
in 2004, 2003, and 2002, respectively.
 
 ***Property,
Plant and Equipment—Net*** —Depreciation
is provided for on the straight-line method over the estimated useful lives of
the assets, 3 to 30 years. Amortization of leasehold improvements is over
the lesser of the lease term or useful life of the improvement.
 
 The
Company's property, plant and equipment are recorded at cost and include
significant expenditures that increase the asset lives. Ordinary maintenance and
repairs are charged to operations as incurred. When assets are sold or otherwise
disposed of, the recorded cost and related accumulated depreciation or
amortization are removed from the accounts and any resulting gain or loss is
recognized.
 
 ***Long-Term
Investments*** —The
Company's long-term investments include both publicly traded and privately-held
companies. None of the Company's investments represent ownership of more than
20% in the various companies. For the Company's publicly traded investments, the
Company follows SFAS No. 115, *Accounting
for Certain Investments in Debt and Equity Securities,* and
accounts for such investments as available for sale. Unrealized holding
gains/losses are recorded in other comprehensive loss, net of tax. Any realized
gains/losses are recorded in other income/expense and cost is determined by
specific identification. The Company accounts for its privately-held company
investments under the cost method. When events dictate, the Company performs an
impairment analysis to determine whether the loss, if any, is other than
temporary. Private and public securities investment impairments totaled
$4,310,000, $3,631,000, and $0 in 2004, 2003, and 2002, respectively. In
determining if an impairment exists, the Company's impairment policy is to
evaluate the latest actual financial operating results, review projections on a
discounted cash flow model and perform an overall analysis of the Company's
original cost. The actual amount of impairment is based on the difference
between the discounted cash flows versus the recorded value.
 
 ***License
Agreements*** —The
Company accounts for its license agreements in accordance with the guidelines in
Statement of Financial Accounting Standards ("SFAS") No. 86, *Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed* . SFAS
No. 86 requires capitalized software costs to be amortized using the
greater of the ratio of current gross revenues to anticipated future gross
revenues or the straight-line method over the remaining economic life. In
addition, the Company monitors the capitalized license costs to ensure the costs
are stated at their net realizable value. The capitalized software is purchased
from the Company's vendors for inclusion in the Company's new products. The
Company believes the software is incidental to its products.
 
 35
 ***Income
Taxes*** —Deferred
income taxes are recognized for the tax consequences of temporary differences by
applying enacted statutory tax rates to the differences between financial
statement carrying amounts and the income tax basis of assets and liabilities.
Income taxes, which would be due upon the repatriation of foreign subsidiary
earnings, have not been provided where the undistributed earnings are considered
indefinitely invested. The Company records a valuation allowance when it is more
likely than not that the deferred income tax asset will not be realized.
 
 On
October 22, 2004, the President of the United States signed the American Jobs
Creation Act of 2004 (the "Act").  The Act creates a temporary incentive
for U.S. corporations to repatriate accumulated income earned abroad by
providing an 85 percent dividends received deduction for certain dividends from
controlled foreign corporations.  The deduction is subject to a number of
limitations and, as of today, uncertainty remains as to how to interpret
numerous provisions of the Act.  As such, the Company is not in a position
to decide on whether, and to what extent, the Company might repatriate foreign
earnings that have not yet been remitted to the United States.  The Company
is currently conducting an evaluation of the effects of the repatriation
provisions of the Act and will complete this evaluation by December 31,
2005.  The Company does not expect the Act to have a material impact on its
financial position or results of operations.
 
 ***Promotional
Pricing Incentives from our Vendors*** —The
Company receive promotional pricing incentives from several of its product
vendors. The amount of the pricing incentives is based on the volatility of the
price on its key product components and the quantity of historical purchases of
these components from such vendors. The pricing incentives have no impact on
future component purchases from these vendors. The Company records the
reimbursement from its vendors for these promotional pricing incentives when the
Company is released of the legal liability for the payment of the product
purchases by its vendors. Promotional pricing incentives from its vendors
totaled $3,900,000, $0 and $0 in 2004, 2003, and 2002, respectively.
 ******
 ***Patent
Litigation Expenses*** — There
are certain claims against the Company related to patent infringement cases. The
Company accrues for these claims whenever it determines an unfavorable outcome
is probable. The amount of the accrual is estimated based on each individual
claim, including past history with the vendor and type of claim.
 
 ***Revenue
Recognition, Warranty and Promotions*** —Revenues
are recognized when products are shipped and risk of loss is transferred,
evidence of an arrangement exists, the price is fixed or readily determinable,
and collectability is probable. The Company extends rights of return to its
customers, which are accrued for based on estimated future returns determined by
using estimates and historical experience.
 
 The
Company provides a variety of warranty programs worldwide, and each program is
based on the specific products. Accruals are provided for such estimated future
costs at the time the product is sold, and such amounts are based upon
historical experience (see Note 14).
 
 The
Company offers promotions such as rebates, price protection and other incentives
to customers in the normal course of business. Accruals for these promotions are
provided for based on estimates and historical experience. The cost of these
promotions is netted against sales.
 
 The
Company occasionally requests that its contract manufacturers ship finished
goods directly to its customers. However, the Company's primary business
practice is to have finished goods delivered from its contract manufacturers
directly to the Company's regional warehouses, where it is stored for eventual
shipment to its customers. For vendor drop shipment sales, the Company retains
title to the shipment from the time it leaves the contract manufacturer's port
of choice, until the time title passes to the customer. The Company's vendor
drop shipment revenue was $19,628,000, $18,300,000 and $19,800,000 in 2004,
2003, and 2002, respectively.
 
 ***Advertising*** —Advertising
costs, which include cooperative advertising, media advertising and production
costs, are recorded as selling, general and administrative expenses in the
period in which the advertising first takes place. Advertising costs were
$27,599,000, $27,944,000 and $23,615,000 for the years ended December 31,
2004, 2003 and 2002, respectively.
 
 ***Research
and Development*** —Research
and development expenses were $1,852,000, $8,158,000 and $7,662,000 for the
years ended December 31, 2004, 2003 and 2002, respectively.
 
 ***Other
Income—Net*** —The
other income, net account consists primarily of realized investment gains
(losses), foreign currency transaction gains (losses) and other miscellaneous
income. See Note 4 for realized investment gains (losses), and for
transaction gains (losses), see below for more information.
 
 ***Foreign
Currency Translation and Transaction Gain (Loss)*** —The
assets and liabilities of subsidiaries whose functional currency is other than
the U.S. dollar are translated at the exchange rates applicable at the end of
the reporting year. The statements of operations and cash flows of such
subsidiaries are translated at the average exchange rates during the year.
Translation gains or losses are accumulated as a separate component of
stockholders' equity.
 
 The
Company's net transaction gains were $5,295,000, $5,988,000, and $3,232,000 for
the years ended December 31, 2004, 2003 and 2002, respectively.
 
 ***Stock-Based
Compensation*** —The
Company accounts for employee stock options in accordance with Accounting
Principles Board ("APB") Opinion No. 25, *Accounting
for Stock Issued to Employees* . Under
APB Opinion No. 25, the Company does not recognize compensation expense
related to employee stock options, since the options are not granted at a price
below the estimated market price on the date of grant.
 
 SFAS
No. 123, *Accounting
for Stock-Based Compensation* ,
encourages, but does not require, the recognition of compensation expense for
employee stock-based compensation arrangements using the fair value method of
accounting. The Company has elected the "disclosure only" alternative and has
disclosed the pro forma net income (loss) per share amounts using the fair value
method. In accordance with SFAS No. 148, *Accounting
for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB
Statement No. 123,* the
following pro forma disclosure is required.
 
 36
 Had
compensation expense for the Company's stock options been recognized based on
the fair value on the grant date under the methodology prescribed by SFAS
No. 123, the Company's net income (loss) would have been impacted as shown
in the following table for the years ended December 31:
 
 **2004**
    
    **2003**
    
    **2002**Net
      income (loss):As
      reported
    $
    (16,257)
    
    $
    4,482
    
    $
    19,191Pro
      forma
    $
    (16,425)
    
    $
    4,235
    
    $
    18,949Basic
      earnings (loss) per share:As
      reported
    $
    (0.05)
    
    $
    0.01
    
    $
    0.05Pro
      forma
    $
    (0.05)
    
    $
    0.01
    
    $
    0.05Diluted
      earnings (loss) per share:As
      reported
    $
    (0.05)
    
    $
    0.01
    
    $
    0.05Pro
      forma
    $
    (0.05)
    
    $
    0.01
    
    $
    0.05
 
 
 The fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
  **2003**
    
    **2002**Dividend
      yield
    
    0%
    
    
    0%Expected
      volatility
    
    0%
    
    
    0%Risk-free
      interest rates
    
    4.01%
    
    
    4.00%Expected
      lives
    
    4
      years
    
    
    4
      yearsWeighted-average
      fair value of options granted
    $
    0.06
    
    $
    0.09
 
 In
December 2004, the FASB issued SFAS 123(R), “Share-Based Payment,” which revises
SFAS 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion
No. 25, “Accounting for Stock Issued to Employees.”  SFAS 123(R) requires
fair value recognition of stock option grants in the income statement as an
expense and is effective for the first interim and annual reporting period that
begins after June 15, 2005.  This pronouncement would become effective for
the Company as of the third quarter of 2005 and may have a material impact on
the Company operating results.  The Company is in the process of evaluating
the impact of this pronouncement on the financial statements and how it may
change the way the Company provides incentive compensation to its employees in
the future.
 
 ***Foreign
Component Suppliers and Assemblers and Regulations*** —A
significant number of products distributed by the Company are manufactured in
China, Taiwan and Thailand. The purchase of goods manufactured in foreign
countries is subject to a number of risks, including economic disruptions,
transportation delays and interruptions, foreign exchange rate fluctuations,
imposition of tariffs, import and export controls, and changes in governmental
policies, any of which could have a material effect on the Company's business,
results of operations and financial condition. While the Company does not
believe that any of these factors impact its business significantly at present,
there can be no assurance that these factors will not have a material effect on
the Company in the future. Any significant disruption in the delivery of
merchandise from the Company's component suppliers, substantially all of whom
are foreign, would also have a material impact on the Company's business,
results of operations and financial condition. Currently, the majority of
purchases are made in U.S. dollars.
 
 ***Fair
Value of Financial Instruments*** —The
Company's financial instruments recorded on the consolidated balance sheets
include cash and cash equivalents, short-term investments, trade receivables,
net, other receivables, accounts payable, bank borrowings, subordinated notes
payable and convertible mandatorily redeemable preferred stock. Management
believes that the recorded value of such financial instruments is a reasonable
estimate of their fair value, except for the fair value of subordinated notes
payable, which, due to its related party nature, is not determinable.
 
 ***Concentration
of Credit Risk and Major Customers/Suppliers*** —Trade
receivables, net are unsecured, and the Company is at risk to the extent such
amounts become uncollectible. The Company performs credit evaluations of each of
its customers and maintains allowances for potential credit losses as needed.
 
 Two
customers accounted for approximately 28%, 23% and 28% of total net sales for
the years ended December 31, 2004, 2003 and 2002, respectively. These
customers accounted for approximately 26% and 19% of trade receivables, net at
December 31, 2004 and 2003, respectively.
 
 Four
suppliers accounted for approximately 53%, 57%, and 73% of total purchases for
the years ended December 31, 2004, 2003 and 2002, respectively. These
suppliers accounted for approximately 56% and 52% of accounts payable at
December 31, 2004 and 2003, respectively.
 
  37
 **3.**  **Property,
Plant and Equipment**
 
 Property,
plant and equipment, net consist of the following at December 31 (in
thousands):
 
 **Useful
      Lives**
    
    **2004**
    
    **2003**Land
    
    
    
    $
    4,579
    
    $
    4,288Building
    
    30
      years
    
    
    5,306
    
    
    5,147Office
      equipment
    
    3-5
      years
    
    
    20,724
    
    
    19,211Furniture
      and fixtures
    
    4-5
      years
    
    
    5,160
    
    
    4,744Leasehold
      improvements
    
    5-15
      years
    
    
    5,863
    
    
    5,358Construction
      in progress
    
    
    
    
    14
    
    
    5641,646
    
    
    38,802Accumulated
      depreciation and amortization
    
    
    
    
    (26,483)
    
    
    (23,871)$
    15,163
    
    $
    14,931
 
 The total
depreciation and amortization expense for the years ended December 31,
2004, 2003 and 2002 was approximately $3,555,000, $3,463,000, and $5,223,000,
respectively.
 
 **4.**  **Long-Term
Investments**
 
 The
Company investment activity in other comprehensive income, net of tax, is as
follows at December 31 (in thousands):
 
 **2004**
    
    **2003**
    
    **2002**Beginning
      balance—unrealized
      gain
    $
    810
    
    $
    2,011
    
    $
    2,993Unrealized
      holding (losses) gains
    
    (2,159)
    
    
    (623)
    
    
    1,027Reclassification
      for realized gains
    
    1,297
    
    
    (578)
    
    
    (2,009)Ending
      balance—unrealized
      (loss) gain
    $
    (52)
    
    $
    810
    
    $
    2,011
 
 The
Company's long-term investments are summarized as follows at December 31
(in thousands):
 
 **2004**
      **Market/**
      **Carrying**
      **Value**
    
    **Realized**
      **Gain
      (Loss)**
    
    **2003**
      **Market/**
      **Carrying**
      **Value**
    
    **Realized**
      **Gain
      (Loss)**Private
      securities—at
      cost
    $
    2,407
    
    $
    (612)
    
    $
    4,685
    
    $
    (4,630)Available-for-sale
      equity securities—public
    
    4,665
    
    
    (2,161)
    
    
    9,019
    
    
    964$
    7,072
    
    $
    (2,773)
    
    $
    13,704
    
    $
    (3,666)
 
 
 **2004**
      **Market/**
      **Carrying**
      **Value**
    
    **Unrealized**
      **Holding
      Gain****(Loss)**
    
    **2003**
      **Market/**
      **Carrying**
      **Value**
    
    **Unrealized**
      **Holding**
      **Gain
      (Loss)**Available-for-sale
      equity securities—unrealized
      gains
    $
    3,127
    
    $
    913
    
    $
    5,823
    
    $
    1,928Available-for-sale
      equity securities—unrealized
      (losses)
    
    1,538
    
    
    (1,000)
    
    
    3,196
    
    
    (453)$
    4,665
    
    $
    (87)
    
    $
    9,019
    
    $
    1,475
 
 
  38
 
 **Less
      Than 12 months**
    
    **More
      Than 12 months or Greater****Market/**
      **Carrying**
      **Value**
    
    **Unrealized**
      **Holding****Loss**
    
    **Market/**
      **Carrying**
      **Value**
    
    **Unrealized**
      **Holding******
      **Loss**Available-for-sale
      equity securities—unrealized losses
    $
    90
    
    $
    (67)
    
    $
    1,448
    
    $
    (933)
 
 The
unrealized losses that exceed more than 12 months or greater of $933,000 were
due to market-price movements. Management does not believe that any of the
unrealized losses represented an other-than-temporary impairment based on its
evaluation of available evidence as of December 31, 2004.
 
 **5.**  **Bank
Borrowings**
 
 Effective March
16, 2005, the Company renewed its $50,000,000 line of credit with CIT
Group/Business Credit, Inc. with a new $60,000,000 credit line that expires
in March 2008.  Advances
bear interest at the prime rate plus 0.75% (5.9% at December 31, 2004) with
interest payable monthly. As of December 31, 2004 and 2003, there was no
outstanding balance on the line of credit. All advances under the agreement are
collateralized by substantially all of the assets in the domestic subsidiary.  Under the
agreement, the domestic subsidiary is subject to various restrictive covenants,
which, among other things, limit dividends (not to exceed $250,000 per year
without the consent of the CIT Group), capital expenditures and executive
compensation and require the domestic subsidiary to maintain a minimum earnings
before interest, taxes, depreciation and amortization amount. The Company is not
required to comply with the restrictive covenants when borrowing capacity
exceeds $15,000,000.
 
 A foreign
subsidiary has line-of-credit facilities with various financial institutions
that are secured by certain assets of that subsidiary. These credit facilities
allow cash advances, letters of credit and bank guarantees. During the year
2004, the cash advances bore interest at rates ranging from 2.2% to 2.6%. At
December 31, 2004 and 2003, there were outstanding cash advances of
approximately $3,529,000 and $1,475,000, respectively. At December 31,
2004, the borrowing limit was approximately $23,000,000.
 
 In June
2004, ViewSonic Europe Limited entered into a $20,000,000 line of credit
facility with Burdale Financial Limited. This line of credit is secured by
trade receivables and inventory of ViewSonic Europe Limited. Advances bear
interest at Libor plus a margin. There were no borrowings against this facility
as of December 31, 2004.
 
 **6.**  **Income
Taxes**
 
 The
provision (benefit) for income taxes consists of the following for the years
ended December 31 (in thousands):
 
 **2004**
    
    **2003**
    
    **2002**Current:Federal
    $
    (92)
    
    $
    921
    
    $
    —State
    
    (83)
    
    
    760
    
    
    1,447Foreign
    
    117
    
    
    1,010
    
    
    848Total
      current
    
    (58)
    
    
    2,691
    
    
    2,295Deferred:Federal
    
    (2,131)
    
    
    (1,237)
    
    
    9,816State
    
    (310)
    
    
    102
    
    
    123Foreign
    
    (794)
    
    
    777
    
    
    (734)Total
      deferred
    
    (3,235)
    
    
    (358)
    
    
    9,205$
    (3,293)
    
    $
    2,333
    
    $
    11,500
 
 
 39
  The
components of deferred tax assets (liabilities) are as follows at
December 31 (in thousands):
 
 **2004**
    
    **2003****Deferred
      tax assets**Current:Reserves
    $
    8,448
    
    $
    7,747Accruals
    
    1,858
    
    
    2,955State
      taxes
    
    18
    
    
    277Unrealized
      foreign exchange loss
    
    (420)
    
    
    (87)Other
    
    241
    
    
    700Sub-Total
    
    10,145
    
    
    11,592Valuation
      Allowance
    
    (480)
    
    
    —Total
      current
    
    9,665
    
    
    11,592Non-current:Net
      operating loss carryforwards
    
    7,944
    
    
    2,445Depreciation
      and amortization
    
    790
    
    
    1,619Foreign
      tax credit carryforwards
    
    1,811
    
    
    1,129Other
    
    2
    
    
    —Non-current
      — unrealized loss on securities
    
    35
    
    
    —Subtotal
    
    10,582
    
    
    5,193Valuation
      allowance
    
    (3,217)
    
    
    (3,024)Total
      noncurrent
    
    7,365
    
    
    2,169**Deferred
      tax liabilities**Non-current—unrealized
      gain on securities
    
    —
    
    
    (590)Net
      deferred tax assets
    $
    17,030
    
    $
    13,171
 
 The
valuation allowance of $3,697,000 and $3,024,000 as of December 31, 2004
and 2003, respectively, is primarily for the deferred tax assets generated from
non-U.S. entities. These deferred tax assets may not be realizable due to the
uncertainty of whether future taxable income will be generated from these
non-U.S. entities. The increase in the valuation allowance was largely due to
the losses sustained in jurisdictions where no tax benefit can be
provided.
 
 For
federal income tax purposes, the Company has a net operating loss carryforward
of $12,358,000 at December 31, 2004. This net operating loss carryforward will
expire in 2025, if not utilized. The Company also has net operating loss
carryforwards in various states totaling $22,509,000 at December 31, 2004,
which results in a deferred tax asset of $876,000. These net operating loss
carryforwards begin to expire in 2010.
 
 In
addition, the Company had approximately $7,751,000 of non-U.S. net operating
loss carryforwards at December 31, 2004. The majority of the non-U.S. net
operating loss carryforwards relate to operations of subsidiaries in countries
permitting indefinite carryforward of losses. Generally, a valuation allowance
is provided when it is more likely than not that the deferred income tax asset
will not be realized.
 
 Income
(loss) before taxes attributable to foreign operations was $(4,527,000),
$17,940,000 and $6,753,000 for the years ended December 31, 2004, 2003 and
2002, respectively.
 
 A
reconciliation of the Company's (benefit) provision for income taxes to the U.S.
federal statutory rate is as follows for the years ended December 31 (in
thousands):
  40
  **2004**
      **Amount**
    
    **%**
    
    **2003**
      **Amount**
    
    **%**
    
    **2002**
      **Amount**
    
    **%**Provision
      (benefit) for income taxes at statutory rate
    $
    (5,500)
    
    
    (35.0)%
    
    $
    3,383
    
    
    35.0%
    
    $
    11,604
    
    
    35.0%Nondeductible
      items
    
    222
    
    
    1.4
    
    
    3,434
    
    
    35.5
    
    
    72
    
    
    0.2Change
      in valuation allowance
    
    673
    
    
    4.3
    
    
    (4,289)
    
    
    (44.4)
    
    
    (639)
    
    
    (1.9)State
      taxes—net
      of federal benefit
    
    (256)
    
    
    (1.6)
    
    
    560
    
    
    5.8
    
    
    1,021
    
    
    3.1Permanent
      and other items, including foreign income taxed at different
      rates
    
    1,568
    
    
    10.0
    
    
    (755)
    
    
    (7.8)
    
    
    (558)
    
    
    (1.7)$
    (3,293)
    
    
    (20.9)%
    
    $
    2,333
    
    
    24.1%
    
    $
    11,500
    
    
    34.7%
 **7.**  **Convertible
Mandatorily Redeemable Preferred Stock**
 
 ***Series A
Stock*** —On
April 14, 2000, the Company entered into a Series A Preferred Stock
and Warrant Purchase Agreement (the "Agreement") with a U.S.-based high-tech
company (the "Investor") providing for an investment of up to $50,000,000 in the
Company by the Investor in exchange for 18,382,353 shares of Series A
convertible mandatorily redeemable convertible preferred stock and warrants. The
$50,000,000 would be paid to the Company based on the achievement of certain
milestones as defined in the Agreement.
 
 On
April 14, 2000, all conditions were met for the first closing and, in
exchange for $10,000,000, the Company issued 3,676,471 shares of Series A
convertible mandatorily redeemable convertible preferred stock, par value of
$0.001 per share (the "Series A Stock"). Each share of Series A Stock
could be converted into one share of common stock or redeemed for cash on the
redemption dates. In connection with such issuance, the Company granted to the
Investor warrants (collectively, the "warrants") to purchase an additional
18,382,353 shares of Series A Stock with an exercise price of $2.72 per
share. The warrants were immediately exercisable. The Company recorded these
warrants at their estimated fair market value of $987,000.
 
 The
redemption price for each share of Series A Stock was an amount in cash
equal to $3.81 (as adjusted for any stock splits, stock dividends,
recapitalizations and similar transactions) plus all declared but unpaid
dividends on the Series A Stock for a portion of the shares on
March 31, 2003 and the remaining shares on March 31, 2004.
Accordingly, the Company was accreting the value of the Series A Stock from
its initial value of $9,013,000 to the redemption price $14,007,000.
 
 As the
milestones were not achieved, the Investor was not obligated to purchase
additional shares of Series A Stock and, upon execution of the Series B
Preferred Stock Exchange and Warrant Purchase Agreement, the obligations of the
parties under the Agreement were extinguished.
 
 ***Series B
and C Stock*** —On
January 10, 2002, the Company entered into a Series B Preferred Stock
Exchange and Warrant Purchase Agreement (the "Exchange Agreement") with the
Investor. Under the Exchange Agreement, the Investor contributed an additional
$5,000,000, bringing the total cash contributed to $15,000,000. The exchange was
made for the 3,676,471 shares of Series A Stock originally issued and the
related warrants. As consideration for the exchange, the Company issued to the
Investor 7,500,000 shares of Series B convertible mandatorily redeemable
convertible preferred stock, par value of $.001 per share (the "Series B
Stock"). Each share of Series B Stock is convertible into one share of
common stock or redeemable for cash for $2.00 per share on January 10,
2006. In connection with such issuance, the Company granted to the Investor
3,300,000 Interest Warrants and 7,500,000 Valuation Warrants to purchase
Series C non-redeemable convertible preferred stock (par value of $.001 per
share). The Interest Warrants vest on January 10, 2006, or following the
completion of a qualified initial public offering, and have an exercise price of
$.01 per share. The Valuation Warrants were immediately vested and have an
exercise price of $2.00 per share. As of December 31, 2004 and 2003, a
total of 18,000,000 shares of Series C preferred stock were authorized, and
no shares were issued or outstanding.
 
 In
accordance with applicable accounting guidance, the exchange was accounted for
as an extinguishment of the Series A Stock and related warrants. The
exchange resulted in no gain or loss, as the fair value of the consideration
provided to the Investor was equal to the carrying value of the extinguished
instruments. The Series B Stock was recorded at its fair value of
$9,750,000, and the Interest and Valuation Warrants were valued at $7,479,000.
The Company is accreting the value of the Series B Stock from its initial
value of $9,750,000 to the redemption price of $15,000,000. Such accretion
totaled $1,372,000, $1,229,000 and $1,078,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
 
 41
 The
Investor currently holds 100% of the outstanding shares of Series B Stock
and, consequently, has a representative observing all meetings of the Board of
Directors of the Company (the "Board") but has no voting rights on the Board of
Directors.
 
 The
Investor is entitled to dividends payable when and if declared by the Board. The
dividends would be cumulative and would be paid prior to payment of any dividend
with respect to the common stock. No dividends were declared for the years ended
December 31, 2004, 2003 and 2002.
 
 The
following is a summary of the Series B Stock as of December 31 (in
thousands):
 
 **2004**
    
    **2003**Series
      B convertible preferred stock:Authorized—12,500,000
      shares at December 31, 2004 and 2003Issued
      and outstanding—7,500,000
      shares at December 31, 2004 and 2003 (liquidation preference of $2.60 per
      share)
    $
    13,428
    
    $
    12,056
 
 **8.**  **Stockholders'
Equity**
 
 A portion
of the Company's retained earnings is restricted based on certain regulations
governing a subsidiary in Taiwan. The total amount of restricted retained
earnings was approximately $2,640,000 and $2,640,000 at December 31, 2004
and 2003, respectively.
 
 In 2002,
the Company issued 1,917,017 shares of common stock in connection with the
acquisition of a business and a long-term investment.
 
 **9.**  **Related
Party Transactions**
 
 The
Company sells inventory to several related parties, which include a company
where an officer is related to the principal stockholder. Net sales to these
related parties were approximately $24,692,000, $28,808,000, and $27,209,000 for
the years ended December 31, 2004, 2003, and 2002, respectively. The
Company had receivables of approximately $1,531,000 and $2,750,000 from these
related parties at December 31, 2004 and 2003, respectively, which are
included in other receivables.
 
 At
December 31, 2004, the Company had subordinated notes payable to its
principal stockholder and related entities. The subordinated notes payable is
not callable until the expiration date, April 12, 2008. The amounts
outstanding at December 31, 2004 and 2003 are $43,000,000. The interest
rates on the subordinated notes payable was 3.97% for the years ended
December 31, 2004, 2003 and 2002, respectively. Interest expense related to
this amount totaled $1,712,000, $1,707,000, and $1,707,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
 
 **10.**  **Commitments
and Contingencies**
 
 ***Lease
Commitments*** —The
Company leases certain facilities under lease agreements that expire at various
dates through 2008. One lease provides for a five-year renewal option with
accompanying cost-of-living rent increases. Commitments under the lease
agreements also provide for the payment of property taxes, insurance, utilities
and maintenance costs. The following is a schedule of future minimum lease
payments required under these operating leases (in thousands):
 
 **Year
      Ending December 31**2005
    $1,7252006
    1,4882007
    
    7882008
    
    15Thereafter
    
    -$
    4,016
 Total
rental expense for the years ended December 31, 2004, 2003, and 2002 was
approximately $2,819,000, $2,788,000 and $2,565,000, respectively.
 
 42
 ***Litigation*** —The
Company is involved in various legal matters in the normal course of its
business. Management believes that the ultimate outcome of such matters will not
have a material adverse effect on the accompanying consolidated financial
statements.
 
 During
the fourth quarter of 2003, the Company in conjunction with the principal
stockholder settled a complaint through the transfer of 9,000,000 shares from
the principal stockholder to certain other stockholders. The value of the shares
transferred was $9,810,000, and it has been reflected as a selling, general and
administrative expense and a capital contribution by the principal stockholder.
 
 ***Services
Agreements*** —In 1999,
the Company entered into a services agreement with a logistics supplier. The
agreement provides for warehousing, shipping and freight services. The amount to
be paid is based on the level of services provided as defined in the agreement.
For the years ended 2004, 2003, and 2002, the expense was approximately
$3,493,000, $3,642,000, and $3,494,000, respectively.
 During
2000, the Company entered into a services agreement with a repair service
provider. The amount to be paid is based on the level of services provided as
defined in the agreement. For the years ended December 31, 2004, 2003, and
2002, the expense was approximately $1,571,000, $1,871,066 and $2,202,000,
respectively.
 
 ***Purchase
Commitments*** —The
Company has purchase commitments for materials and supplies as part of the
normal course of business. The total outstanding commitment under an agreement
for supply production of component parts was $0 and $678,000 as of
December 31, 2004 and 2003, respectively. Commitments to purchase inventory
at above-market prices have been reserved. The total amount reserved under these
commitments is $0 and $3,364,000 as of December 31, 2004 and 2003,
respectively and is included as part of other accrued expenses.
 
 ***Other
Agreements*** —The
Company had a licensing agreement for embedded software with a U.S.-based
high-tech company. The total outstanding commitment under this licensing
agreement is $0 and $1,051,000 as of December 31, 2004 and 2003,
respectively.
 
 **11.**  **401(k)
Retirement Plan**
 
 The
Company has a 401(k) plan (the “401(k) Plan”) for its eligible domestic
employees. Employer contributions made to the 401(k) Plan during the years ended
December 31, 2004, 2003, and 2002 were $1,011,000, $958,000 and $646,000,
respectively.
 
 **12.**  **Stock
Options**
 
 In June
2004, the Company established a 2004 Equity Incentive Plan (the “2004 EIP”).
Under terms of the 2004 EIP, officers, members of the Board and certain
other employees may be granted options to purchase the Company’s common stock at
the estimated fair market value on the date the option is granted. As of
December 31, 2004, no options were granted under 2004 EIP. It is expected that
options granted under the 2004 EIP will vest over three or four years.  All
options may be exercised for up to 10 years from the date of grant. As the
Company's common stock is not publicly-traded, the fair market value will be
determined by the Board based upon various factors and information including
valuations which may be performed, from time to time, by an independent
appraiser.
 
 In
April 1999, the Company established a stock option plan (the “Plan”). Under
terms of the Company's Plan, officers, members of the Board and certain other
employees may be granted options to purchase the Company's common stock at the
estimated market price on the date the option is granted. Options granted
through April 30, 2002 vest over four years. Options granted on or after
May 1, 2002 vest over three years. All options may be exercised for up to
10 years from the date of grant. The fair market value was determined by
the Company based in part on valuations performed by an independent appraiser in
connection with the issuance of the options.
 
  43
 Presented
below is a summary of the Plan's activity for the years shown:
 
 **Options**
    
    **Weighted-**
      **Average**
      **Price**
    
    **Options**
      **Exercisable**
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**Balance—December
      31, 2001
    
    25,203,775
    
    $
    1.03
    
    
    12,009,897
    
    $
    1.03Granted
    
    4,505,980
    
    $
    1.22Granted
    
    64,000
    
    $
    1.36Exercised
    
    (2,700)
    
    $
    1.00Canceled
    
    (3,651,364)
    
    $
    1.02Balance—December
      31, 2002
    
    26,119,691
    
    $
    1.07
    
    
    15,368,651
    
    $
    1.04Granted
    
    12,080,206
    
    $
    1.09Exercised
    
    (11,924)
    
    $
    1.03Canceled
    
    (5,924,970)
    
    $
    1.05Balance—December
      31, 2003
    
    32,263,003
    
    $
    1.08
    
    
    18,221,149
    
    $
    1.05Granted
    
    —
    
    $
    0.00Exercised
    
    (76,595)
    
    $
    1.04Canceled
    
    (4,296,915)
    
    $
    1.07Balance—December
      31, 2004
    
    27,889,493
    
    $
    1.08
    
    
    20,196,260
    
    $
    1.06
 
 The
following table summarizes information for options outstanding at
December 31, 2004:
 **Range
      of**
      **Prices**
    
    **Options**
      **Outstanding**
    
    **Weighted-**
      **Average**
      **Remaining**
      **Life
      (Years)**
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**
    
    **Options**
      **Exercisable**$1.00
    
    
    14,825,141
    
    
    5.17
    
    $
    1.00
    
    
    13,575,968$1.09
    
    
    8,625,498
    
    
    8.43
    
    $
    1.09
    
    
    3,793,768$1.30
    
    
    2,513,211
    
    
    7.33
    
    $
    1.30
    
    
    1,894,267$1.36
    
    
    1,925,643
    
    
    5.46
    
    $
    1.36
    
    
    932,257
 **13.**  **Business
Segments**
 
 In
accordance with SFAS No. 131, *Disclosures
about Segments of an Enterprise and Related Information* , the
Company has three reportable segments: Americas, Europe and Asia Pacific. The
Company believes these segments do not meet the economically similar criteria
requirements of SFAS No. 131, and, therefore, are separate reportable
segments. The Company sells similar products in the local markets, including CRT
displays, LCD displays, projectors, plasma displays, HDTV technology and the
latest in mobile products including wireless monitors. The types and class of
customers, primarily distributors and retailers, are also similar across the
product lines. The Company has two major products—visual displays (CRT and LCD
computer monitors) and other products. Both products are sold to all of its
markets. The Company's other products combined make-up 13.9% of units sold in
2004 9.2% in 2003, and 1.8% in 2002.
 
 44
 The
following segment financial information is for the years ended December 31
(in thousands):
 
 **2004**
    
    **2003**
    
    **2002**Net
      sales:Americas
    $
    610,644
    
    $
    665,450
    
    $
    613,090Europe
    
    237,727
    
    
    179,909
    
    
    126,009Asia
      Pacific
    
    255,962
    
    
    215,332
    
    
    137,022$
    1,104,333
    
    $
    1,060,691
    
    $
    876,121Income
      (loss) from operations:Americas
    $
    (9,510)
    
    $
    6,320
    
    $
    24,498Europe
    
    (502)
    
    
    9,010
    
    
    3,346Asia
      Pacific
    
    (6,953)
    
    
    2,790
    
    
    262Stockholders'
      complaint settlement (Note 10)
    
    —
    
    
    (9,810)
    
    
    —$
    (16,965)
    
    $
    8,310
    
    $
    28,106Assets:Americas
    $
    244,954
    
    $
    255,956
    
    $
    271,600Europe
    
    101,194
    
    
    73,621
    
    
    43,685Asia
      Pacific
    
    110,566
    
    
    71,995
    
    
    50,067Net
      assets held for sale
    
    —
    
    
    2,550
    
    
    5,960$
    456,714
    
    $
    404,122
    
    $
    371,312Depreciation
      and amortization:Americas
    $
    2,111
    
    $
    2,146
    
    $
    3,808Europe
    
    265
    
    
    351
    
    
    500Asia
      Pacific
    
    1,179
    
    
    966
    
    
    915$
    3,555
    
    $
    3,463
    
    $
    5,223Capital
      additions:Americas
    $
    2,344
    
    $
    1,984
    
    $
    2,056Europe
    
    307
    
    
    147
    
    
    316Asia
      Pacific
    
    571
    
    
    799
    
    
    355$
    3,222
    
    $
    2,930
    
    $
    2,727
 
 The Company's
goodwill is recorded in the United States. The inter-geographical sales were
immaterial for the years ended December 31, 2004, 2003, and 2002. The
following table summarizes the Company's net sales and long-lived assets in
different geographical locations for the years ended December 31 (in
thousands):
 
 **2004**
    
    **2003**
    
    **2002**Net
      sales:United
      States
    $
    533,992
    
    $
    586,204
    
    $
    554,854Taiwan
    
    137,280
    
    
    91,237
    
    
    85,505China
    
    118,593
    
    
    89,370
    
    
    31,793Others
    
    314,468
    
    
    293,880
    
    
    203,969$
    1,104,333
    
    $
    1,060,691
    
    $
    876,121Long-lived
      assets:United
      States
    $
    5,323
    
    $
    5,100
    
    $
    5,338Taiwan
    
    9,816
    
    
    9,961
    
    
    10,211China
    
    617
    
    
    498
    
    
    362Others
    
    754
    
    
    719
    
    
    877$
    16,510
    
    $
    16,278
    
    $
    16,788
 45
 **14.**  **Warranty**
 
 The
Company provides product warranty programs on a worldwide basis that vary in
term from 12 to 36 months. The length of the warranty period and the
specific warranty coverage are based on the type of product. The Company accrues
for estimated warranty costs at the time the product is sold, and such amounts
are based upon historical experience. The historical data that determines the
warranty accrual and the overall estimate of the warranty reserve includes the
following key factors: net cost of repair (repair costs less reimbursements from
suppliers), defective rates and total number of products under warranty. The
following table summarizes the Company's activity in the warranty reserve for
the years shown (in thousands):
 
 
 **Beginning**
      **Accrued**
      **Warranty**
      **Reserve**
    
    **Payments**
      **for
      Units**
      **Returned**
    
    **Additional**
      **Warranty**
      **Expense**
      **for
      Units**
      **Sold**
    
    **Warranty**
      **Reserve**
      **Adjustments**
    
    **Ending**
      **Accrued**
      **Warranty**
      **Reserve**December
      31, 2002
    $
    29,538
    
    $
    (15,036)
    
    $
    12,945
    
    $
    (13,268)
    
    $
    14,179December
      31, 2003
    $
    14,179
    
    $
    (11,038)
    
    $
    10,206
    
    $
    1,220
    
    $
    14,567December
      31, 2004
    $
    14,567
    
    $
    (11,290)
    
    $
    13,688
    
    $
    400
    
    $
    17,365
 
 The
warranty reserve adjustments in 2002 reflect a reduction in the reserve mainly
due to lower net repair costs as a result of moving to a supplier managed repair
program in late 2001. Prior to late 2001, the Company internally managed its
warranty program. In late 2001, ViewSonic introduced the supplier managed repair
program, or SMRP, under which the Company outsourced its repair process. The
program has reduced the Company’s overall costs for warranty repair. Under SMRP,
warranted units are repaired by third-party repair centers. The repair centers
are directly reimbursed by the Company’s contract manufacturers. The impact on
earnings per share (basic and diluted) related to the warranty reserve
adjustments totaled $0.00, $0.00 and $0.04, for the years ended
December 31, 2004, 2003, and 2002, respectively.
 
 **15.**  **Earnings
Per Share**
 
 The
Company presents both basic and diluted earnings (loss) per share ("EPS")
amounts. Basic EPS is calculated by dividing net income (loss) by the
weighted-average number of common shares outstanding during the year. Diluted
EPS amounts are based upon the weighted-average number of common and potential
common shares, including warrants outstanding during the year.
 
 Potential
common shares are excluded from the computation in periods in which they have an
anti-dilutive effect. The Company uses the treasury stock method to calculate
the impact of outstanding stock options. Stock options for which the exercise
price exceeds the average market price over the period have an anti-dilutive
effect on EPS and, accordingly, are excluded from the calculation. For 2004, due
to the loss incurred by the Company, all options of 5,662,948 are excluded
because they were anti-dilutive.  For 2003 and 2002, options for 4,795,000,
and 2,724,000 shares, respectively, were excluded from the diluted earnings per
common share calculation because they were anti-dilutive.
 
 The basic
and diluted EPS was calculated using the EITF 03-06 *“Participating
Securities and the Two Class Method under SFAS No. 128”.* The
following is a reconciliation of the numerators and denominators of the basic
and diluted net income per share computations for the periods presented (amounts
in thousands, except share and per share information). Amounts are for the years
ended December 31 (amounts in thousands, except per share
information).
 
  46
  **2004**
    
    **2003**
    
    **2002**Basic
      EPS:Numerator:(Loss) income from continuing operations (1)
    $
    (13,793)
    
    $
    6,132
    
    $
    20,600Loss discontinued operations
    $
    (5,989)
    
    $
    (2,853)
    
    $
    (2,465)Gain on disposal of discontinued operations
    $
    2,153
    
    $
    —
    
    $
    —Denominator—weighted-average
      shares outstanding
    
    353,917
    
    
    353,891
    
    
    353,322Basic
      EPSContinuing operations
    $
    (0.04)
    
    $
    0.02
    
    $
    0.06Discontinued operations
    $
    (0.02)
    
    $
    (0.01)
    
    $
    (0.01)Gain on discontinued operations
    $
    0.01
    
    $
    0.00
    
    $
    0.00Total
      Basic EPS
    $
    (0.05)
    
    $
    0.01
    
    $
    0.05Diluted
      EPS:Numerator:(Loss) income from continuing operations (1)
    $
    (13,793)
    
    $
    6,132
    
    $
    20,600Loss from discontinued operations
    $
    (5,989)
    
    $
    (2,853)
    
    $
    (2,465)Gain on disposal of discontinued operations
    $
    2,153
    
    $
    —
    
    $
    —Denominator:Weighted-average shares outstanding
    
    353,917
    
    
    353,891
    
    
    353,322Stock options (2)
    
    —
    
    
    1,373
    
    
    5,746Interest warrants (3)
    
    —
    
    
    3,275
    
    
    3,275Total
      shares
    
    353,917
    
    
    358,538
    
    
    362,344Diluted
      EPSContinuing operations
    $
    (0.04)
    
    $
    0.02
    
    $
    0.06Discontinued operations
    $
    (0.02)
    
    $
    (0.01)
    
    $
    (0.01)Gain on discontinued operations
    $
    0.01
    
    $
    0.00
    
    $
    0.00Total
      Diluted EPS
    $
    (0.05)
    
    $
    0.01
    
    $
    0.05
 (1)
    Prepared
      in accordance to EITF 03-06 “Participating Securities and the Two Class
      Method under SFAS No. 128”. The EPS calculation allocated (loss) income
      from continuing operations between common stock and the convertible
      mandatorily redeemable preferred stock.
 
 (2)
    For
      the years ended December 31, 2004, 2003 and 2002, options for the
      purchase of 5,662,948, 4,795,000 and 2,724,000 shares were excluded from
      the diluted earnings per share calculation for each such period because
      they were anti-dilutive.
 
 (3)
    For
      the year ended December 31, 2004, common stock issuable upon the exercise
      of outstanding warrants of 3,275,000 shares were excluded from the diluted
      earnings per share calculation because they were
      anti-dilutive.
 
 **16.**  **Rescission
Shares**
 
 Recipients
of certain options issued by the Company as well as purchasers of the underlying
shares for which registration or qualification may have been required may had
the right under the Securities Act of 1933, as amended or state securities laws
to rescind their grant of options and/or purchases of shares. The Company
concluded a rescission offer, as permitted under California 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 equal to 10% of the strike
price plus 7% per annum interest from the date of grant of the option. Holders
of stock subject to rescission were offered 100% of the exercise price plus 7%
per annum interest from the date of exercise of the option. As a result,
approximately 469,000 options and 15,168 common stock shares were tendered back
to and accepted by the Company and an expense of $79,000 was recorded for the
rescission of these securities.
 
 **17.**  **Discontinued
Operations**
 
 On July
30, 2004, the Company completed the sale of Advance Digital Optics, Inc., or
ADO, a majority-owned subsidiary and recorded a $3,257,000 gain, net of tax
expense of $1,127,000. The cost basis of its investment in ADO was $4,100,000.
The Company also incurred $307,000 of expenses associated with the sale. Ten
percent of the gross proceeds payable to the Company, as well as ten percent
from certain other principal shareholders of ADO, shall remain in an escrow for
one year to afford the buyer recourse in the event of a breach of
representations and warranties under the merger agreement.
 ****
 47
 During
the fourth quarter of 2004, the Company made the decision to dispose of
VisionBank, one of its majority-owned subsidiaries. As of December 31, 2004, the
net liabilities of VisionBank were $1,847,000. The loss recorded for
discontinued operations of $1,104,000 consists of goodwill impairment and
write-down of fixed assets, with no tax benefit.
 
 In
accordance with SFAS No. 144, *Accounting
for the Impairment or Disposal of Long-Lived Assets* , the
results of operations of these businesses are reported as discontinued
operations for the periods indicated (in thousands):
 **Discontinued
      Operations**
    **December
      31, 2004**
    
    **December
      31, 2003**
    
    **December
      31, 2002**Net
      Sales
    $
    10,616
    
    $
    13,993
    
    $
    7,923Loss
      from discontinued operations (no tax benefit)
    $
    (5,989)
    
    $
    (2,853)
    
    $
    (2,465)Net
      gain on disposal of discontinued operations, net of tax
      ($1,127,000)
    $
    2,153
    
    $
    —
    
    $
    —
 **December
      31,**
      **2004**
    
    **December
      31,**
      **2003**Current
      assets
    $
    1,769
    
    $
    5,959Other
      assets
    
    40
    
    
    7,398Total
      assets
    
    1,809
    
    
    13,357Accounts
      payable and accrued expenses
    
    3,656
    
    
    9,366Minority
      interest
    
    —
    
    
    1,441Net
      (liabilities)/assets of discontinued operations
    $
    (1,847)
    
    $
    2,550
 ****
 **18.**  **Quarterly
Information**
 
 The
following table sets forth for the periods indicated selected unaudited
quarterly financial information for 2004 and 2003.
 
 **Quarter
      Ended****2004**
    
    **2003****Mar.
      31**
    
    **Jun.
      30**
    
    **Sep.
      30**
    
    **Dec.
      31**
    
    **Mar.
      31**
    
    **Jun.
      30**
    
    **Sep.
      30**
    
    **Dec.
      31****(in
      thousands, except per share amounts)**Net
      sales
    $
    292,605
    
    $
    260,812
    
    $
    249,020
    
    $
    301,896
    
    $
    264,056
    
    $
    235,788
    
    $
    272,091
    
    $
    288,756Cost
      of sales
    
    247,804
    
    
    228,935
    
    
    248,184
    
    
    270,254
    
    
    223,198
    
    
    204,890
    
    
    237,800
    
    
    252,673Gross
      profit
    
    44,801
    
    
    31,877
    
    
    836
    
    
    31,642
    
    
    40,858
    
    
    30,898
    
    
    34,291
    
    
    36,083Income
      (loss) from continuing operations before income taxes
    
    14,045
    
    
    (1,086)
    
    
    (31,438
    )
    
    2,765
    
    
    9,926
    
    
    1,435
    
    
    6,008
    
    
    (7,701)Provision
      (benefit) for income taxes
    
    3,369
    
    
    (92)
    
    
    (7,985
    )
    
    1,415
    
    
    1,818
    
    
    378
    
    
    1,636
    
    
    (1,499)Income
      (loss) from continuing operations
    
    10,676
    
    
    (994)
    
    
    (23,453
    )
    
    1,350
    
    
    8,108
    
    
    1,057
    
    
    4,372
    
    
    (6,202)(Loss)
      from discontinued operations (2)
    
    (1,031)
    
    
    (1,293)
    
    
    (426
    )
    
    (3,239)
    
    
    (436)
    
    
    (368)
    
    
    (823)
    
    
    (1,226)Gain
      on disposal of discontinued operations (2)
    
    —
    
    
    —
    
    
    3,257
    
    
    (1,104)
    
    
    —
    
    
    —
    
    
    —
    
    
    —Net
      income (loss)
    $
    9,645
    
    $
    (2,287)
    
    $
    (20,622
    )
    $
    (2,993)
    
    $
    7,672
    
    $
    689
    
    $
    3,549
    
    $
    (7,428)Preferred
      stock accretion
    $
    327
    
    $
    336
    
    $
    349
    
    $
    360
    
    $
    289
    
    $
    304
    
    $
    313
    
    $
    323Net
      income (loss) available to common stockholders
    $
    9,318
    
    $
    (2,623)
    
    $
    (20,971
    )
    $
    (3,353)
    
    $
    7,383
    
    $
    385
    
    $
    3,236
    
    $
    (7,751)Basic
      earnings (loss) per share (1)
    $
    0.03
    
    $
    0.00
    
    $
    (0.06
    )
    $
    (0.01)
    
    $
    0.02
    
    $
    0.00
    
    $
    0.01
    
    $
    (0.02)Diluted
      earnings (loss) per share (1)
    $
    0.03
    
    $
    0.00
    
    $
    (0.06
    )
    $
    (0.01)
    
    $
    0.02
    
    $
    0.00
    
    $
    0.01
    
    $
    (0.02)
 
 (1)  Basic and
diluted earnings per share are net of continuing and discontinued
operations.
 
 (2)  Two of
the Company’s majority-owned subsidiaries were discontinued during
2004.
 
 48
 **Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures**
 
 Not
applicable.
 
 **Item
9A. Controls and Procedures**
 
 *Evaluation
of Disclosure Controls and Procedures*
 
 We
maintain “disclosure controls and procedures,” as such term is defined in Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of a simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate.
 
 Based on
their evaluation as of December 31, 2004, our Chief Executive Officer and Chief
Financial Officer have concluded that, our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were
sufficiently effective to ensure that the information required to be disclosed
by us in this Annual Report on Form 10-K was recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. ****
 
 *Changes
in Internal Controls*
 
 There
were no changes in our internal controls over financial reporting during the
three months ended December 31, 2004 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
 ****
 **Item
9B. Other Information**
 
 None.
 
 49
 **Part
III**
 
 **Item
10. Directors and Executive Officers of the Registrant**
 
 **Executive
Officers and Directors**
  The following
table sets forth the name, age as of March 1, 2005 and position of each person
who serves as a ViewSonic executive officer and/or director:
 
 **Name****Executive
      Officers:**
    **Age**
    **Position**James
      Chu
    47
    Chairman
      of the Board and Chief Executive OfficerJames
      A. Morlan
    56
    Chief
      Financial OfficerRobert
      J. Ranucci
    40
    Vice
      President, General Counsel and SecretaryMatthew
      W. Milne
    37
    President,
      ViewSonic Americas & Sr. Vice President, Business Development &
      StrategyH.C.
      Ho
    51
    President,
      ViewSonic International and President, Global Products
    GroupMichael
      Holstein
    52
    Vice
      President, Advanced Solutions & Emerging TechnologyJan
      Jensen
    42
    President
      & Managing Director, ViewSonic Europe**Directors:**Matthew
      E. Massengill
    44
    DirectorWilliam
      J. Miller
    56
    DirectorBruce
      L. Stein
    50
    DirectorLuc
      H. Vanhal
    45
    Director
 
 *James
Chu* founded
ViewSonic and has served as our Chairman of the Board and Chief Executive
Officer since our inception in 1987. From September 1986 to June 1987,
Mr. Chu served as President of U.S. Operations of Behavior Tech Computer
Corporation, a Taiwanese keyboard manufacturer.
 
 *James
A. Morlan* has
served as our Chief Financial Officer since June 2000. From
January 1997 to June 2000, Mr. Morlan served as Vice President of
Finance of Golden Valley Foods, an operating company of ConAgra
Foods, Inc., a packaged food company. Mr. Morlan holds a B.S. in
Electrical Engineering from the University of Iowa.
 
 *Robert
J. Ranucci* has
served as our Vice President, General Counsel and Secretary since
July 2003. From June 2000 to June 2003, Mr. Ranucci served
as our General Counsel and Secretary. From June 1995 to May 2000,
Mr. Ranucci was the managing partner of the law firm of Ranucci &
Ranucci in Los Angeles, California. Mr. Ranucci holds a B.A in Economics
from Claremont McKenna College, and an M.A. in Economics and a J.D. from the
University of Southern California.
 
 *Matthew
W. Milne*  has
served as our President of ViewSonic Americas since February 2005 and also as
Senior Vice President of Business Development and Strategy since September 2004.
From December 2002 to September 2004, Mr. Milne served as Senior Vice President
and General Manager of Gateway Inc.'s Consumer Electronics, a computer
manufacturer. From March 2000 to December 2002, Mr. Milne was President and CEO
of Cameo Technologies, Inc., a spin-off brand from Western Digital Corporation.
From June 1992 to March 2000, Mr. Milne held various senior-level positions at
Western Digital Corporation. Mr. Milne holds a B.A. in Finance from California
State University, Fullerton and an M.B.A. from California Polytechnic State
University, Pomona.
 
 *Heng-Chun
(“HC”) Ho* has
served as our President, ViewSonic International and President, Global Products
Group since February 2005. From November of 2001 to October of 2004,
Mr. Ho served as President & CEO of Sampo Corporation and Sampo Group,
a consumer electronics and appliance manufacturer. From November of 1999 to
November of 2001, Mr. Ho served as Vice Chairman & CEO of Sampo
Technology Corporation. From July of 1993 to October of 1999, Mr. Ho
served as Senior Vice President & General Manager of Primax Electronics
Corporation. From June of 1993 to July of 1991, Mr. Ho served as Plant
Manager at Qume ITT at Hsinchu Science Based Industrial Park. Mr. Ho holds a
B.S. in Physics from Cultural University in Taipei.
  **
 *Michael
Holstein* has
served as our Vice President, Visual Solutions Group since October 2003.
From June 2002 to September 2003, Mr. Holstein served as our
Director of Supply Base Management, and from October 2001 to May 2002,
he served as our Director of Product Engineering, Mobile and Wireless. From
November 2000 to September 2001, Mr. Holstein served as the Vice
President of Development Technology for Gateway, Inc., a computer
manufacturer, and from November 1996 to October 2000, he served as
Gateway's Director of Consumer Products.
 
 50
 *Jan
Jensen* has
served as our President and Managing Director of ViewSonic Europe, dated
September 3, 2004. From February 2003 to October 2004, Mr. Jensen served as Vice
President Worldwide Sales Channels for Proxim  Corporation, networking
equipment company. From October 2001 to January 2003, Mr. Jensen served as
Deputy Chief Operating Officer for Metro International, a global media company.
From June 1999 to September 2001, Mr. Jensen served as Vice President Business
to Business for Gateway, Inc., in Europe, the Middle
East and Africa. From August 1996 to May 1999, Mr. Jensen was Director of
International Channel Management at Siemens Computer Systems Worldwide
Headquarters, a German company.  Mr. Jensen has a M.S. from Aarhus School
of Business Administration.
 
 *Matthew
E. Massengill* has
served as a member of our Board of Directors since December 2003. Since
January 2000, Mr. Massengill has been the Chief Executive Officer and
a director of Western Digital Corporation, a disk drive manufacturer. In
November 2001, Mr. Massengill was named Chairman of the Board of
Directors of Western Digital. From October 1999 to January 2000,
Mr. Massengill was Chief Operating Officer, and from August 1999 to
October 1999, he was Co-Chief Operating Officer of Western Digital. He
previously served for more than five years in various executive capacities
within Western Digital. Mr. Massengill holds a B.S. in Engineering from
Purdue University.
 
 *William
J. Miller* has
served as a member of our Board of Directors since December 2003.
Mr. Miller has acted as an independent consultant to several technology
companies since October 1999. From April 1996 to October 1999,
Mr. Miller was Chairman of the Board of Directors and Chief Executive
Officer of Avid Technology, Inc., a provider of digital tools for
multimedia. Mr. Miller also served as President of Avid Technology from
September 1996 through October 1999. Mr. Miller serves as a
director of NVIDIA Corporation, a visual computing technology company, and
Waters Corporation, a scientific instrument manufacturing company.
Mr. Miller holds a B.A. and a J.D. from the University of Minnesota.
 
 *Bruce
L. Stein* has
served as a member of our Board of Directors since June 2003. Since April
2003, Mr. Stein has served as the Co-CEO of The Hatchery LLC, which creates and
develops family and kids oriented consumer products and entertainment. From
September 2001 to April 2003, Mr. Stein served as a consultant and director
of Avalon Digital Systems, Inc. From October 1999 to September 2001,
Mr. Stein served as a consultant and a director of Radical
Communications, Inc., a messaging solution provider, which was acquired by
Avalon Digital Systems, Inc. Mr. Stein served in various positions at
Mattel, Inc., a manufacturer of toy products, from August 1996 to
March 1999, including President, Mattel Worldwide, Chief Operating Officer
and as a director. From August 1995 to August 1996, Mr. Stein was
Chief Executive Officer of Sony Interactive Entertainment Inc., a
subsidiary of Sony Computer Entertainment America Inc. At various times
between January 1995 to June 1998, Mr. Stein was a consultant to
DreamWorks SKG, a motion picture company, Warner Bros. Entertainment, an
entertainment company, and Mandalay Entertainment, a film production company.
From January 1987-1994 Mr. Stein served as President of Kenner Products, Inc.
Mr. Stein holds a B.A. from Pitzer College in Claremont and an M.B.A. from
the University of Chicago.
 
 *Luc
H. Vanhal* **has served as a member of our Board of Directors since June 2003.
Since August 2004, Mr. Vanhal has served as Chief Financial Officers of Belkin
Corporation, a provider of connectivity solutions. From January 2001 to
April 2004, Mr. Vanhal served as President and Chief Operating Officer
of Vivendi Universal Games, Inc., a global developer, publisher and
distributor of multi-platform interactive entertainment. Mr. Vanhal also served
as Chief Financial Officer from February 1999 to January 2001. From
June 1990 to February 1999, Mr. Vanhal held several positions at
The Walt Disney Company, including Chief Financial Officer for the Worldwide
Consumer Products Division from 1997 to 1999. Mr. Vanhal holds a B.A. and
an M.B.A. from the University of Leuven, Belgium.**


There are
no family relationships among any ViewSonic executive officers or
directors.
 
 **Identification
of Audit Committee and Financial Expert**
 
 ViewSonic
maintains an Audit Committee consisting of directors Messrs. Miller, Stein
and Vanhal. Mr. Vanhal serves as the Audit Committee Chairperson. All members of
our Audit Committee are independent (as independence is currently defined in
Rule 4350(d)(2)(A)(i) and (ii) of the Nasdaq listing standards and under
applicable SEC rules and regulations). **** SEC
regulations require ViewSonic to disclose whether our Board of Directors has
determined that a director qualifying as a "financial expert" serves on
ViewSonic’s Audit Committee. ViewSonic’s Board of Directors has determined that
Mr. Miller qualifies as a "financial expert" within the meaning of such
regulations.
 
 51
  **Board
of Director Nomination Procedures**
 
 Stockholders
who wish to communicate with the Board may do so by sending written
communications addressed to the Secretary of ViewSonic Corporation at 381 Brea
Canyon Road, Walnut, CA 91789. All communications will be compiled by our
Secretary and submitted to the Board or the individual directors on a periodic
basis.
 
 **Section 16(a)
Beneficial Ownership Reporting Compliance**
 
 Section 16(a)
of the Exchange Act requires our directors, executive officers and greater than
ten percent beneficial owners of our stock to file reports of ownership and
changes in ownership with the SEC. Directors, executive officers and greater
than ten percent stockholders are required by SEC regulations to furnish
ViewSonic with copies of all Section 16(a) reports they file.
 
 Based
solely on its review of the copies of the Forms 3, 4 and 5 filed by or received
from its reporting persons (or written representations received from such
persons), ViewSonic believes that each of its directors, executive officers and
greater than ten percent beneficial owners of its stock during 2004 complied
with all filing requirements applicable to such persons, except Mr. Jensen who
filed a Form 3 late.
 ****
 **Code
of Ethics**
 
 ViewSonic has
adopted a Code of Ethics and Business Conduct, or the Code, applicable to all of
its Board members, employees and executive officers, including our Chief
Executive Officer (Principal Executive Officer) and Chief Financial Officer
(Principal Financial and Accounting Officer). ViewSonic has made the Code
available on its website at www.viewsonic.com/companyinfo/governance.htm . ****
 
 ViewSonic
intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K
regarding (1) any amendments to the Code, or (2) any waivers under the
Code relating to ViewSonic’s Chief Executive Officer and Chief Financial Officer
by posting such information on its website at
www.viewsonic.com/companyinfo/governance.htm.
 
 **ITEM
11. EXECUTIVE COMPENSATION**
 
 **Executive
Officer Compensation**
 
 The
following table sets forth the compensation information for our Chief Executive
Officer and three most highly compensated executive officers whose salary
and bonus for 2004 were in excess of $100,000 plus one former executive officer,
who are collectively referred to as the “Named Executive Officers.”
 
 **SUMMARY
COMPENSATION TABLE**
 **Annual
      Compensation**
    
    **Long
      Term**
      **Compensation**
      **Awards****Name
      and Principal Position**
    
    **Year**
    
    **Salary($)**
    
    **Bonus($)**
    
    **Other
      Annual Compensation($)**
    
    **Securities**
      **Underlying
      Options**
    
    **All
      Other**
      **Compensation
      ($)**James
      Chu
      Chairman of the Board and
      Chief Executive Officer
    
    
    2004
      2003
    
    
    300,000
      275,000
    
    
    47,213
      98,106
    
    
    —
      —
    
    
    —
      —
    
    
    4,898(1)
      4,498(2)James
      A. Morlan
      Chief Financial Officer
    
    
    2004
      2003
    
    
    254,038
      237,500
    
    
    43,280
      95,519
    
    
    —
      —
    
    
    —
      600,000
    
    
    7,637(3)
      6,224(4)Robert
      Moon (5)
      Chief Information Officer
    
    
    2004
      2003
    
    
    199,500
      190,000
    
    
    20,242
      40,757
    
    
    —
      —
    
    
    —
      225,000
    
    
    5,698(6)
      5,008(7)Christopher
      M. Franey (8)
      Former President, ViewSonic Americas
    
    
    2004
      2003
    
    
    418,854(9)
      421,250(12)
    
    
    162,023
      168,768
    
    
    767,781(10)
      158,670(13)
    
    
    —
      600,450
    
    
    20,038(11)
      4,741(14)Michael
      Holstein
      Vice President, Advanced Solutions & Emerging
    Technology
    
    
    2004
      2003
    
    
    200,004
      171,682
    
    
    18,730
      6,198
    
    
    —
      —
    
    
    —
      392,352
    
    
    5,672(15)
      4,651(16)
 52
 (1)
Includes $4,694 discretionary contributions made to a 401(k) Savings Plan and
$204 for insurance-related benefits.
(2)
Includes $4,294 discretionary contributions made to a 401(k) Savings Plan and
$204 for insurance-related benefits.
(3)
Includes $7,433 discretionary contributions made to a 401(k) Savings Plan and
$204 for insurance-related benefits.
(4)
Includes $6,020 discretionary contributions made to a 401(k) Savings Plan and
$204 for insurance-related benefits.
(5)
Mr. Moon resigned as Chief Information Officer in February 2005.
(6)
Includes $5,494 discretionary contributions made to a 401(k) Savings Plan and
$204 for insurance-related benefits.
(7)
Includes $4,804 discretionary contributions made to a 401(k) Savings Plan and
$204 for insurance-related benefits.
(8)
Mr. Franey resigned as President, ViewSonic Americas in February
2005.
(9)
Includes salary of $269,129 and car and housing allowance of
$149,725.
(10)
Includes $93,385 relocation and tax gross-up of $674,396 related to income
earned by Mr. Franey in 2004, but paid to Mr. Franey in 2005.
(11)
Includes $4,670 discretionary contributions made to a 401(k) Savings Plan, $204
for insurance-related benefits and $15,164 in connection with tax
preparation.
(12)
Includes salary of $263,750 and a car and housing allowance of
$157,500.
(13)
Includes a tax gross-up of $158,670 related to income earned by Mr. Franey in
2003, but paid to Mr. Franey in 2004.
(14)
Includes $4,537discretionary contributions made to a 401(k) Savings Plan and
$204 for insurance-related benefits.
 (15)
Includes $5,468 discretionary contributions made to a 401(k) Savings Plan and
$204 for insurance-related benefits.
 (16)
Includes $4,447 discretionary contributions made to a 401(k) Savings Plan and
$204 for insurance-related benefits.
 **Director
Compensation**
 
 Non-employee
members of our Board of Directors receive a retainer fee of $30,000, the
chairman of each committee receives $10,000 and each committee member
receives $3,000 per year. During 2004, (a) Mr. Massengill received $46,000
and computer equipment with an equivalent value of $653, (b) Mr. Miller received
$48,170 and computer equipment with an equivalent value of $1,144 and (c) each
of Messrs. Stein and Vanhal received $46,000.
 
 **Stock
Option Grants and Exercises**
 
 No
options were granted to the Named Executive Officers during 2004.
 
 **Aggregated
Option Exercises During 2004 and Option Values at December 31, 2004**
 
 The
following table presents the number and value of securities underlying
unexercised options that are held by, each of the Named Executive Officers as of
December 31, 2004.  No options were exercised during 2004 by such
individuals.
 
 Amounts
shown under the column "Value of Unexercised In-the-Money Options at
December 31, 2004" are based on a price of $1.09 per share, which was the
fair market value of shares of our common stock on December 31, 2004,
(based upon the per share price of $1.09, as determined by the Board of
Directors on May 1, 2003, in connection with a grant of stock options on
May 1, 2003), without taking into account any taxes that may be payable in
connection with the transaction, multiplied by the number of shares underlying
the option, less the exercise price payable for these shares.
 
 **Number
      of Securities**
      **Underlying
      Unexercised**
      **Options
      at December 31, 2004**
    **Value
      of Unexercised**
      **In-the-Money
      Options at**
      **December
      31, 2004****Name**
    **Exercisable**
    **Unexercisable**
    **Exercisable**
    **Unexercisable**James
      Chu
    —
    —
    —
    —James
      A. Morlan
    1,050,000
    300,000
    $67,500
    —Robert
      Moon
    568,750
    156,250
    41,063
    $3,938Christopher
      M. Franey
    1,414,624
    300,266
    100,296
    —Michael
      Holstein
    276,912
    233,088
    7,266
    2,422
 **Employment
Agreements**
 
 **
 *Jan
Jensen*
 
 We entered
into an employment agreement with Jan Jensen, the President and Managing
Director of ViewSonic Europe, dated September 3, 2004.  Mr. Jensen
commenced employment with us on October 18, 2004. Under the terms of his
agreement with us, Mr. Jensen has an annualized base salary of Euro 240,000 and
is also entitled to a variable compensation bonus that is targeted at Euro
120,000, if Mr. Jensen achieves goals related to the bonus as determined by the
Board of Directors. Mr. Jensen was given a signing bonus of Euro 15,000 and a
car allowance of Euro 2,300 per calendar month. If Mr. Jensen’s employment is
terminated or he resigns within twelve months of his start date, he must repay
ViewSonic the entire amount of the signing bonus. Mr. Jensen also received a
pension equal to 10% of his base salary. In connection with his agreement,
ViewSonic agreed to grant Mr. Jensen, subject to approval by the Compensation
Committee of the Board of Directors, an option to purchase 500,000 shares of
Common Stock of ViewSonic at the current fair market value of ViewSonic’s shares
at the time of grant. The option vests 25% on the date of grant and the
remainder vests on a pro rata basis over 3 years, such that on the third
anniversary of the grant date of the option grant, the shares shall be
fully vested.


53
 ****
 *Matthew
W. Milne*

We entered
into an agreement with Matthew
W. Milne, the President of ViewSonic Americas and Senior Vice President,
Business Development and Strategy, dated February 22, 2005.
Underthe terms of his agreement with us, Mr. Milne has an annualized
base salary of $310,800.  If Mr. Milne’semployment is terminated by
ViewSonic for any reason other than gross misconduct, Mr. Milne shall be
entitled to receive at least three months of salary continuation in addition to
the number of months of salary continuation under our standard
guidelines.

****
**Compensation
Committee Interlocks and Insider Participation**
****
During
2004, our Compensation Committee was comprised of Messrs. Massengill, Stein and
Vanhal.  None of our executive officers serve as members of the board of
directors or compensation committee of any entity that has one or more executive
officers who serve on our Board of Directors or Compensation Committee. No
interlocking relationship exists between our Board of Directors or Compensation
Committee and the board of directors or compensation committee of any other
company, nor has any interlocking relationship existed in the past.
 ****
 **Item
12. Security Ownership of Certain Beneficial Owners and
Management** **and
Related Stockholder Transactions**
 
 The
following table presents information regarding the ownership of our common stock
and preferred stock as of March 15, 2005 by:
 
 ·  Each
director;
 ·  Each of
the named executive officers;
 ·  All of
our directors and executive officers as a group; and
 ·  All of
those known by us to be beneficial owners of more than five percent of our
common stock.
 
 Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission, or SEC, and generally includes voting or investment power
with respect to securities. Beneficial ownership also includes shares of common
stock subject to options exercisable within 60 days of March 1, 2005. These
shares are not deemed outstanding for purposes of computing the percentage
ownership of each other person. Percentage of beneficial ownership is based on
361,459,176 shares of our common stock and preferred stock outstanding as of
March 1, 2005. Unless otherwise indicated, the address of each of the
individuals and entities listed below is c/o ViewSonic Corporation, 381 Brea
Canyon Road, Walnut, California, 91789.
  **Shares**
      **Beneficially
      Owned****Name
      and Address of Beneficial Owner**
    **Shares
      Issuable**
      **Pursuant
      to**
      **Options**
      **Exercisable
      Within**
      **60
      days of**
      **March
      1, 2005**
    **Number**
    **Percent****Directors
      and Named Executive Officers**James
      Chu (1)
    —
    311,969,998
    86.3%Matthew
      E. Massengill
    125,000
    125,000
    *William
      J. Miller
    125,000
    125,000
    *Bruce
      L. Stein
    125,000
    125,000
    *Luc
      H. Vanhal
    125,000
    125,000
    *James
      A. Morlan
    1,050,000
    1,050,000
    *Robert
      Moon (2)
    600,000
    600,000
    *Christopher
      M. Franey (3)
    1,414,624
    1,421,624
    *Michael
      Holstein
    290,368
    290,368
    *All
      directors and executive officers as a group
    (13 persons)
    4,058,520
    316,035,518
    86.5%**5%
      Stockholders**Keypoint
      Investments, L.P. (4)
    —
    58,831,542
    16.3%
 
 *   Represents
beneficial ownership of less than 1% of the outstanding shares of our common
stock.
  (1) Includes
58,831,542 shares held by Keypoint Investments, L.P., a California limited
partnership. Mr. Chu and his wife, Lily Chu, are general partners of
Keypoint Investments, L.P.
 (2) Mr.
Moon resigned as Vice President, Information Service in February
2005.
 (3) Mr. Franey
resigned as President, ViewSonic Americas in February 2005.
 (4) Mr.
Chu and his wife, Lily Chu, are general partners of Keypoint Investment, L.P.
 54
 
 Stockholder Approval of Stock Plans
 ****
 Information
regarding our stockholder approved stock plans is included under Part II,
Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Repurchases of Equity Securities— Equity Compensation Plan Information”
and is incorporated by reference here.
 ****
 **Item
13. Certain Relationships and Related Transactions**
 
 **Notes
Payable**
 
 As of
December 31, 2004, we had outstanding a subordinated note payable to James
Chu, our Chairman of the Board and Chief Executive Officer, and Keypoint
Investments, L.P., a California limited partnership, of which Mr. Chu and
his wife, Lily Chu, are the general partners, in the aggregate principal amount
of $43.0 million. The subordinated notes are due on April 12, 2008 and
no payments were made against the principal amount in 2004 or 2003. The interest
rate on the subordinated notes was 3.97% per annum for 2004, 2003, and 2002,
respectively. Interest expense related to the subordinated notes was
$1.7 million for 2004, 2003 and 2002, respectively.
 
 **Related
Party Sales**
 
 We have
entered into non-exclusive distribution agreements with ASI Corp., a
privately-held company located in Fremont, California pursuant to which ASI
Corp. distributes a full range of our products. The prices charged to ASI Corp.
are consistent with the prices we charge to our other distribution customers.
Mr. Chu's sister and her husband own 100% of the stock of ASI Corporation.
Net sales to ASI Corporation were $24.7 million, $28.8 million, and
$27.2 million for 2004, 2003, and 2002, respectively. We had an account
receivable balance of $1.5 million and $2.8 million from ASI Corp. at
December 31, 2004 and 2003, respectively, which are included in other
receivables. We believe that the distribution agreements with ASI Corp. were in
our best interests and on terms no less favorable to us than could be obtained
from unaffiliated third parties.
  **Investor
Rights Agreement**
 
 We,
Mr. Chu and certain other preferred stockholders have entered into an
agreement, pursuant to which these stockholders have registration rights with
respect to their shares of common stock.
 
 **Employment
Agreements**
 
 Please
see Item 11. "Executive Compensation—Employment Agreement" for a
description of our employment agreements.
 
 We
believe that the above transactions were in our best interests and on terms no
less favorable to us than could be obtained from unaffiliated third parties.
 
 **Indemnification
Agreements**
 
 We have
entered into indemnification agreements with each of our directors and executive
officers. The agreements require us to indemnify such individuals for certain
liability to which they may be subject as a result of their affiliation with us,
to the fullest extent permitted by Delaware law.
 
 **Transactions
Between Stockholders**
 
 In
December 2003, Mr. Chu, our Chief Executive Officer and the Chairman
of our Board of Directors, transferred 9,000,000 shares of ViewSonic common
stock held by him to certain investors who had purchased our common stock in
2000. At the same time, we entered into an agreement with these stockholders
providing for certain registration rights as described above under "Investor
Rights Agreement." In connection with these transactions, the investors provided
a release to ViewSonic and Mr. Chu of alleged claims of misrepresentation,
breach of contract and breach of fiduciary duty arising out of their previous
purchase of common stock. Mr. Chu did not receive any compensation from
ViewSonic in connection with these transactions.
  
 55
 **Item
14. Principal Accountant Fees and Services**
 
 
 **Fees
of Deloitte & Touche LLP**
 
 The
following table presents fees for professional audit services rendered by
Deloitte & Touche LLP for the audit of ViewSonic’s annual financial
statements for 2004 and 2003, and fees billed for all other services rendered by
Deloitte & Touche LLP.
 **Year
      Ended December 31,****2004**
    
    **2003******
    **(in
      thousands)**Audit
      fees
    $
    861,782
    
    $
    550,975Tax
      services
    
    598,975
    
    
    476,818Total
      fees
    $
    1,460,756
    
    $
    1,027,794
 The Audit
Committee has determined that the rendering of the services other than audit
services by Deloitte & Touche LLP is compatible with maintaining Deloitte
& Touche’s independence .
  **Audit
Committee Pre-Approval Policy**
 
 Section 10A(i)(1)
of the Exchange Act requires that all services to be performed by ViewSonic’s
independent registered public accounting firm be approved in advance by the
Audit Committee of the Board of Directors, subject to certain exceptions
relating to non-audit services accounting for less than five percent of the
total fees paid to its independent registered public accounting firm which are
subsequently ratified by the Audit Committee, or the De Minimus Exception. In
addition, pursuant to Section 10A(i)(3) of the Exchange Act, the Audit
Committee has established procedures by which the Chairperson of the Audit
Committee may pre-approve such services provided the Chairperson report the
details of the services to the full Audit Committee at its next regularly
scheduled meeting. None of the audit-related or non-audit services described
above were performed pursuant to the De Minimus Exception during the periods in
which the pre-approval requirement has been in effect. ****
 
 **Part
IV**
 **Item
15. Exhibits and Financial Statement Schedules**
 
 (a)  The
following documents are filed as part of this Annual Report on
Form 10-K:
 
 **(1)
Financial Statements.**
 
 56
 The
following documents are included as Part II, Item 8 of this Annual Report
on Form 10-K:
 
 
 **Page**Independent
      Registered Public Accountants Report
    30Consolidated
      Balance Sheets as of December 31, 2004 and 2003
    31Consolidated
      Statements of Operations for the years ended December 31, 2004, 2003
      and 2002
    32Consolidated
      Statements of Stockholders' Equity for the years ended December 2004,
      2003 and 2002
    33Consolidated
      Statements of Cash Flows for the years ended December 31, 2004, 2003
      and 2002
    34Notes
      to Consolidated Financial Statements
    35
 
 **(2)
Financial Statement Schedules.**
 
 **Schedule
II - Valuation and Qualifying Accounts**
 
 The
following table summarizes our activity in the promotional allowances as of
December 31 (in thousands):
 
 **2004**
    
    **2003**
    
    **2002**Accrued
      Promotional Expenses (1)Balance,
      beginning of
    $
    15,779
    
    $
    20,930
    
    $
    20,635Additions
      to allowance
    
    85,872
    
    
    81,650
    
    
    79,575Deductions
      net of recoveries
    
    (71,384)
    
    
    (86,801)
    
    
    (79,280)Balance,
      end of period
    $
    30,267
    
    $
    15,779
    
    $
    20,930
 
 (1)   Consists
of promotional expenses as described below:
 
 (a) Our gross
sales and cost of sales are adjusted for our estimate of future returns in our
statement of operations. The returns reserve represents the
 estimated returns-related
gross profit for future returns that
still have an expected right of return.
 (b)Account
development funds (cooperative advertising and marketing funds) presented in
SG&A on the income statement.
 (c)  Freight
allowance presented in cost of sales within the income statement.
  Accrued
promotional expenses excludes certain sales allowance expense net of off-invoice
discounts, cash discounts and miscellaneous allowances which are recorded
against accounts receivable.
 
 The
following table summarizes the Company's activity in the accounts receivable
allowance as of December 31 (in thousands).
 
 **2004**
    
    
    **2003**
    
    
    **2002**Allowance
      for Doubtful AccountsBalance,
      beginning of
    $
    4,192
    
    $
    2,787
    
    $
    6,073Additions
      to allowance
    
    (257)
    
    
    1,228
    
    
    618Deductions
      net of recoveries
    
    1,392
    
    
    177
    
    
    (3,904)Balance,
      end of period
    $
    5,327
    
    $
    4,192
    
    $
    2,787
 
 (3)Exhibits.
 
 The
exhibits listed in the accompanying index to exhibits are filed or incorporated
by reference as a part of this Annual Report.
 
 57
 ****
 **SIGNATURES**
  Pursuant
to the requirements of Section 12 of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 29 , 2005.
 
 **VIEWSONIC
      CORPORATION**By: /s/James
      ChuChairman
      of the Board of Directorsand
      Chief Executive Officer *(Principal Executive
      Officer)*
 
 **POWER
OF ATTORNEY**
 
 KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints James Chu and James A. Morlan, and each of them, as his
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Report on Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
 
 **Signature**
    **Title**
    **Date**/s/  JAMES
      CHU
    Chairman
      of the Board of Directors and Chief Executive Officer *(Principal
      Executive Officer*)
    March
      29,
      2005James
      Chu/s/
      JAMES A. MORLAN
    Chief
      Financial Officer
      (*Principal
      Financial Officer and Principal Accounting Officer*)
    March
      29,
      2005James
      A. Morlan/s/  MATTHEW
      E. MASSENGILL
    Director
    March
      29,
      2005Matthew
      E. Massengill/s/  WILLIAM
      J. MILLER
    Director
    March
      29,
      2005William
      J. Miller/s/  BRUCE
      L. STEIN
    Director
    March
      29,
      2005Bruce
      L. Stein/s/  LUC
      H. VANHAL
    Director
    March
      29,
      2005Luc
      H. Vanhal
 
 
 ****
 58
 **EXHIBIT
INDEX**
 ****
      **Exhibit
      Number**
    **Description
      of Document**3.1(1)
    Amended
      and Restated Certificate of Incorporation.3.2(2)
    Amended
      and Restated Bylaws.4.1(3)
    Reference
      is made to Exhibits 3.1 and 3.2.4.2(4)+
    1999
      Stock Plan.4.3(5)+
    Form
      of Non-Qualified Stock Option Agreement pursuant to the 1999 Stock
      Plan.4.4(6)
    Specimen
      Stock Certificate.4.5(7)+
    2004
      Equity Incentive Plan and form of Stock Option
  Agreement.10.1(8)
    Form
      of Indemnity Agreement.10.2(9)
    Amended
      and Restated Investor Rights Agreement, dated December 5,
      2003.10.3(10)
    Subordinated
      Promissory Note, issued to James Chu, dated December 1,
    2001.10.4(11)
    Subordinated
      Promissory Note, issued to Keypoint Investments, L.P., dated December 1,
      2001.10.5(12)
    Financing
      Agreement between ViewSonic Corporation and The CIT Group/Business Credit
      Inc., dated December 18, 2001.10.6
    Second
      Amendment to Financing Agreement by and between ViewSonic Corporation and
      The CIT Group/Business Credit Inc., dated March 16,
  2005.10.7
    Letter
      Agreement by and between ViewSonic Corporation and The CIT Group/Business
      Credit Inc., dated March 16, 2005.10.8(13)
    Build
      to Suit Industrial Lease between ViewSonic Corporation and Catellus
      Development Corporation, dated June 25, 1996.10.9(14)
    First
      Amendment to Lease between ViewSonic Corporation and Catellus Development
      Corporation, dated December 18, 1998.10.10(15)
    Second
      Amendment to Lease between ViewSonic Corporation and Catellus Development
      Corporation, dated March 6, 2002.10.11(16)
    Facility
      Agreement between ViewSonic Europe Limited and Burdale Financial Limited,
      dated June 24, 2004.10.12(17)
    Deed
      of Debenture among ViewSonic Europe Limited, others as Chargors and
      Burdale Financial Limited, dated June 24, 2004.10.13(18)
    Pledge
      Agreement between ViewSonic Europe Limited and Burdale Financial Limited,
      dated June 24, 2004.10.14(19)
    Third
      Party Pledgeholder Agreement among ViewSonic Europe Limited, Burdale
      Financial Limited and Furness Logistics B.V., dated June 24,
      2004.10.15(20)+
    Director's
      Service Agreement, by and between Jan Jensen and ViewSonic, dated
      September 8, 2004.10.16+
    2005
      Non-Employee Director Cash Compensation Policy10.17+
    Matthew
      W. Milne's Offer Letter dated February 22,
      2005.21.1
    List
      of Registrant's Subsidiaries23.1
    Consent
      of Deloitte & Touche LLP, Independent Registered Public Accounting
      Firm24.1
    Power
      of Attorney (See page 58).31.1
    Certification
      of Chief Executive Officer as required by Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended.31.2
    Certification
      of Chief Financial Officer as required by Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended.32.1
    Certification
      of Chief Executive Officer and Chief Financial Officer as required by
      Rule 13a-14(b) of the Securities Exchange Act of 1934, as
      amended.
 
 59
 
 +Management
contract, compensatory plan or arrangement.
 
 (1)  Incorporated
by reference to Exhibit 3.1 to
ViewSonic Corporation's Registration Statement on Form 10, as amended
(000-50730), filed with the Securities and Exchange Commission on April 29,
2004, amended on July 25, 2004 and August 27, 2004.
 (2)  Incorporated
by reference to Exhibit 3.2 to
ViewSonic Corporation's Registration
Statement on Form 10, as amended (000-50730), filed
with the Securities and Exchange Commission on April 29,
2004, amended on July 25, 2004 and August 27, 2004.
 (3)  Incorporated
by reference to Exhibit 4.1 to
ViewSonic Corporation's Registration Statement on Form 10, as
amended (000-50730), filed with the Securities and Exchange Commission on April 29,
2004, amended on July 25, 2004 and August 27, 2004.
 (4)  Incorporated
by reference to Exhibit 4.2 to
ViewSonic Corporation's Registration
Statement on Form 10, as amended (000-50730), filed with the Securities and
Exchange Commission on April 29, 2004, amended on July 25, 2004 and
August 27, 2004.
 (5)  Incorporated
by reference to Exhibit 4.3 to ViewSonic Corporation's Registration Statement on
Form 10, as amended (000-50730), filed with the Securities and Exchange
Commission on April 29, 2004, amended on July 25, 2004 and August 27,
2004.
 (6)  Incorporated
by reference to Exhibit 4.4 to ViewSonic Corporation's Registration Statement on
Form 10, as amended (000-50730), filed with the Securities and Exchange
Commission on April 29, 2004, amended on July 25, 2004 and August 27,
2004.
 (7)  Incorporated
by reference to Exhibit 99.2 to ViewSonic Corporation's Registration Statement
on Form S-8 (333-118775) filed with the Securities and Exchange Commission on
August 16, 2004.
 (8)  Incorporated
by reference to Exhibit 10.1 to ViewSonic Corporation's Registration Statement
on Form 10, as amended (000-50730), filed with the Securities and Exchange
Commission on April 29, 2004, amended on July 25, 2004 and August 27,
2004.
 (9)  Incorporated
by reference to Exhibit 10.2 to ViewSonic Corporation's Registration Statement
on Form 10, as amended (000-50730), filed with the Securities and Exchange
Commission on April 29, 2004, amended on July 25, 2004 and August 27,
2004.
 (10)  Incorporated
by reference to Exhibit 10.3 to ViewSonic Corporation's Registration Statement
on Form 10, as amended (000-50730), filed with the Securities and Exchange
Commission on April 29, 2004, amended on July 25, 2004 and August 27,
2004.
 (11)  Incorporated
by reference to Exhibit 10.4 to ViewSonic Corporation's Registration Statement
on Form 10, as amended (000-50730), filed with the Securities and Exchange
Commission on April 29, 2004, amended on July 25, 2004 and August 27,
2004.
 (12)  Incorporated
by reference to Exhibit 10.6 to ViewSonic Corporation's Registration Statement
on Form 10, as amended (000-50730), filed with the Securities and Exchange
Commission on April 29, 2004, amended on July 25, 2004 and August 27,
2004.
 (13)  Incorporated
by reference to Exhibit 10.7 to ViewSonic Corporation's Registration Statement
on Form 10, as amended (000-50730), filed with the Securities and Exchange
Commission on April 29, 2004, amended on July 25, 2004 and August 27,
2004.
 (14)  Incorporated
by reference to Exhibit 10.8 to ViewSonic Corporation's Registration Statement
on Form 10, as amended (000-50730), filed with the Securities and Exchange
Commission on April 29, 2004, amended on July 25, 2004 and August 27,
2004.
 (15)  Incorporated
by reference to Exhibit 10.9 to ViewSonic Corporation's Registration Statement
on Form 10, as amended (000-50730), filed with the Securities and Exchange
Commission on April 29, 2004, amended on July 25, 2004 and August 27,
2004.
 (16)  Incorporated
by reference to Exhibit 10.10 to ViewSonic Corporation's Quarterly Report on
Form 10-Q, (000-50730), filed with the Securities and Exchange Commission
on August 16, 2004.
 (17)  Incorporated
by reference to Exhibit 10.11 to ViewSonic Corporation's Quarterly Report on
Form 10-Q, (000-50730), filed with the Securities and Exchange Commission
on August 16, 2004.
 (18)  Incorporated
by reference to Exhibit 10.12 to ViewSonic Corporation's Quarterly Report on
Form 10-Q, (000-50730), filed with the Securities and Exchange Commission
on August 16, 2004.
 (19)  Incorporated
by reference to Exhibit 10.13 to ViewSonic Corporation's Quarterly Report on
Form 10-Q, (000-50730), filed with the Securities and Exchange Commission
on August 16, 2004.
 (20)  Incorporated
by reference to Exhibit 10.15 to ViewSonic Corporation's Quarterly Report on
Form 10-Q, (000-50730), filed with the Securities and Exchange Commission
on November 15, 2004.
  *      
The certification attached as Exhibit 32.1, accompanies this Annual Report
on Form 10-K, is not deemed filed with the Securities and Exchange
Commission and is not to be incorporated by reference into any filing of
ViewSonic Corporation under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or after the
date of this Form 10-K, irrespective of any general incorporation language
contained in such filing.
  60