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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 27, 2002Commission File No 0-23018
PLANAR SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
| Oregon |
|
93-0835396 |
| (State or other jurisdiction of incorporation or organization) |
|
(I.R.S. employer identification
number) |
1195 NW Compton Drive
Beaverton, OR 97006
(Address of principle executive offices, including zip code)
(503) 748-1100
(Registrant’s telephone 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: Common
Stock
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 proceeding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
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. x
| As of December 11, 2002 |
|
|
|
| Aggregate market value of the voting stock held by non-affiliates of the Registrant based upon the closing bid price of
such stock: |
|
$ |
270,306,635 |
| Number of shares of Common Stock outstanding: |
|
|
13,932,714 |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be used in connection with the Annual Meeting of Shareholders to be held on January 30, 2003, are
incorporated by reference into Part III of this report.
Part I
Item 1.
BUSINESS
Planar Systems, Inc. (Planar) is a leading developer, manufacturer and marketer of high-performance electronic display systems. The
Company’s products range from display components to stand-alone display systems built for specific market applications. Technology used in the Company’s products include its proprietary electroluminescent (EL) flat-panel displays, active
matrix liquid crystal displays (AMLCDs), passive matrix liquid crystal displays (PMLCD), and plasma display panels (PDPs). The Company manufactures EL and PMLCD displays and sources other display components from a global network of manufacturers.
The company’s products are used in a wide variety of medical, industrial, and commercial applications. The
Company competes on a global basis with development, manufacturing and marketing operations in both the United States and Europe. Major customers include Philips, Gilbarco, Datex Ohmeda, Siemens, GE Medical, DataScope, Diebold, Kodak, Allen Bradley,
Dell and CDW.
Industry Background
The information display industry is undergoing significant changes as the proliferation of networked devices is increasing the requirements for the display of text and graphic information. Many devices
are located in challenging environments, such as outdoors, in vehicles, in portable instruments and in healthcare institutions, requiring specialized displays with high-performance attributes.
Cathode-ray tube (CRT) displays have been the dominant display technology for decades. But CRTs tend to be bulky, fragile, and require substantial amounts of power to
operate. Various flat-screen technologies, with high performance and greater versatility due to improved form factor, are displacing CRTs.
There are several display technologies currently in development or commercially available, including various forms of liquid crystal, gas plasma and EL displays. The principal differentiators among flat-panel display
technologies are commercial availability, ruggedness, durability, price, size, color capability, design flexibility and power consumption.
Electroluminescent—Planar’s proprietary EL display technology is a monochrome, solid-state device with a thin-film luminescent layer sandwiched between transparent dielectric (insulator) layers and a matrix
of row and column electrodes deposited on a single glass substrate. A circuit board, with control and drive components mounted within the same area as the viewing area on the glass panel, is connected to the back of the glass substrate using various
interconnect technologies. The result is a flat, compact, reliable and rugged display device.
Passive Matrix
LCD—PMLCDs modulate light (which is either reflected or transmitted) by applying a voltage to a liquid crystal material placed between two glass plates. These are typically monochrome displays.
Active Matrix LCD—AMLCD screens incorporate the PMLCD technology plus add a transistor at every pixel location. This allows
each pixel to be turned on and off independently which increases the image quality, response time and side-to-side viewing angle of the display. These are typically color displays.
Plasma—Gas plasma creates a visible image by ionizing a gas contained between two glass plates. The ionized gas emits an ultra-violet light, which excites
phosphors and emit visible light. PDPs generally have higher power consumption requirements than other display technologies but may provide the most cost-effective solution for full-color, large format displays.
2
Other—There is a wide diversity of new technologies constantly under
development by a variety of companies in the display industry with the objective of bringing viable technologies into commercialization. Some of the more visible efforts include ferroelectric LCDs, electrophoretic displays, organic light emitting
diodes (OLEDs) and various forms of projection displays.
Planar manufactures EL displays in factories in Oregon
and Finland, and has announced its intention to consolidate all EL manufacturing at its Finland plant. Planar has manufactured PMLCD displays at its Wisconsin facility, and has announced its intention to close that plant and source PMLCD components
from Asian manufacturers. For all other display technology components, both those currently in wide use and those that may yet reach commercial viability, Planar maintains a large and versatile network of suppliers.
Markets
The
Company is currently serving the following market segments:
Medical—Planar display components are
embedded in a wide range of diagnostic and therapeutic equipment, including defibrillators, anesthesia systems, ventilators, infusion pumps, picture archiving and communication systems and blood analyzers. But an increasing portion of the
Company’s medical business is comprised of stand-alone display systems, including medically certified monitors and medically certified workstations. Most of Planar’s medical business is through products that feature the Company’s
brand, but it also supplies display sub-systems and components to OEM’s. The Company believes that its displays provide superior display quality and reliability for crucial medical applications.
Industrial—Planar displays are used in a wide range of industrial environments, process control equipment, vehicle control
systems, mobile information systems, communications equipment, gas pumps, ticketing machines and other outdoor kiosk applications. Reliability, ruggedness, temperature tolerance, optical attributes and custom form factor distinguish the
Company’s solutions used in these challenging environments. With its industrial customers, the Company specializes in collaborative relationships to develop custom designs specific for particular applications. While the industrial market is
closely correlated with overall economic activity, the Company believes there is significant and ongoing demand for specialized displays in industrial equipment. Prior to fiscal 2003, the Company had reported separately the Industrial and
Transportation segments, which were combined at the beginning of fiscal 2003.
Commercial—The Company
markets a line of Planar-branded monitors through leading online retailers who primarily serve the business market. Flat-panel monitors provide an alternative to bulky, inefficient CRTs on the desktop. The Company believes the performance attributes
and declining costs of flat-panel displays will continue to cause a widespread transition from CRT monitors to flat-panels for home and office use.
Products
The Company offers a variety of displays and display systems in a wide range of
resolutions, formats, viewing areas and technologies. These can be classified in two primary product lines:
Flat-Panel Display Components—This product line includes monochrome EL, AMLCD and PMLCD displays. These are marketed to OEMs for integration into their products.
Value-added Display Solutions—The Company incorporates a variety of display components into systems and sub-systems that include such attributes as enhanced
ruggedness, special mounting systems, peripheral devices, enhanced product design, local computing capability or special packaging. These products are typically designed for specific market applications. The Company differentiates its services
through the development of close business relationships with its customers and channel partners.
3
Research, Development and Product Engineering
The Company believes that a significant level of investment in research, development and product engineering is required to maintain
market leadership. Total expenses were $15.1 million, $15.1 million and $14.3 million for the fiscal years 2002, 2001, and 2000, respectively, for research, development, and product engineering. These expenses were partially offset by contract
funding from both government agencies (in the United States and Finland) and private sector companies of $2.2 million, $4.0 million and $3.8 million in fiscal years 2002, 2001, and 2000, respectively. Research and development expenses of the Company
are primarily related to the commercialization of display technologies, new drive architectures and fundamental process improvements. Product engineering expenses are directly related to the design, prototyping and release to production of new
Company products. Research, development and product engineering expenses consist primarily of salaries, project materials, outside services, allocation of facility expenses and other costs associated with the Company’s ongoing efforts to
develop new products, processes and enhancements.
Manufacturing
The Company operates EL manufacturing facilities in Oregon and Finland. These facilities produce a wide range of display types and sizes from 1” x 4” to 12”
x 14”. In August 2002, the Company announced its intention to close its Oregon EL plant during fiscal 2003 and consolidate all EL production in its Finland plant. The Company believes production volumes and quality necessary to meet forecast
demand are achievable from the single plant.
The Company’s facility in Wisconsin has produced PMLCD display
components in a wide range of types and sizes. In July 2002, the Company announced its intention to close its Wisconsin plant during fiscal 2003. The Company has worked closely with a manufacturing partner in China, transferring process knowledge
critical for the manufacture of wide-temperature PMLCD components.
The Company continues to shift manufacturing
and assembly capacities to offshore partners, and many of its products are now produced entirely by a closely managed network of suppliers. The Company has an investment in a Taiwan-based company that manufactures stand-alone, flat-panel monitors
for Planar, but also acquires displays and components from a number of other vendors. Planar’s effective management of its global supply chain is an important competency.
The Company’s manufacturing operations consist of the procurement and inspection of components, manufacture of the display, final assembly of all components and
extensive testing of finished products. The Company currently procures all of its raw materials from outside suppliers. This includes glass substrates, driver integrated circuits, electronic circuit assemblies, power supplies and high-density
interconnects.
Quality and reliability are emphasized in the design, manufacture and assembly of the
Company’s products. All of the Company’s facilities have active operator training/certification programs and regularly use advanced statistical process control techniques. The Company’s products undergo thorough quality inspection and
testing throughout the manufacturing process.
The Company believes that worldwide quality standards are
increasing and that many customers now expect vendors to have ISO9001 certification. This certification requires that a company meet a set of criteria, established by an independent, international quality organization that measures the quality of
systems, procedures and implementation in manufacturing, marketing and development of products and services. All of the Company’s operating units have received and maintain their ISO9001 certification.
4
Sales and Marketing
The Company’s products are distributed worldwide primarily through Company-employed sales personnel. Planar’s vertically integrated sales team for its medical
business unit is headquartered in the Company’s Waltham, Massachusetts office, with additional sales and marketing staff stationed in Beaverton, Oregon; Brussels, Belgium; and Espoo, Finland. The Company’s industrial business unit manages
sales and operations from the Beaverton office, with additional staff in Espoo also managing a network of independent sales representatives and distributors for certain European markets. The Company’s commercial business is run from the
Beaverton office.
As of September 27, 2002 and September 28, 2001, the Company’s backlog of domestic and
international orders aggregated approximately $59.9 million and $44.8 million, respectively. As of September 27, 2002, the Company included in its backlog all accepted contracts or purchase orders and in the prior year only included those orders
which were scheduled for delivery in the next six months. Variations in the magnitude and duration of contracts received by the Company and customer delivery requirements may result in substantial fluctuations in backlog from period to period. The
Company believes its backlog may be of limited utility in predicting future sales since its commercial monitor business and a growing portion of its medical business operate on a ship-to-order basis with very little backlog.
Competition
The
market for information displays is highly competitive, and the Company expects this to continue. The Company believes that over time this competition will have the effect of reducing average selling prices of flat-panel displays. The Company’s
ability to maintain gross margins depends, in part, on its ability to increase unit volumes or increase its value-added contribution to each unit; to provide additional value to its customers through peripheral devices and system integration and; to
reduce material costs in an amount sufficient to compensate for any decreases in selling prices.
The Company
competes with other display manufacturers based upon commercial availability, price, display performance (e.g., brightness, color capabilities, contrast and viewing angle), size, design flexibility, power usage, durability, ruggedness and customer
service. The Company believes its total quality program, wide range of product offerings, flexibility, responsiveness, technical support and customer satisfaction programs are important to the competitive position of the Company.
The principal component manufacturers against which the Company competes include Sharp for EL and Sharp, Toshiba, Optrex,
Seiko-Epson and Hitachi for PMLCDs. In display systems including AMLCD components sourced from manufacturers, Planar’s value-added products compete against those from Barco, Totoku and NDS in the medical market; and Sharp, Sony, NEC, Viewsonic,
Dell and others in the commercial market. Customers in the industrial market often are deciding between a display solution from Planar and one of their own displays developed by their internal engineering department, in addition, other display
systems specialists exist including GDS, Three-Five Systems, White Electronic Designs Corp. and a variety of small, highly specialized producers.
Intellectual Property
The Company relies on a combination of patents, trade secrets,
trademarks, copyrights and other elements of intellectual property law, nondisclosure agreements and other measures to protect its proprietary rights. The Company currently owns or has license rights to over 50 patents and several more pending
patent applications for its technologies. The expiration dates of the Company’s existing patents range from 2003 to 2022. Features for which the Company has and is seeking patent protection include display glass design, materials, electronics
addressing, control functions and process manufacturing.
Within the agreements under which the Company receives
research and development funding from government agencies, the funding entities retain certain rights with respect to technical data developed by the Company pursuant to funded research. Generally, these rights restrict the government’s use of
the specific data to governmental purposes, performed either directly or by third parties sub-licensed by the government. Rights under the Company’s funding agreements with private sector companies vary significantly, with the Company and the
third party each retaining certain intellectual property rights.
5
Employees
As of September 27, 2002, the Company had 643 employees worldwide, 422 in the United States and 221 in Europe. Of these, 80 were engaged in marketing and sales, 87 in research, development and product
engineering, 77 in finance and administration, and 399 in manufacturing and manufacturing support.
The
Company’s future success will depend in a large part upon its ability to continue to attract, retain and motivate highly skilled and qualified manufacturing, technical, marketing, engineering and management personnel. The Company’s U.S.
employees are not represented by any collective bargaining units and the Company has never experienced a work stoppage in the U.S. The Company’s Finnish employees are, for the most part, covered by national union contracts. These contracts are
negotiated annually between the various unions and the Employer’s Union and stipulate benefits, wage rates, wage increases, grievance and termination procedures and work conditions.
Item 2. Properties
The
Company leases three of its primary manufacturing facilities and various sales offices in the United States and Europe. The EL manufacturing operation, located in Hillsboro, Oregon, leases 70,000 square feet, which includes 25,000 square feet of
cleanroom. In addition the Company’s assembly operations located in Beaverton, Oregon, leases 37,000 square feet of custom designed space, including 15,000 square feet of cleanroom. The European facility, located in Espoo, Finland, is a custom
designed facility in which Planar leases 85,000 square feet, including approximately 15,000 square feet of cleanroom.
The Company entered into a new lease in August 2001 for approximately 72,000 square feet of class A office space in Beaverton, Oregon. The construction of this facility was completed in June 2002 and is now used for administrative
office space, design engineering and associated lab and research and development activities.
During 1994, the
Company acquired a 21,000 square foot facility, with approximately 6,000 square feet of cleanroom, also located in Beaverton, Oregon. This facility is being used for research and development activities.
The Company’s Lake Mills, Wisconsin, PMLCD manufacturing operation includes a 70,000 square foot facility with approximately 7,500
square feet of cleanroom. This property has been listed for sale.
In April 2002, the Company acquired DOME
imaging systems, inc. in Waltham, Massachusetts. DOME leases approximately 31,000 square feet which is used for sales and administration office space, design engineering and associated lab and research and development activities and quality testing.
The Company has field sales offices in key U.S. metropolitan areas and five sales offices in Europe. The offices
are located in the Boston, Chicago, New York, Portland, Raleigh, Helsinki, London, Paris, Munich and Brussels metropolitan areas. Lease commitments for most of these facilities are typically six to twelve months. The Brussels office has 36 months
remaining under the lease commitment. None of these sales offices has significant leasehold improvements nor are any planned.
The Company believes that its facilities are adequate for its immediate and near-term requirements and does not anticipate the need for significant additional expansion in the near future.
Item 3. Legal Proceedings
There are no pending, material legal proceedings to which the Company is a party or to which any of its property is subject.
Item 4. Submission of Matter to a Vote of Security Holders
No matters were submitted to stockholders during the fourth quarter of the fiscal year.
6
Part II
Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters
Shares of the Company’s Common Stock commenced trading in the over-the-counter market on the Nasdaq National Market System on December 16, 1993, under the symbol PLNR.
The Company currently intends to retain its earnings to support operations and, therefore, does not anticipate paying any cash dividends
in the foreseeable future. The following table sets forth for the fiscal periods indicated, the range of the high and low closing prices for the Company’s Common Stock on the Nasdaq National Market System.
| |
|
High
|
|
Low
|
| Fiscal 2002 |
|
|
|
|
|
|
| First Quarter |
|
$ |
21.53 |
|
$ |
14.54 |
| Second Quarter |
|
|
26.25 |
|
|
17.75 |
| Third Quarter |
|
|
25.59 |
|
|
17.30 |
| Fourth Quarter |
|
|
20.90 |
|
|
14.96 |
| |
| Fiscal 2001 |
|
|
|
|
|
|
| First Quarter |
|
$ |
28.88 |
|
$ |
14.88 |
| Second Quarter |
|
|
32.69 |
|
|
12.44 |
| Third Quarter |
|
|
28.23 |
|
|
12.38 |
| Fourth Quarter |
|
|
31.50 |
|
|
16.40 |
During the quarter ended September 27, 2002, the Company sold
securities without registration under the Securities Act of 1933, as amended (the “Securities Act”) upon the exercise of certain stock options granted under the Company’s stock option plans. An aggregate of 1,750 shares of Common
Stock were issued at exercise prices of $6.50. These transactions were effected in reliance upon the exemption from registration under the Securities Act provided by Rule 701 promulgated by the Securities and Exchange Commission pursuant to
authority granted under Section 3 (b) of the Securities Act.
On May 9, 2002, The Company completed the sale of
462,963 shares of newly issued common stock to an accredited investor in a private placement transaction pursuant to section 4 (2) and Regulation D under the Securities Act of 1933, as amended. The purchase price was $21.60 per share and resulted in
net proceeds of approximately $9,471,000. The Company has filed a registration statement with the Securities and Exchange Commission covering the resale of the securities issued in the private placement.
Item 6. Selected Financial Data
| |
|
Fiscal year
|
| |
|
2002
|
|
|
2001
|
|
2000
|
|
|
1999
|
|
|
1998
|
| Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sales |
|
$ |
205,929 |
|
|
$ |
207,952 |
|
$ |
174,551 |
|
|
$ |
122,914 |
|
|
$ |
129,015 |
| Gross profit |
|
|
60,330 |
|
|
|
64,828 |
|
|
40,659 |
|
|
|
33,175 |
|
|
|
40,252 |
| Income (loss) from operations |
|
|
(3,379 |
) |
|
|
22,571 |
|
|
(2,160 |
) |
|
|
(3,151 |
) |
|
|
11,827 |
| Net income (loss) |
|
|
(3,062 |
) |
|
|
14,537 |
|
|
543 |
|
|
|
(5,125 |
) |
|
|
8,951 |
| Net income (loss) per share (diluted) |
|
$ |
(0.24 |
) |
|
$ |
1.13 |
|
$ |
0.05 |
|
|
$ |
(0.44 |
) |
|
$ |
0.74 |
| |
| Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Working capital |
|
$ |
76,433 |
|
|
$ |
59,286 |
|
$ |
50,296 |
|
|
$ |
54,378 |
|
|
$ |
51,520 |
| Assets |
|
|
206,471 |
|
|
|
136,200 |
|
|
128,175 |
|
|
|
111,771 |
|
|
|
118,629 |
| Long-term liabilities |
|
|
46,943 |
|
|
|
13,392 |
|
|
15,486 |
|
|
|
16,622 |
|
|
|
4,526 |
| Shareholders’ equity |
|
|
124,359 |
|
|
|
96,089 |
|
|
73,268 |
|
|
|
72,744 |
|
|
|
83,378 |
7
Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Report contain statements, including statements
regarding the Company’s expectations as to sales, gross margins, operating expenses, the effective tax rate and earnings per share for fiscal 2003, that are forward-looking statements within the meaning of the Securities Litigation Reform Act
of 1995. Such statements are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. Words such as “expects”, “anticipates”,
“intends”, “plans”, “believes”, “seeks”, “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees
of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due
to numerous factors including the following: domestic and international business and economic conditions, changes in growth in the flat panel monitor industry, changes in customer demand or ordering patterns, changes in the competitive environment
including pricing pressures or technological changes, continued success in technological advances, shortages of manufacturing capacities from our third party partners, final settlement of contractual liabilities, future production variables
impacting excess inventory and other risk factors described below under “Outlook: Issues and Uncertainties”. The forward-looking statements contained in this Report speak only as of the date on which they are made, and the Company does not
undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report. If the Company does update one or more forward-looking statements, investors and others should not conclude that the
Company will make additional updates with respect thereto or with respect to other forward-looking statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This Management’s Discussion and Analysis
of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition, bad debts, inventories, warranty obligations, intangible asset valuation and income taxes. We base our 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 value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions. We believe the following critical accounting policies and the related judgments and estimates affect the preparation of our consolidated financial statements.
Revenue Recognition. Our policy is to recognize revenue upon shipment of our products to our customers. The Company defers and recognizes
service revenue over the contractual period or as services are rendered. The Company estimates expected sales returns and records the amount as a reduction of revenue at the time of shipment. The Company’s policies comply with the guidance
provided by Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), issued by the Securities and Exchange Commission. Judgments are required in evaluating the credit worthiness of our customers. Credit is not
extended to customers and revenue is not recognized until we have determined that the risk of uncollectibility is minimal.
Allowance for Doubtful Accounts. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a
process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer when determining or modifying their credit limits. We regularly
8
evaluate the collectibility of our trade receivable balances based on a combination of factors. When a customer’s account balance becomes past due, we initiate dialogue with the customer to
determine the cause. If it is determined that the customer will be unable to meet its financial obligation to us, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other
material events impacting their business, we record a specific allowance to reduce the related receivable to the amount we expect to recover given all information presently available.
We also record an allowance for all other customers based on certain other factors including the length of time the receivables are past due and historical collection
experience with customers. We believe our reported allowances are adequate. If the financial conditions of those customers were to deteriorate, however, resulting in their inability to make payments, we may need to record additional allowances which
would result in additional general and administrative expenses being recorded for the period in which such determination was made.
Inventory Reserves. The Company is exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage.
These factors include, but are not limited to, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices, and the availability of key components from our suppliers. Our
policy is to establish inventory reserves when conditions exist that suggest that our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products and market conditions. We regularly
evaluate the ability to realize the value of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values and new
product introductions. Purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net
realizable value. If actual demand for our products deteriorate or market conditions are less favorable than those that we project, additional inventory reserves may be required.
Product Warranties. Our products are sold with warranty provisions that require us to remedy deficiencies in quality or performance of our
products over a specified period of time at no cost to our customers. Our policy is to establish warranty reserves at levels that represent our estimate of the costs that will be incurred to fulfill those warranty requirements at the time that
revenue is recognized. We believe that our recorded liabilities are adequate to cover our future cost of materials, labor and overhead for the servicing of our products sold through that date. If actual product failures, or material or service
delivery costs differ from our estimates, our warranty liability would need to be revised accordingly.
Intangible assets. The Company adopted the Financial Accounting Standards Board (“FASB”) Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business
Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets” on accounting for business combinations and goodwill as of the beginning of fiscal year 2002. Accordingly, the Company no longer amortizes goodwill from
acquisitions, but continues to amortize other acquisition-related intangibles and costs.
In conjunction with the
implementation of the new accounting rules for goodwill, the Company completed a goodwill impairment analysis in the second quarter of fiscal year 2002, and found no impairment. As required by the new rules, the Company will perform a similar review
annually, or earlier if indicators of potential impairment exist. The impairment review is based on a discounted cash flow approach that uses estimates of future market share and revenues and costs for the Company’s segments as well as
appropriate discount rates. The estimates used are consistent with the plans and estimates that the Company uses to manage the underlying businesses. However, if the Company fails to deliver new products for these groups, if the products fail to
gain expected market acceptance, or if market conditions in the related businesses are unfavorable, revenue and cost forecasts may not be achieved, and the Company may incur charges for impairment of goodwill.
9
For identifiable intangible assets, the Company amortizes the cost over the
estimated useful life and assesses any impairment by estimating the future cash flow from the associated asset in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of”. If the estimated undiscounted cash flow related to these assets decreases in the future or the useful life is shorter than originally estimated, the Company may incur charges for impairment of these assets. The impairment is based on the
estimated discounted cash flow associated with the asset. An impairment could result if the underlying technology fails to gain market acceptance, the Company fails to deliver new products related to these technology assets, the products fail to
gain expected market acceptance or if market conditions in the related businesses are unfavorable.
Income
Taxes. We have recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. The Company has assessed the valuation allowance based upon our estimate of future
taxable income covering a relatively short time horizon given the volatility in the markets we serve and our historic operating results. The availability of tax planning strategies to utilize our recorded deferred tax assets is also considered. If
the Company is able to realize the deferred tax assets in an amount in excess of their reported net amounts, an adjustment to the deferred tax assets would increase earnings in the period such determination was made. Similarly, if we should
determine that we may be unable to realize our net deferred tax assets to the extent reported, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.
GENERAL
The Company is a worldwide leader in the development, manufacture and marketing of high performance electronic display products and systems. Planar began shipping products in 1983 and has experienced revenue growth based upon the
expansion of its product line and market acceptance of its products for a variety of applications.
BUSINESS
ACQUISITIONS
In April 2002, the Company completed the acquisition of DOME imaging systems, inc.
(“DOME”). DOME designs, manufactures and markets computer graphic imaging boards, flat panel displays and software for original equipment manufacturers and end users in the medical field. As a result of the acquisition, the Company is able
to offer a broader range of medical display solutions. The acquisition was accounted for as a purchase and, accordingly, the operations of DOME have been included in the consolidated financial statements from the date of acquisition. The total
consideration paid was $65.7 million which consisted of cash of $52.2 million, stock options assumed which were valued at $11.3 million, cash to be paid for stock options of $1.2 million and closing and related costs of $1.0 million. The Company
recorded a non-recurring charge of $2.3 million in the third quarter of fiscal 2002 for in-process research and development costs. See Note 3 – Business Acquisitions in the Notes to Consolidated Financial Statements which is included in Item 8
– Financial Statements and Supplementary Data in this report.
In December 2000, the Company acquired
AllBrite Technologies, Inc., by exchanging 941,823 shares of common stock of the Company for all of the outstanding capital stock of AllBrite. The acquisition qualified as a tax-free reorganization and has been accounted for as a pooling of
interests under Accounting Principles Board Opinion No. 16. Accordingly, the fiscal 2000 consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of AllBrite as
though it had been a part of the Company.
Prior to the acquisition, AllBrite’s fiscal year ended on December
31. In recording the business combination, AllBrite’s prior period financial statements have been restated to a year ended September 30, to conform to the Company’s fiscal year-end and the Company’s presentation.
10
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of net sales of certain items in the Consolidated Financial Statements of the Company. The table
and the discussion below should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
| |
|
Sept. 27, 2002
|
|
|
Sept. 28, 2001
|
|
|
Sept. 29, 2000
|
|
| Sales |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
| Cost of sales |
|
70.7 |
|
|
68.8 |
|
|
76.7 |
|
| |
|
|
|
|
|
|
|
|
|
| Gross profit |
|
29.3 |
|
|
31.2 |
|
|
23.3 |
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
| Research and development, net |
|
6.3 |
|
|
5.3 |
|
|
6.0 |
|
| Sales and marketing |
|
7.4 |
|
|
8.1 |
|
|
7.9 |
|
| General and administrative |
|
6.6 |
|
|
7.2 |
|
|
7.4 |
|
| Amortization of intangibles |
|
0.5 |
|
|
— |
|
|
— |
|
| Non-recurring charges |
|
10.1 |
|
|
(0.3 |
) |
|
3.2 |
|
| |
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
30.9 |
|
|
20.3 |
|
|
24.5 |
|
| |
|
|
|
|
|
|
|
|
|
| Income (loss) from operations |
|
(1.6 |
) |
|
10.9 |
|
|
(1.2 |
) |
| Non-operating income (expense): |
|
|
|
|
|
|
|
|
|
| Interest, net |
|
(0.7 |
) |
|
(0.2 |
) |
|
(0.2 |
) |
| Foreign exchange, net |
|
(0.1 |
) |
|
(0.2 |
) |
|
1.2 |
|
| Other, net |
|
— |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| Net non-operating income (expense) |
|
(0.8 |
) |
|
(0.4 |
) |
|
1.0 |
|
| |
|
|
|
|
|
|
|
|
|
| Income (loss) before income taxes |
|
(2.4 |
) |
|
10.5 |
|
|
(0.2 |
) |
| Provision (benefit) for income taxes |
|
(0.9 |
) |
|
3.5 |
|
|
(0.5 |
) |
| |
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
(1.5 |
)% |
|
7.0 |
% |
|
0.3 |
% |
| |
|
|
|
|
|
|
|
|
|
Sales
The Company’s sales of $205.9 million in 2002 decreased $2.0 million or 1.0% as compared to sales of $208.0 million in 2001. The decrease in sales was principally due
to lower sales of $32.1 million and $18.1 million within the Transportation and Industrial segments, which decreased 59.6% and 26.4%, respectively. Sales in the Medical segment increased by $7.8 million or 11.0% year over year. Desktop monitor sales
increased by $40.3 million or 277.4% due to higher volumes and also due to increasing the number of distributors and resellers from the time we entered the market in October 2000. The increase in sales in the Medical market was due primarily to the
acquisition of DOME in the third quarter of fiscal 2002. Sales in the Industrial market were lower due to the current economic conditions and due to softness across all applications. The decrease in sales in the Transportation market was primarily
due to the exit from the military business and lower volumes in the vehicle market. Sales related to the exited military businesses were $29.9 million in fiscal 2001. The Company’s sales of $208.0 million in 2001 increased $33.4 million or
19.1% as compared to sales of $174.6 million in 2000. The increase in sales was principally due to higher sales of $9.1 million and $9.4 million within the Industrial and Medical segments, which increased 15.4% and 15.3% respectively. Sales in the
Transportation segment were relatively flat year over year. Sales volumes in the Medical market increased primarily in the medical instrument and medical monitor markets. Industrial market sales increased due to higher volumes to the kiosk markets.
The Transportation segment was the market most negatively impacted by the economic climate due to its dependency on fuel prices and the capital intensive nature of our customers’ products. Sales to military customers in the Transportation
segment were $29.9 million in fiscal 2001 which was a slight increase over fiscal 2000 sales. The Company expects sales for fiscal 2003 to be approximately $230.0 million, including $70.0 to $80.0 million in desktop monitor sales.
11
International sales decreased by 1.6% to $48.6 million in 2002 as compared to
$49.4 million recorded in 2001, and increased by 39.8% in 2001 from 2000 sales of $35.4 million. The decrease in international sales was due primarily to decreased sales in the Industrial market segment. In fiscal 2001, the increase in international
sales was due primarily to increased sales in existing market segments in the Company’s foreign markets, primarily medical monitors. As a percentage of total sales, international sales decreased to 23.6% in 2002 and increased to 23.8% in 2001
from 20.3% in 2000. In 2002, the decline in international sales as a percentage of total sales was mainly attributable to the higher volumes of desktop monitor sales, which almost exclusively go to US customers. The increase in international sales
in 2001 as a percentage of total sales was mainly attributable to the overall increase in demand for our medical monitor products in Europe.
Gross Profit
The Company’s gross margin as a percentage of sales decreased to 29.3%
in 2002 from 31.2% in 2001. The decrease was primarily due to $1.5 million of non-recurring charges recorded in 2002 and a higher percentage of total sales coming from the commercial market, which has lower gross margins. This decrease was partially
offset by higher gross margins on the new digital imaging products acquired in the acquisition of DOME during the year. The Company’s gross margin as a percentage of sales increased to 31.2% in 2001 from 23.3% in 2000. The increase was
primarily due to $7.4 million of non-recurring charges, which were recorded in 2000 as compared to a non-recurring gain of $2.2 million in 2001. The Company also realized higher EL margins as yields improved, higher margins on our commercial AMLCD
products due to increased volumes and higher margins on our CRT products due to higher yields and increased volumes. These increases were partially offset by lower margins on the LCD products due to lower volumes and lower gross margins on our
desktop monitor products. For 2003, the Company expects gross margins to be in the range of 31.0% to 32.0%.
Research and Development
Research and development expenses, net of $12.9 million increased $1.8 million or 16.5% from $11.1 million in
the prior year. This increase reflects continued investment in the development of new products and the additional product development expenses related to the DOME acquisition offset by lower personnel costs and lower contract funding as compared to
the prior year. As a percentage of sales, research and development expenses increased to 6.3% in 2002 from 5.3% in 2001. This increase was primarily due to the increase in research and development spending. Research and development expenses of $11.1
million increased $605,000 or 5.8% from $10.5 million in fiscal 2000. This increase was due primarily to increased spending related to the new photonics program. As a percentage of sales, research and development expenses decreased to 5.3% in 2001
from 6.0% in 2000. This decrease was primarily due to the increase in sales.
Sales and Marketing
Sales and marketing expenses decreased $1.6 million or 9.5% to $15.3 million in 2002 from $16.9 million in 2001. This decrease was
primarily due to lower commissions on lower sales volumes and the savings related to the completion of the strategic change to a direct sales force offset by increased headcount and higher advertising expenses associated with our desktop monitor
business. As a percentage of sales, sales and marketing expenses decreased to 7.4% in 2002 as compared to 8.1% in 2001. Sales and marketing expenses increased $3.0 million or 21.5% to $16.9 million in 2001 from $13.9 million in 2000. This increase
was primarily due to the Company’s strategic decision to reorganize by market segments, which resulted in increasing our investments in marketing. In addition, higher commissions on higher sales volumes contributed to the increase in sales and
marketing expenses. Commission expenses were also higher due to the Company’s decision to move to a direct sales force, which resulted in payments to the old distributors and the new direct sales force. As a percentage of sales, sales and
marketing expenses increased to 8.1% in 2001 as compared to 7.9% in 2000.
12
General and Administrative
General and administrative expenses decreased $1.3 million or 8.8% to $13.7 million in 2002 from $15.0 million in 2001. The decreases in general and administrative expenses
were primarily due to lower personnel costs and lower acquisition costs which were included in the prior year related to the acquisition of AllBrite Technologies, Inc. offset by increased general and administrative expenses related to the DOME
operations. As a percentage of sales, general and administrative expenses decreased to 6.6% in 2002 from 7.2% in 2001. General and administrative expenses increased $2.1 million or 16.2% to $15.0 million in 2001 from $12.9 million in 2000. The
increases in general and administrative expenses were primarily due to increased personnel costs and acquisition costs related to the AllBrite acquisition. As a percentage of sales, general and administrative expenses decreased to 7.2% in 2001 from
7.4% in 2000.
Amortization of Goodwill and Excess of Fair Market Value of Acquired Net Assets over Purchase
Price
In connection with the Company’s acquisition of Standish Industries, Inc. in September 1997, the
Company recorded goodwill on its balance sheet for the excess of the purchase price over the fair value of the net assets acquired. The goodwill was being amortized over a ten-year period resulting in operating expenses of $571,000 per year. During
fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). FAS 142 changed the accounting for goodwill from an amortization method to an impairment
only approach and accordingly, the Company had no amortization expense related to goodwill in fiscal 2002.
In
connection with the Company’s acquisition of its Finland operation in January 1991, the Company exchanged Common Stock with a fair market value (based upon an independent valuation) equivalent to the value of the business acquired. Due to
historical losses of this business and the expectation of future losses, the value of the Comm