ITEM 1. BUSINESS
Planar Systems, Inc. (Planar) is a leading developer, manufacturer and marketer of high performance electronic display products. The Company's products include its proprietary electroluminscent (EL) flat panel displays, cathode ray tubes (CRTs), active matrix liquid crystal displays (AMLCDs), backlights and its newly acquired passive matrix liquid crystal display (PMLCD) products. These products are used in a wide variety of medical, industrial process control, instrumentation, military/avionics, transportation, communications and other applications. The Company competes on a global basis with full development, manufacturing and marketing operations in both the United States and Europe. Major customers include Datascope, Hewlett-Packard, Protocol Systems, SCI/Johnson & Johnson, Siemens, and Smiths Industries.
INDUSTRY BACKGROUND
The information display industry is undergoing significant changes as the proliferation and sophistication of microprocessors is increasing the volume of text, graphics and video information that is generated and displayed. At the same time, electronic systems are becoming smaller and more portable. These trends are converging to drive a growing demand for high performance flat, lightweight, power-efficient displays that are capable of delivering high volumes of information. Although commodity CRTs dominate the overall information display market, they are large, heavy, fragile, and require substantial amounts of power to operate.
There are several display technologies currently in development or commercially available, including various forms of liquid crystal, gas plasma and EL displays. The principal basis of competition among display suppliers are commercial availability, long life, price, display performance, size, customer service, design flexibility, power usage and ruggedness.
Passive Matrix LCD. PMLCDs modulate light (which is either reflected or applied directly) by applying a voltage to a liquid crystal material placed between two glass plates.
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.
Gas Plasma. Gas plasma creates a visible image by ionizing a gas contained between two glass plates. The ionized gas emits a visible light, typically red. Gas plasma displays generally have higher power consumption requirements than other display technologies but may provide the most cost effective solution for large-sized displays. These displays are primarily used in industrial, point-of- sale and military applications.
Electroluminescent. Planar's standard monochrome EL display technology is a 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. When AC voltage is applied to a column and a row electrode, the phosphor thin film between them emits light that passes through the transparent electrode, through the glass face, and on to the viewer. Increasing the number of rows and columns, and thus the number of pixels, in a given space increases the clarity of the display to the viewer.
Other. There is a wide diversity of new technologies constantly under development with the objective of competing in this market. Some of the more visible efforts include field emissions displays (FED), ferroelectic LCDs and various forms of projection displays.
STRATEGY
The Company's goal is to enhance its position as a leading, independent supplier of information displays. The Company has successfully developed a broad product line of information displays which has resulted in large market acceptance. In the last two fiscal years, the Company has shipped over a quarter million units to customers with a particular emphasis on the medical, industrial, instrumentation, transportation and military / avionics markets. The Company is now seeking to broaden its technology base and market penetration. Key elements of the Company's strategy to achieve this goal include:
Expand Market Presence. The Company continues to identify and pursue growing markets that have a high correlation between the capabilities of the Company's products and the specific needs of the target market. Within these markets, the Company focuses on a broad range of customers whose applications receive high value and benefit from Planar's products. Today, the Company's core markets are industrial (medical, process control and instrumentation), transportation and military/avionics. Additionally, Planar is focusing increased attention on emerging markets for high information content displays including communications and business/office.
Provide Differentiated Products. To maintain its technological advantage, the Company is continuing to expand the capabilities and applications of its proprietary EL, AMLCD and CRT technologies. During fiscal year 1997, Planar introduced several new products within its ICEBrite/TM/ family. These products are based upon Planar's Integral Contract Enhancement technology. Additionally, the Company introduced the ColorBrite product family that includes multi-color EL products and AMLCD products for commercial applications. The Company, also continues its development of a militarized AMLCD in connection with its agreement with dpiX (a Xerox company). Through business acquisitions this past year, the Company expanded its product line to include a full line of PMLCD products which adds low power and lower cost products to the Company's offerings.
Enhance Competitive Position Through Operations. The Company seeks to manufacture and deliver products of superior quality and reliability supported by a high level of customer service. The Company maintains a close relationship with its customers throughout the product life cycle, from engineering prototypes through production and sales.
The Company believes that it is the only flat panel display company with full development, manufacturing and sales operations in both the United States and Europe. The Company believes that separate regional facilities permit the Company to provide: (i) direct access to key regional markets, allowing for a faster and more complete response to customer needs; (ii) two internal sources of manufactured products to protect the Company's customers from disruption of supply; (iii) multiple production and processing technologies to accelerate new product development and optimize displays for specific applications; and (iv) reduced supplier risk as each operation tends to use different vendors.
Pursue Strategic Relationships. The Company seeks to provide customers with the best display solution regardless of technology. Display industry customers are constantly asking for higher product performance at competitive prices. To meet these customer demands, the Company intends to continue to evaluate, and actively seek to develop or acquire, promising technologies directly, or through strategic relationships.
MARKETS
The Company is currently serving the following core market segments:
Industrial-Medical. Displays are used in patient monitors and a range of diagnostic and therapeutic equipment, including anesthesia systems, ventilators, infusion pumps and blood analyzers. These medical applications typically require a wide viewing angle and clear, crisp images readable from across the room in varying light conditions by multiple users at the same time. The Company believes that its displays provide superior display quality and reliability for crucial medical applications.
Industrial-Process Control. Displays are used in a wide range of manufacturing environments, including industrial computers, operator interfaces and machine control panels. The reliability, ruggedness, wide operating temperature range and low susceptibility to electromagnetic interference of Planar displays permit the Company to deliver solutions to a range of problems in these difficult environments.
Industrial-Instrumentation. The Company's displays are used in a wide range of test and measurement products, including digital oscilloscopes, analyzers and telecommunications test equipment. The Company believes there is an increasing market demand for the Company's displays in smaller, more portable test equipment.
Military/Avionics. The Company's sales in this market consist primarily of high performance CRTs and AMLCDs sold to systems integrators for military cockpits. Additionally, the Company sells processed EL display glass to military systems suppliers
for integration into various military subsystems used in communications applications, tactical displays, avionics and shipboard command and control equipment. Although military spending is contracting in the U.S., the Company believes that this will remain an important strategic market because military customers continue to require increasing display performance, are often willing to share development costs and have significant influence over the distribution of research and development funding from government sources.
Transportation. The pervasive use of microprocessors has increased the demand for higher information content displays for space constrained transportation applications. The Company has sold displays to customers for use in global positioning applications, cockpit displays for trains, forklift applications and railway car information systems.
In addition to the core markets described above, Planar is serving the following emerging markets:
Communications. As hardware becomes increasingly portable and the support systems allow for greater transmission of data, telecommunication devices require displays with more information capability. The Company has sold displays to customers for use in field communication systems and financial trader telephone turrets.
Business/Office Equipment. The Company sells displays for a variety of applications in the office and retail markets, including high speed photocopiers, office control panels, point-of-sale devices, custom designed monitors and elevators.
PRODUCTS
The Company offers a variety of displays and display systems in a wide range of resolutions, formats, viewing areas and technologies. These displays can be classified in three primary product lines:
Flat Panel Displays. This product line includes monochrome EL and LCD, multi-color EL and full color AMLCD displays. This is principally an OEM component market where the customers purchase displays to either incorporate directly into their products or enhance the displays by integrating additional features and reselling them to the ultimate user.
Cathode Ray Tubes. The Company offers high performance CRTs based on its proprietary taut shadow mask technology. These displays are sold primarily to military systems companies who integrate them into cockpit applications.
Value-added Display Solutions. To be able to better satisfy customers' display needs, the Company has a small business activity that develops, manufactures and sells end user products. These products incorporate displays into systems that often include keyboards, touch input devices, local computing capability and special packaging. An initial market for these products
has been bedside computing applications where hospitals are increasingly recognizing the productivity gained by such installations.
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 $17.3, $16.5, and $14.1 million for the fiscal years 1997, 1996 and 1995, 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 $9.6, $9.4 and $9.1 million in fiscal years 1997, 1996 and 1995, respectively. Research and development expenses of the Company are primarily related to advanced technology programs in a new display family utilizing active matrix electroluminscent (AMEL) technology, 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.
Recent development efforts have been focused on both short term and long term programs designed to enhance the Company's product offerings and capabilities. These programs include the following:
AMEL. This program is focused on the development of high resolution image sources for miniature display applications. During fiscal 1997, the Company announced product capabilities for monochrome AMEL VGA displays. Current development efforts are addressing higher resolution (up to 2,000 lines per inch), improved performance, color and lower manufacturing costs. Potential markets include medical, industrial, military, computing and entertainment.
Small Graphics Displays (SGD). This product development effort led to the an SGD service that provides quick turnaround designs coupled with volume production of small graphics custom display systems. Initial targeted markets include industrial process control, business/office equipment and transportation.
New Technology Development. As part of the Company's strategy, relationships are continuing to be established to explore various display technologies and their incorporation into the product line. Some of the projects being pursued include AMLCDs, fast PMLCDs, backlights, field emission displays (FED), and organic light emitting diodes.
GOVERNMENT AND INDUSTRY PARTNERSHIPS
The Company believes that it is necessary for the United States and Europe to further develop sources of supply, equipment and a base of trained personnel to support the display industry. Additionally, as part of the Company's technology strategy, the Company believes that it is important to be involved with a broad range of display technologies and industry groups. As
a result of its participation, the Company benefits from work being done which complements (and in some cases, funds) the Company's internal development objectives. To that end, the Company has employees who actively participate in several government/industry partnerships, including:
Phosphor Technology Center of Excellence (PTCOE). Advance Research Projects Agency (ARPA) has funded the creation of the PTCOE to promote the development of appropriate materials and processes for the fabrication of phosphors for light emissive displays. Dr. King is a member of the steering committee of the PTCOE's Board.
United States Display Consortium (USDC). The USDC was created to develop an infrastructure to support a U.S.-based display industry by funding equipment and materials suppliers in this industry, establishing and maintaining appropriate benchmarks and disseminating information to industry participants. The USDC is funded by contracts from ARPA and member contributions.
Next Generation EL Manufacturers Consortium. This Consortium was created in connection with an agreement with ARPA under a focused Technology Reinvestment Project. This two-year cost share program which will provide the Planar-led consortium with approximately $30 million, which the consortium is required to match on a one to one basis, to further develop technologies necessary to manufacturing AMEL miniature displays.
EUREKA. EUREKA is a European Union program targeted at supporting the development of critical technology capacity within Europe. Planar International qualified for participation in the EUREKA program for its project to develop multi-color and full color EL display products and received funding under this program in 1996 and 1997.
MANUFACTURING
The Company operates EL manufacturing facilities in both the U.S. and Finland. These facilities are designed to produce a wide range of display sizes and types from 1"x 4" to 12"x 14" that can be manufactured with relatively minor changes to the basic equipment set-up.
The CRT facility is designed to produce 5" x 5" and 6" x 6" militarized CRTs. However, the Company believes that the CRT facility and technology can be scaled to produce displays up to 25" per side with little capital investment.
The Company's manufacturing operations consist of the procurement and inspection of components, manufacture of the display component, 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 and manufacture of the Company's products. All of the Company's manufacturing 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 want manufacturers 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. As of September 26, 1997, all three existing operating divisions have received and maintain their ISO9001 certification. It is anticipated that the newest division, Planar Standish will obtain ISO9001 certification in the near future.
SALES AND MARKETING
The Company's products are distributed worldwide through a combination of independent sales representatives, distributors and Company-employed sales personnel. In the United States, Planar has regional sales personnel in the Boston, Chicago, Dallas, Detroit, Milwaukee, Los Angles, Portland and Tampa metropolitan areas. Each of these locations is staffed by a regional sales manager who has responsibility for OEM sales in a specific region. Each region also has a number of independent sales representatives who generally have exclusive marketing and sales rights in their area and are managed by the regional sales manager. International sales are conducted through a combination of direct sales offices (Finland, Germany and the United Kingdom), independent sales representatives and distributors.
As of September 26, 1997, the Company's backlog of domestic and international orders aggregated approximately $31.4 million. The Company includes in its backlog all accepted contracts or purchase orders that are scheduled for delivery in the next six months. The Company believes that its backlog may be of limited utility in predicting future sales, particularly since its international sales are primarily conducted through distributors, which typically do not place purchase orders substantially in advance of delivery dates. 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.
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. If the Company is unable to increase unit volumes or increase the performance of its products in order to offset or reduce any decreases in selling prices, the Company's results of operations would be adversely impacted. In addition, the Company's ability to maintain gross margins will depend in part on its ability to reduce cost of sales in an amount sufficient to compensate for any decreases in selling prices.
The Company competes with other display manufacturers based upon commercial availability, long life, price, display performance (e.g., brightness, color capabilities, contrast and viewing angle), size, customer service, design flexibility, power usage, durability and ruggedness. The Company believes its total quality program, wide range of product offerings, flexibility, responsiveness, regional production sites, technical support and customer satisfaction programs are important to the competitive position of the Company.
The principal display competitors against which the Company competes include Sharp, Toshiba, Optrex, Seiko-Epson and Hitachi for LCDs, Sharp for EL, Sharp, DTI, Hitachi and NEC for AMLCDs. In addition, a significant number of Korean companies including Samsung, Hyundai and Goldstar have also made large investments in AMLCD technology.
The Company's CRT business, Planar Advance, has no direct competitors but there are two companies offering military avionic displays: Sony Corp. and Thompson CSF. Due to the products' design and performance, the Company believes that it currently supplies 100% of the United States' market for high brightness full color military CRTs and has a dominant share of the total military cockpit display market worldwide. Increasingly, the Company is seeing display manufacturers attempting to move into the military avionics markets with the U.S. government investing significantly in the AMLCD technology for avionics applications. The primary competitors producing militarized AMLCDs are Litton Canada and OIS Optical Imaging Systems.
INTELLECTUAL PROPERTY
The Company relies on a combination of patents, trade secrets, trademarks, copyrights and other 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 1999 to 2012. Features for which the Company has and is seeking patent protection include display glass design, materials, electronics addressing and control functions and process manufacturing.
Pursuant to 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.
EMPLOYEES
As of September 27, 1996, the Company had 575 full-time, regular employees worldwide, 323 in the United States and 252 in Europe. Of these employees, 43 were engaged in marketing and sales, 83 in research, development and product engineering, 50 in finance and administration, 168 in manufacturing support and 231 in manufacturing. Through the acquisition of Standish Industries, Inc. the Company has added an additional 302 employees to its workforce.
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.
ITEM 2. PROPERTIES
The Company leases its three primary manufacturing facilities and various sales offices in the United States and Europe. The two U.S. facilities, located in Beaverton, Oregon, are Planar America and Planar Advance. Planar America leases 45,000 square feet of custom designed space, including 5,000 square feet of cleanroom. In addition, during fiscal 1997, Planar America leased an additional facility which when completed will provide an additional 34,000 square feet, including 10,000 square feet of cleanroom. Planar Advance's operation is located in a large facility in which it leases 29,000 square feet, including approximately 7,000 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.
During 1994, the Company acquired a 21,000 square foot facility with approximately 6,000 square feet of cleanroom located near the Planar America facility. This facility is being used for research and development activities and production of miniature displays. Additionally, the Company has leased 17,000 square feet of an adjacent building.
As of September 26, 1997, the Company acquired Standish Industries, Inc. Standish is located in Lake Mills, Wisconsin and owns and occupies a 70,000 square foot facility with approximately 7,500 square feet of cleanroom.
The Company has six field sales offices in key U.S. metropolitan areas and two sales offices in Europe. The offices are located in Boston, Chicago, Dallas, Detroit, Los Angles, Tampa, London and Munich metropolitan areas. Lease commitments for these facilities are short term, typically six to twelve months. None of these sales offices has any significant leasehold improvements nor are any planned.
The Company believes that its current facilities are adequate for its immediate and near term requirements and does not anticipate the need for significant expansion in the near future.
ITEM 3.
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.
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.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Shares of the Company Common Stock commenced trading in the over-the-market on the Nasdaq National Market System on December 16, 1993, under the symbol PLNR. As of December 12, 1997, there were 4,956 beneficial holders of the Company's Common Stock.
The Company has never declared nor paid any cash dividend on its capital stock. 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.
During the quarter ended September 26, 1997, 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 56,633 shares of Common Stock were issued at exercises prices ranging from $2.00 to $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 September 26, 1997, Planar Systems, Inc. (the "Company") purchased all of the outstanding capital stock of Standish Industries, Inc., a Wisconsin corporation, and Standish International, Inc., a Wisconsin corporation, from Charles P. Hoke, Elizabeth A. Hoke and William R. Steinmetz, Trustee of the Steven Hoke Management Trust, the Catherine Hoke Management Trust, the Lauren Hoke Management Trust and the Charles D. Hoke Management Trust (together, the "Sellers") in exchange for approximately $13,650,000 in cash and 89,126 shares of common stock of the Company (the "Stock"). The Stock was offered and sold to the Sellers in reliance upon the exemption from the registration under the Securities Act provided by Section 4(2) of the Securities Act.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
General
The Company is a worldwide leader in the development, manufacture and marketing of high performance electronic display products. 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.
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.
Sales. The Company's sales increased by 10.5% to $88.9 million in fiscal 1997 from $80.4 million in fiscal 1996. The increase in fiscal 1997 was attributable primarily to increases in sales to manufacturers of medical and transportation products which offset declines in the industrial and instrumentation markets. Fiscal 1996 sales increased by 2.4% from $78.5 million in fiscal 1995. The increase in fiscal 1996 was attributable primarily to increases in sales to manufacturers of medical and industrial products and sales in the information technology market,
specifically in the bedside point of care market which offset a decline of nearly 30% in military sales.
International sales, net of intercompany eliminations, decreased 20% to $23.6 million in fiscal 1997 as compared to the $29.8 million recorded in fiscal 1996 and increased 10% in fiscal 1996 from fiscal 1995. As a percentage of total sales, international sales decreased in fiscal 1997 to 26.6%. This was attributable to two primary factors: a decline in military sales to European customers and weakness in the Finnish markka which results in lower sales when translated from the Finnish markka to the US dollar. The higher percentage, 37.1%, in fiscal 1996 versus fiscal 1995, 34.5%, was primarily attributable to an increase in military sales to Europe which offset a decline in European sales of the component business.
Gross Profit. The Company's gross profit as a percentage of sales decreased to 32.1% in fiscal 1997 from 34.8% in fiscal 1996 and 36.2% in fiscal 1995. The decline in gross margin in fiscal 1997 was related primarily to changes in the product mix from higher margin CRT products to flat panels and several one time adjustments related to the product transitions of the systems products as well as contract adjustment on the CRT products. The decrease in gross margin in fiscal 1996 was primarily due to the decline in the federal business which is historically at a higher margin.
Research and Development. Total expenses related to research and development increased 4.7% in fiscal 1997 from fiscal 1996 and 17.1% in fiscal 1996 from fiscal 1995. Net expenses (after the deduction of related contract funding) increased 8.4% in fiscal 1997 from fiscal 1996 and increased by 41.2% in fiscal 1996 from fiscal 1995. Increases in net expenses in both years are related to continued work on the next generation color products, new technology development at Planar Advance including work on AMLCDs and FEDs and the continued development of AMEL miniature displays.
Purchased Research and Development Costs. Purchased research and development costs were $8.3 million for fiscal 1997. These one-time, non- recurring costs represent in-process research and development costs expensed by the Company in connection with its acquisition of Standish Industries, Inc.
Sales and Marketing. Sales and marketing expenses increased by 14.1% to $8.1 million in fiscal 1997 from $7.1 million in fiscal 1996 and increased 6.7% in fiscal 1996 from $6.7 million in fiscal 1995. The increase in marketing and sales costs was attributable to sales commissions paid on a higher level of sales and an increased focus on marketing. As a percentage of sales, sales and marketing expenses increased to 9.1% in 1997 from 8.8% in fiscal 1996 and increased from 8.5% in fiscal 1995. The increase in fiscal 1997 as a percentage of sales was attributable to development of sales and market infrastructures to support expansion of the federal products line and the end user systems business. The increase in fiscal 1996 was due to the additional resources added to the North American sales force.
General and Administrative. General and administrative costs increased by 20.5% to $6.3 million in fiscal 1997 from $5.2 million in fiscal 1996 and increased 1.9% over the $5.1 million
spent in fiscal 1995. The increase in fiscal 1997 was primarily related to the additional administrative costs required to build the infrastructure to support of the growth of the Company, specifically in areas of management systems and overall management development. The increase in fiscal 1996 was primarily due to the increases in overall costs.
Amortization of Excess of Fair Market Value of Acquired Net Assets Over Purchase Price. In connection with the Company's acquisition of Planar International 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 Common Stock paid was less than the fair market value of the net assets acquired. This required the Company to write fixed assets down to zero and to record negative goodwill on its balance sheet for the remaining amount of the excess of fair market value of the net assets acquired over the purchase price. Amortization of this negative goodwill has created a positive offset to operating expenses in the amount of $476,000 per year. Negative goodwill is being amortized over a ten-year period.
Non-operating Income and Expense. Non-operating income and expense includes interest income on investments, interest expense and net foreign currency exchange gain or loss. Net interest income decreased in fiscal 1997 from fiscal 1996 due to the increased debt used to finance production expansion. Net interest income increased in fiscal 1996 from fiscal 1995 due to increased average cash balances.
Foreign currency exchange gains and losses are related to timing differences in the receipt and payment of funds in various currencies and the conversion of cash accounts denominated in foreign currencies to the applicable functional currency. Foreign currency exchange gains and losses accounted for a gain of $1,543,000 in fiscal 1997, and a gain of $242,000 and a loss of approximately $690,000 in fiscal 1995. These amounts are comprised of realized gains and losses on cash transactions involving various currencies and unrealized gains and losses related to foreign currency denominated receivables and payables resulting from exchange rate fluctuations between the various currencies in which the Company operates.
From September 27, 1996 to September 26, 1997, the U.S. dollar strengthened by almost 14% against the Finnish markka. This strengthening of the U.S. dollar resulted in lower reported revenues and operating expenses due to translation of the Finnish markka to U.S. dollars for consolidated financial reporting.
The Company generally realizes about one-third of its revenue outside the United States and expects this to continue in the future. Additionally, the functional currency of the Company's major foreign subsidiary, Planar International, is the Finnish markka which must be translated to U.S. dollars for consolidation. As such, the Company's business and operating results will be impacted by the effects of future foreign currency fluctuations.
The other expense recognized for the year ended September 26, 1997 reflects the write off of an equity investment in Virtual i-O, a privately held virtual reality headset manufacturing
company. The investment was accounted for under the cost method. In December 1996, as a result of delays in product developments and supplier issues, Virtual i-O needed additional funding which it received at a price per share lower than that paid by the Company. Based upon the lower of cost or market method, the Company's investment was written down based on the price paid in the last round of independent financing. This resulted in a $250,000 write-down in the quarter ended December 1996. During the quarter ended March 28, 1997, Virtual i-O declared bankruptcy and the remainder of the Company's investment was written off.
Provision for Income Taxes. The Company recorded a tax benefit of $784,000 for the year ended September 26, 1997 versus effective rates of 20.0% in fiscal 1996 and 18.2% in fiscal 1995. For fiscal 1997, the change in the effective tax rates was due to recognition of a book loss in the US compared to the book income of the Planar International. The book loss in the US was significantly impacted by the write off of the purchased research and development associated with the acquisition of Standish Industries, Inc. In prior years, the change in effective tax rates was due to the relative profitability of Planar International compared to the US entities. As a result of the acquisition of Planar International in January 1991, the Company recognized a change in ownership for tax purposes that resulted in a limitation on the annual utilization of net operating loss carryforwards for U.S. tax purposes. In fiscal 1996 and 1997, the Company is subject to the $2.1 million annual limitation.
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited consolidated financial results for each quarter in the two year period ended September 26, 1997. The Company believes that all necessary adjustments have been included to present fairly the quarterly information when read in conjunction with the Consolidated Financial Statements. The operating results for any quarter are not necessarily indicative of the results that may be expected for any future period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $12.6 million, $1.5 million and $9.5 million in fiscal 1997, 1996 and 1995, respectively. The increase in 1997 was primarily related to changes in the balance sheet accounts. The decline in 1996 from 1995 was primarily due to the increase in inventory and a decline in operating income.
Additions to plant and equipment were $2.5 million, $3.4 million and $6.9 million in fiscal 1997, 1996 and 1995, respectively. The principal acquisitions during fiscal 1997 were
related to the acquisition of equipment to be used in connection with the development of the military flat panel displays and the continued development of AMEL miniature displays. The principal acquisitions during fiscal 1996 were related to additional capacity improvements at both Planar America and Planar International. The principal acquisitions during fiscal 1995 were related to upgrading the production facility and equipment at Planar International and additional research and development equipment at Planar America and the renovation costs associated with the acquired facility.
At September 26, 1997, the Company had a bank line of credit agreement with a borrowing capacity available of $8 million and credit facilities for financing equipment of $19.5 million. A similar bank line of credit was in place as of September 27, 1996. As of September 26, 1997 and September 27, 1996, no borrowings were outstanding under the credit line and approximately $5.4 million and $5.2 million was outstanding under the equipment financing lines, respectively. In addition, as part of the acquisition of Standish Industries, Inc., the Company assumed debt of $3.2 million.
The Company believes its existing cash and investments together with cash generated from operations and existing borrowing capabilities will be sufficient to meet the Company's working capital requirements for the foreseeable future.
OUTLOOK: ISSUES AND UNCERTAINTIES
Planar does not provide forecasts of future financial performance. While Planar's management is optimistic about the Company's long-term prospects, the following issues and uncertainties, among others, should be considered in evaluating its growth outlook.
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. Certain of the Company's competitors have substantially greater name recognition and financial, technical, marketing and other resources than the Company, and competitors of the Company have made and continue to make significant investments in the construction of manufacturing facilities for AMLCDs and other advanced displays. There can be no assurance that the Company's competitors will not succeed in developing or marketing products that would render the Company's products obsolete or noncompetitive. To the extent the Company is unable to compete effectively against its competitors, whether due to such practices or otherwise, its financial condition and results of operations would be materially adversely affected.
DEVELOPMENT OF NEW PRODUCTS AND RISKS OF TECHNOLOGICAL CHANGE
The Company's future results of operations will depend upon its ability to improve and market its existing products and to successfully develop, manufacture and market new products. There can be no assurance that the Company will be able to continue to improve and market its existing products or develop and market new products, or that technological developments will not cause the Company's products or technology to become obsolete or noncompetitive. Even successful new product introductions typically result in pressure on gross margins during the initial phases as costs of manufacturing start-up activities are spread over lower initial sales volumes.
A portion of the Company's flat panel products rely on EL technology, which currently constitutes only a small portion of the information display market. The Company's future success with EL technology will depend in part upon increasing acceptance of EL products in the marketplace. In that regard, the Company's competitors are investing substantial resources in the development and manufacture of displays using a number of alternative technologies. In the event these efforts result in the development of products that offer significant advantages over the Company's products, and the Company is unable to improve its technology or develop or acquire alternative technology that is more competitive, the Company's business and results of operations will be adversely affected.
The Company's military product sales are principally based on CRT technology. Military avionics contractors are increasingly focused on incorporating displays, primarily AMLCDs, into cockpit applications that have traditionally used CRTs. The Company's ability to transition the military product line to flat panel displays over the next few years will be important to the long term success of Planar's military avionics business. The Company entered into an agreement with dpiX (a Xerox company) to jointly develop, manufacture and market AMLCDs into military applications. However, there can be no assurance that this business arrangement will be successful.
LEVEL OF ADVANCED RESEARCH AND DEVELOPMENT FUNDING
The Company's advanced research and development activities have significantly been funded by outside sources, including agencies of the United States and Finnish governments and private sector companies. The Company's recently funded research and development activities have principally focused on multi-color and full color displays, miniature displays, advanced packaging and other applications. The actual funding that will be recognized in future periods is subject to wide fluctuation due to a variety of factors including government appropriation of the necessary funds and the level of effort spent on contracts by the Company.
As Congress has become more serious about balancing the federal budget, there has been significant debate on the level of funding to be made available to programs that have historically supported the Company's research activities. Additionally, government research and development funding has been gradually shifting to a more commercial approach, and
contractors are increasingly required to share in the development costs. This trend is likely to continue, which could increase the Company's net research and development expenses. While the Company has historically not experienced any loss or decline of external research funding, the loss or substantial reduction of such funding could adversely affect the Company's results of operations and its ability to continue research and development activities at current levels. See Note 1 in the "Notes to Consolidated Financial Statements".
RELIANCE ON MEDICAL EQUIPMENT MARKET
Over one third of the Company's sales in fiscal 1997 were made to customers that manufacture and sell medical equipment to health care providers worldwide, and the Company believes that sales in this market will continue to be important to the Company. As a result, developments that adversely impact the market for medical equipment produced by the Company's customers could, in turn, adversely affect the Company's business and results of operations. In addition, the Company's sales have been and may in future periods be adversely affected due to delays in approvals by foreign or domestic government regulatory agencies which prevent a customer of the Company from introducing, producing or marketing products.
INTERNATIONAL OPERATIONS AND CURRENCY EXCHANGE RATE FLUCTUATIONS
Shipments to customers outside of North America accounted for approximately 26.6%, 37.1%, and 34.5% of the Company's sales in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. The Company anticipates that international shipments will continue to account for a significant portion of its sales. As a result, the Company is subject to risks associated with international operations, including trade restrictions, overlapping or differing tax structures, changes in tariffs, export license requirements and difficulties in staffing and managing international operations (including, in Finland, relations with national labor unions). See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
DECLINING MILITARY EXPENDITURES
As a result of the Company's acquisition of Planar Advance, the Company's sales for military applications have increased. Military capital expenditure levels have been declining for several years and depend largely on factors outside of the Company's control. Although the Company believes that its dependence on military sales will decrease as the Company continues to expand its customer base, no assurance can be given that military sales will continue at current levels. In addition, as a result of the reduction in military CRT sales, several key CRT suppliers have threatened to halt production of critical components. Although the Company believes it has reached agreement with each of its critical vendors, no assurance can be given that critical material supply will be available when needed.
EFFECTS OF QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
Results of operations have fluctuated significantly from quarter to quarter in the past, and may continue to fluctuate in the future. Various factors, including timing of new product
introductions by the Company or its competitors, foreign currency exchange rate fluctuations, disruption in the supply of components for the Company's products, changes in product mix, capacity utilization, the timing of orders from major customers, production delays or inefficiencies, seasonality, the timing of expenses and other factors affect results of operations. Quarterly fluctuations may adversely affect the market price of the Common Stock.
The Company's backlog at the beginning of each quarter does not normally include all orders needed to achieve expected sales for the quarter. Consequently, the Company is dependent upon obtaining orders for shipment in a particular quarter to achieve its sales objectives for that quarter. The Company's expense levels are based, in part, on expected future sales. If sales levels in a particular quarter do not meet expectations, operating results may be adversely affected.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PLANAR SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors Planar Systems, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Planar Systems, Inc. and subsidiaries as of September 26, 1997 and September 27, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three year period ended September 26, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Planar Systems, Inc. and subsidiaries as of September 26, 1997 and September 27, 1996, and the results of their operations, and their cash flows for each of the years in the three-year period ended September 26, 1997 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Portland, Oregon November 7, 1997
PLANAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
PLANAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
PLANAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
PLANAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
PLANAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 26, 1997 AND SEPTEMBER 27, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Planar Systems, Inc. was incorporated on April 27, 1983 and commenced operations in June 1983. Planar Systems, Inc., and its wholly-owned subsidiaries (collectively, the "Company") are engaged in developing, manufacturing and marketing of electronic display products. These display products primarily include electroluminescent (EL), liquid crystal displays (LCD) and high performance taut shadow mask cathode ray tubes (CRT) technologies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of Planar Systems, Inc. and its wholly-owned subsidiaries, Planar International Ltd., Planar America, Inc., Planar Standish, Inc., Planar Flat Candle, Inc. and Planar Advance, Inc. All significant intercompany accounts and transactions are eliminated in consolidation.
FISCAL YEAR
The Company's fiscal year ends on the last Friday in September. The last day of fiscal 1997, 1996 and 1995 was September 26, September 27 and September 29, respectively. Due to statutory requirements, Planar International's fiscal year-end is September 30. All references to a year in these notes are to the Company's fiscal year ended in the period stated which includes the fiscal year results of Planar International.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The local currency is the functional currency of the Company's foreign subsidiary. Assets and liabilities of the foreign subsidiary are translated into U.S. dollars at current rates of exchange, and revenues and expenses are translated using weighted average rates, in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation". Adjustments from foreign currency translation are included as a separate component of shareholders' equity. Foreign currency transaction gains and losses are included as a component of non-operating income.
STATEMENT OF CASH FLOWS
Cash and cash equivalents consist of highly liquid instruments with original maturities of three months or less in accordance with SFAS No. 95, "Statement of Cash Flows".
In accordance with SFAS No. 95, cash flows from the Company's operations in Finland are calculated based upon its functional currency. As a result, amounts related to assets and liabilities reported on the Statement of Consolidated Cash Flows will not necessarily agree with changes in the corresponding balances on the Consolidated Balance Sheets. The effect of exchange rate changes on cash balances held in foreign currencies is reported as a separate line item in the Consolidated Statements of Cash Flows.
INVESTMENTS
Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determination at each balance sheet date. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale, along with the Company's investment in equity securities. Securities available for sale are carried at fair value, with unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. At September 26, 1997, the Company had no investments that qualified as trading or held to maturity.
The amortized cost of debt securities classified as available for sale is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and interest are included in interest income. The cost of securities sold is based upon specific identification.
At September 26, 1997, the Company's investments in debt and equity securities were classified as cash and cash equivalents and short-term investments. These investments are diversified among high credit quality securities in accordance with the Company's investment policy. As of September 26, 1997, all debt securities are invested in federal and state and municipal securities. These securities have been reported at their fair market value of $14,561 compared to historical cost of $14,554. The unrealized gains of $7 are reported as a separate component of shareholders' equity, net of deferred taxes.
The estimated fair value of debt securities available for sale by contractual maturities at September 26, 1997 is as follows:
INVENTORIES
Inventories are stated at the lower of cost (first in, first out method) or market, net of reserves for estimated inventory obsolescence based upon the Company's best estimate of future product demand. Inventories consist of:
PLANT AND EQUIPMENT
Depreciation of equipment is computed on a straight line basis over the estimated useful lives of the assets, generally five years. Leasehold improvements are amortized on a straight line basis over the lesser of the life of the leases or the estimated useful lives of the assets. Depreciation of the building is computed on a straight line basis over the estimated useful life of the building, estimated to be 39 years.
INCOME TAXES
Under SFAS No. 109, deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at the enacted tax rates expected to be in effect when such amounts are realized or settled. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Income tax credits will be recognized as reductions of the provision for income taxes in the year the credits are realized (the "flow-through method").
REVENUE RECOGNITION
The Company recognizes revenue from product sales upon shipment.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. The Company periodically enters into research and development contracts with certain governmental agencies and private sector companies. These contracts generally provide for reimbursement of costs. Funding from research and development contracts is recognized as a reduction in operating expenses during the period in which the services are performed and related direct expenses are incurred, as follows:
As of September 26, 1997 and September 27, 1996, included in other current assets is $2,656 and $2,964, respectively, related to these research and development contracts.
PRODUCT WARRANTY
The Company provides a warranty for its products and establishes an allowance at the time of sale adequate to cover warranty costs during the warranty period. The warranty period is generally between twelve and fifteen months. This reserve is included in other current liabilities (Note 7).
GOODWILL AND EXCESS FAIR MARKET VALUE OF ACQUIRED NET ASSETS OVER PURCHASE PRICE
Goodwill and the excess of fair market value of acquired net assets over purchase price are being amortized over a ten-year period using the straight line method.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is computed using the weighted average number of common and dilutive common equivalent shares assumed to be outstanding during the period, using the treasury stock method. Common equivalent shares consist of options to purchase common stock.
FINANCIAL INSTRUMENTS
The recorded amount of financial instruments approximates the fair market value.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). In fiscal 1997, the
Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation".
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". This statement specifies the standard for computing and presenting earnings per share. Adoption of SFAS No. 128 is required for fiscal years beginning after December 15, 1996. The Company believes that implementation of this statement will not have a material effect on the financial position or results of operations of the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Earnings" and and No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 130 established standards for reporting comprehensive income and its components. SFAS No. 131 establishes the standards for reporting information about operating segments. Adoption of both standards is required for fiscal years beginning after December 15, 1997. The Company believes that implementation for these standards will not have a material effect on the financial position or results of operations of the Company.
NOTE 2 -- CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of trade receivables and investments. The risk in trade accounts receivable is limited due to the credit worthiness of the companies comprising the Company's customer base and their dispersion across many different sectors of the electronics industry and geographies. The risk in investments is limited due to the credit worthiness of investees comprising the portfolio, the diversity of the portfolio and relative low risk of municipal securities. At September 26, 1997, the Company does not believe it had any significant credit risks.
NOTE 3 - BUSINESS ACQUISITIONS
On June 4, 1997, the Company acquired Flat Candle Corporation for $1,128 cash. Flat Candle Corporation's primary business is that of developing, manufacturing and marketing of back lights. The transaction was accounted for as a purchase. Intangibles of $803 were recorded, which are being amortized over ten years. The financial statements include the operating results of Flat Candle Corporation from the date of acquisition. Pro forma results of operations have not been presented because the effect of this acquisition is not significant.
On September 26, 1997, the Company acquired all of the outstanding capital stock of Standish Industries, Inc. for approximately $15 million in cash and stock. Standish Industries' primary business is that of developing, manufacturing, and marketing electronic displays. The transaction was accounted for as a purchase. Intangibles of $5,714 were recorded, after adjusting for purchased research and development costs (Note 4), which are being amortized over ten years. The financial statements include the operating results of Standish Industries, Inc. from the date of acquisition.
The following summary, prepared on a pro forma basis, combines the consolidated results of operations as if Standish Industries, Inc. had been acquired as of the beginning of the periods presented, after including the impact of certain adjustments, such as amortization of intangibles and the related income tax effects.
The pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results and do not reflect synergies that might be achieved from combined operations.
NOTE 4 - PURCHASED RESEARCH AND DEVELOPMENT EXPENSE
In connection with the acquisition of Standish Industries, Inc. at September 26, 1997 (Note 3), the Company allocated $8,305 of the purchase price to in-process research and development projects as determined by independent appraisal. Accordingly, these costs were expensed as of the acquisition date. These allocations represent the estimated fair value based on risk adjusted cash flows (assuming a 23% discount rate) related to incomplete projects. The development of these projects had not yet reached technological feasibility, and the technology has no alternative future use. The technology acquired in these acquisitions will require substantial additional development by the Company.
NOTE 5 -- PLANT AND EQUIPMENT
Plant and equipment, at cost, consists of:
NOTE 6 -- BORROWINGS
LINE OF CREDIT
The Company has a bank line of credit which allows for borrowings up to $8 million. The line bears interest at the bank's prime rate (8.5% at September 26, 1997) and is unsecured with a negative pledge on accounts receivable and inventories. The agreement is subject to review at
September 30, 1998. There were no borrowings outstanding on this line at September 26, 1997 or September 27, 1996.
LONG TERM DEBT
The Company has entered into credit facilities with several financial institutions to borrow up to $19.5 million to finance equipment purchases. These loans are secured by the financed equipment, mature in 2000 and bear interest at an average rate of 7.5%. As of September 26, 1997 and September 27, 1996, the company has $5.4 million and $5.2 million outstanding under these loans. As a result of the acquisition discussed at note 3, the Company assumed additional debt with of $3,157, maturing over the next several years at an average rate of 9.6%. Aggregate maturities over the next five years are $1,698, $2,270, $2,017, $1,022, $279 and $1,290 thereafter. Covenants under these agreements are not considered restrictive to normal operations.
NOTE 7 -- OTHER CURRENT LIABILITIES
Other current liabilities consist of:
NOTE 8 -- INCOME TAXES
The components of income(loss) before income taxes and extraordinary item consist of the following:
The following table summarizes the provision for US federal, state and foreign taxes on income.
The differences between the U.S. federal statutory tax rate and the Company's effective rate are as follows:
The tax effects of temporary differences and carryforwards which gave rise to significant portions of the deferred tax assets and liabilities as of September 26, 1997 and September 27, 1996 were as follows:
During fiscal year 1997 and 1996, the Company recognized tax benefits of $37 and $143 respectively, related to differences between financial and tax reporting of stock option transactions. This difference was credited to common stock.
The Company has established a valuation allowance for certain deferred tax assets, including net operating loss and tax credit carryforwards. SFAS No. 109 requires that such a valuation allowance be recorded when it is more likely than not that some portion of the deferred tax assets will not be realized. For fiscal year 1997 and 1996, the valuation reserve increased by $192 and decreased by $1,166, respectively.
At September 26, 1997, the Company has net operating loss carryforwards of approximately $7,590 available to reduce future federal taxable income. The carryforwards expire at various dates through 2004. Utilization of the carryforwards is subject to certain limitations due to the change in ownership of the Company which occurred in conjunction with the acquisition of Planar International. As a result of the acquisition, utilization of available net operating loss carryforwards is limited to approximately $2,100 per year.
NOTE 9 -- SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of preferred stock at $.01 par value. At September 26, 1997, no shares of preferred stock have been issued; however the following series of preferred stock had been designated and reserved - Series D Junior Participating Preferred Stock 200,000. Additional series of preferred stock may be designated and the related rights and preferences fixed by action of the Board of Directors.
STOCK OPTIONS
In fiscal 1994, the Company adopted the 1993 Stock Incentive Plan which provides for the granting of options to buy shares of Common Stock. These options are intended to either qualify as "incentive stock options" under the Internal Revenue Code or "non-qualified stock options" not intended to qualify. Under the 1993 plan, options generally become exercisable 25% one year after grant and 6.25% per quarter thereafter, and expire ten years after grant. During fiscal 1997, the Company adopted the 1996 Stock Incentive Plan with the same provisions and guidelines as the aforementioned 1993 plan. The Company reserved 1,200,000 shares of common stock for issuance under this plan. The option price under all plans is the fair market value as of the date of the grant. Total shares reserved under these plans are 2,758,735 shares.
The Company also adopted a 1993 stock option plan for nonemployee directors that provides an automatic annual grant to each outside director of the Company. Total annual grants under this plan cannot exceed 60,000 shares per year. Terms of this plan generally follow the 1993 Stock Incentive Plan. Information regarding these option plans is as follows:
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock-Based Compensation" which defines a fair value based method of accounting for an employee stock option or similar equity instrument. As is permitted under SFAS No. 123, the Company has elected to continue to account for its stock based compensation plans under APB Opinion No. 25. The Company has computed, for pro forma disclosure purposes, the value of all options granted during 1997 and 1996 using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following weighted average assumptions for grants:
Using the Black-Scholes methodology, the total value of options granted during 1997 and 1996 was $1,363 and $3,567, respectively, which would be amortized on a pro forma basis over the vesting period of the options. The weighted average fair value of options granted during 1997 and 1996 was $13.46 per share and $13.58 per share, respectively. If the Company accounted for its stock based compensation plans in accordance with SFAS No 123, the Company's net income and net income per share would approximate the pro forma disclosures below:
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to January 1, 1995, and additional awards are anticipated in future years.
The following table summarizes information about stock options outstanding at September 26, 1997:
EMPLOYEE STOCK PURCHASE PLAN
In fiscal 1995, the Company adopted the 1994 Employee Stock Purchase Plan which provides that eligible employees may contribute, through payroll deductions, up to 10% of their
earnings toward the purchase of the Company's Common Stock at 85 percent of the fair market value at specific dates. At September 26, 1997, 224,914 shares remain available for purchase through the plan and there were 492 employees eligible to participate in the plan, of which 121, or 24.5 percent, were participants. Employees purchased 36,283 shares, at an average price of $8.58 per share during the year. Total receipts to the company were $311. Since the plan is noncompensatory, no charges to operations have been recorded.
SHAREHOLDERS RIGHTS PLAN
In February 1996, the Board of Directors approved a shareholder rights plan and declared a dividend of one preferred share purchase right for each outstanding common share. Each right represents the right to purchase one hundredth of a share of Preferred Stock, at an exercise price of $60.00, subject to adjustment. The rights are only exercisable ten days after a person or group acquires, or commences a tender or exchange offer to acquire, beneficial ownership of 15% or more of the Company's outstanding common stock. Subject to the terms of the shareholder rights plan and the discretion of the Board of Directors, each right would entitle the holder to purchase one share of Common Stock of the Company for each right at one-half of the then-current price. The rights expire in February 2006, but may be redeemed by action of the Board of Directors prior to that time at $.01 per right.
NOTE 10 - COMMITMENTS
OPERATING LEASES
Most of Company's office and manufacturing facilities are subject to long- term operating leases. In addition, regional sales offices and automobiles are subject to leases with terms ranging from one to twelve months.
At September 26, 1997, the approximate minimum annual operating lease payments are:
Total rent expense was $1,920, $1,921 and $1,880 for the years ended September 26, 1997, September 27, 1996 and September 29, 1995, respectively.
NOTE 11 -- GEOGRAPHIC INFORMATION
The Company operates in one industry. Operations include developing, manufacturing, and marketing EL displays, LCD and high performance CRTs.
Information concerning geographic area for fiscal year 1995, 1996 and 1997 is summarized below:
North American sales include all sales made in Canada, the United States and Mexico. Rest of the World sales includes all sales made in countries outside of North America, which in fiscal years 1997, 1996 and 1995 principally consisted of sales made in Europe and Japan.
No customer accounted for 10 percent or more of revenue in fiscal years 1997, 1996 or 1995.
NOTE 12 -- 401(k) AND PROFIT SHARING
All employees in North America over 21 years of age who have completed at least three months of service are eligible to participate in the 401(k) savings and profit sharing plan. Employees can contribute between 0% and 15% of their gross pay subject to statutory maximums. The Company matches 50% of the first 10% of each participating employee's contributions, also subject to statutory maximums. Employer contributions vest over four years. The 401(k) plan expense amounted to $466, $438 and $332 for the years ended September 26, 1997, September 27, 1996 and September 29, 1995, respectively.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III - --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PLANAR SYSTEMS, INC.
The information set forth under the captions "Election of Directors" and "Management" appearing on pages 2 through 5 of the Proxy Statement to be used in connection with the Annual Meeting of Shareholders on February 12, 1998, is incorporated by reference into this Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" appearing on pages 5 through 8 of the Proxy Statement to be used in connection with the Annual Meeting of Shareholders on February 12, 1998, is incorporated by reference into this Report.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Stock Owned by Management and Principal Shareholders" appearing on page 10 of the Proxy Statement to be used in connection with the Annual Meeting of Shareholders on February 12, 1998, is incorporated by reference into this Report.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV - -------
ITEM 14:
ITEM 14: EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON 8-K
(a) Financial Statements and Schedules
The financial statements of Planar Systems, Inc. as set forth under Item 8 are filed as part of this report.
Financial statement schedules have been omitted since the information called for is not present in amounts sufficient to require submission of the schedules.
The independent auditors' report with respect to the above-listed financial statements appears on page 19 of this report.
(b) Reports on 8-K
8-K report filed on October 10, 1997
(c) Exhibits
/(1)/ Incorporated by reference to the Company's Registration Statement on Form S-1 (Reg. No. 33-71020), declared effective on December 15, 1993. /(2)/ Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended September 27, 1996. /(3)/ Incorporated by reference to the Company's Current Report on Form 8-K files on February 21, 1996. /(4)/ Incorporated by reference to the Company's Annual Report on Form 10-K filed as of for the year ended September 30, 1994. /(5)/ Incorporated by reference to the Company's Current Report on Form 8-K filed as of September 12, 1994. /(6)/ Incorporated by reference to the Company's Current Report on Form 8-K files on October 10, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PLANAR SYSTEMS, INC.
December 22, 1997 By: /s/ JACK RAITON --------------- Jack Raiton Vice President Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jack Raiton and James M. Hurd, and each of them singly, as his true and lawful attorneys-in-fact, with full power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may 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 date indicated.