<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934
For the Quarter Ended December 25, 1998 Commission File No. 0-23018
_______________________________________________________________________________
PLANAR SYSTEMS, INC.
(exact name of registrant as specified in its charter)
Oregon 93-0835396
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1400 NW Compton Dr., Beaverton, Oregon 97006
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (503)690-1100
_______________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes ___ No
Number of common stock outstanding as of February 3, 1999
10,641,106 shares, no par value per share
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PLANAR SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page
Part I. Financial Information
Item 1. Financial Statements
<S> <C>
Consolidated Statements of Operations for the Three Months Ended December 25, 1998 and 3
December 26, 1997
Consolidated Balance Sheets at December 25, 1998 and September 25, 1998 4
Consolidated Statements of Cash Flows for the Three Months Ended December 25, 1998 and
December 26, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 8
Part II. Other Information
Item 2. Changes in securities 13
Item 5. Other information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 16
</TABLE>
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Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Planar Systems, Inc.
and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 25, December 26,
1998 1997
----------- -----------
<S> <C> <C>
Sales $30,476 $31,474
Cost of sales 21,220 22,353
------ ------
Gross profit 9,256 9,121
Operating Expenses:
Research and development, net 2,623 1,758
Sales and marketing 2,886 2,638
General and administrative 2,316 2,222
Amortization of goodwill and excess fair market value
of acquired net assets over purchase price 46 46
------ ------
Total operating expenses 7,871 6,664
------ ------
Income from operations 1,385 2,457
Non-operating income (expense):
Interest, net (73) 181
Foreign exchange, net (7) 219
Other, net -- --
------ ------
Net non-operating income (80) 400
------ ------
Income before income taxes 1,305 2,857
Provision for income taxes 365 726
------ ------
Net income $ 940 $ 2,131
====== ======
Net income per share (basic): $0.09 $0.20
Weighted average number of common shares
outstanding (basic): 10,757 10,891
Net income per share (diluted): $0.09 $0.19
Weighted average number of common
shares outstanding (diluted): 10,975 11,141
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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Planar Systems, Inc.
and Subsidiaries
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
ASSETS December 25 September 25
1998 1998
----------- ------------
<S> <C> <C>
(unaudited)
Current assets:
Cash and cash equivalents $ 28,741 $ 23,426
Short-term investments -- --
Accounts receivable 22,736 22,762
Inventories 27,000 25,744
Other current assets 10,432 10,313
------- ------
Total current assets 88,909 82,245
Plant and equipment, net 16,898 16,689
Long-term investments 1,022 200
Goodwill 5,058 5,222
Other 14,092 14,273
------- -------
$125,979 $118,629
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 5,000 $ 10,000
Accounts payable 8,713 9,288
Accrued compensation 3,478 4,039
Current portion of long-term debt 2,343 1,505
Deferred revenue 1,282 1,180
Other current liabilities 3,237 4,237
Current portion of excess fair market value of acquired net
assets over purchase price 476 476
------- ------
Total current liabilities 24,529 30,725
Deferred taxes 915 915
Long-term debt, less current portion 16,402 2,516
Other long-term liabilities 548 499
Long-term portion of excess fair market value of acquired net
assets over purchase price 478 596
------- -------
Total liabilities 42,872 35,251
Shareholders' equity:
Common stock 74,679 74,385
Unrealized loss on marketable securities -- --
Retained earnings 13,676 14,216
Foreign currency translation adjustment (5,248) (5,223)
------ ------
Total shareholders' equity 83,107 83,378
------- -------
$125,979 $118,629
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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Planar Systems, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION> Three Months Ended
December 25, December 26,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 940 $ 2,131
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 1,369 998
Amortization of excess market value of acquired net
assets over purchase price (119) (119)
Goodwill amortization 165 165
Loss on sale of equipment -- 27
Foreign exchange (gain) loss 7 (219)
(Increase) decrease in accounts receivable 15 (1,312)
(Increase) decrease in inventory (1,248) 116
(Increase) decrease in other current assets (120) 711
Increase (decrease) in accounts payable (576) 983
Decrease in accrued compensation (557) (1,316)
Increase (decrease) in deferred revenue 100 (65)
Increase (decrease) in other current liabilities (1,015) 1,209
------ ------
Net cash provided (used) by operating activities (1,039) 3,309
Cash flows from investing activities:
Purchase of plant and equipment (1,592) (598)
(Increase) decrease in other long-term assets 173 (3,545)
Increase in other long-term liabilities 48 18
Net sales of short-term investments -- 4,126
Net sales (purchases) of long-term investments (822) 2,394
------ ------
Net cash provided (used) by investing activities (2,193) 2,395
Cash flows from financing activities:
Net proceeds (payments) of long-term debt 14,723 (3,754)
Net proceeds (payments) of short-term debt (5,000) 6,870
Net proceeds of long-term accounts receivable 17 456
Stock repurchase (1,481) (3,598)
Net proceeds from issuance of capital stock 294 3
------ -----
Net cash provided (used) by financing activities 8,553 (23)
Effect of exchange rate changes on cash and cash
equivalents (6) (33)
Net increase in cash and cash equivalents 5,315 5,648
Cash and cash equivalents at beginning of period 23,426 21,777
------- ------
Cash and cash equivalents at end of period $28,741 $27,425
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
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Planar Systems, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the statements include all adjustments
necessary (which are of a normal and recurring nature) for the fair presentation
of the results of the interim periods presented. These financial statements
should be read in connection with the Company's audited financial statements for
the year ended September 25, 1998.
Note 2 - INVENTORIES
Inventories, stated at the lower of cost or market, consist of:
<TABLE>
<CAPTION>
December 25, 1998 September 25, 1998
----------------- ------------------
(Unaudited)
<S> <C> <C>
Raw materials $15,913 $15,892
Work in process 4,290 3,798
Finished goods 6,797 6,054
------- -------
$27,000 $25,744
======= =======
</TABLE>
Note 3 - OTHER ASSETS
Included in other assets of $14,092 and $14,273 as of December 25, 1998 and
September 25, 1998, respectively, are assets associated with the implementation
of a new production facility and equipment which had not been placed in service
as of December 25, 1998 and September 25, 1998 in the amounts of $12,721 and
$13,271, respectively.
Note 4 - LONG-TERM DEBT
The Company has entered into credit facilities with financial institutions to
borrow up to $21 million to finance equipment purchases. These loans are
secured by the financed equipment and bear interest at an average rate of 6.5%.
As of December 25, 1998 and September 25, 1998 the Company had $18.7 million and
$4.0 million outstanding under these loans.
Note 5 - 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:
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<TABLE>
<CAPTION> Three Months Ended
December 25, 1998 December 26,1997
----------------- ----------------
<S> <C> <C>
Research and development $ 3,057 $ 3,191
Product engineering 2,091 1,464
------ ------
Total expense 5,148 4,655
Contract funding (2,525) (2,897)
------ ------
Research and development, net $ 2,623 $ 1,758
====== ======
</TABLE>
Note 6 - INCOME TAXES
The provision for income taxes has been recorded based upon the current estimate
of the Company's annual effective tax rate. This rate differs from the federal
statutory rate primarily because of the provision for state income taxes,
permanent differences resulting from purchase accounting adjustments and the
effects of the Company's foreign tax rates. Additional differences arise from
the limitation on the utilization of net operating loss carryforwards. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations for further discussion of income taxes.
Note 7 - NET INCOME PER COMMON SHARE
Basic earnings per common share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per
common share is computed using the weighted average number of shares of common
stock and dilutive common equivalent shares outstanding during the period.
Incremental shares of 218,000 and 250,000 for the quarters ended December 25,
1998 and December 26, 1997, respectively, were used in the calculations of
diluted earnings per share.
Note 8 - COMPREHENSIVE INCOME
Comprehensive income for the quarters ended December 25, 1998 and December 26,
1997 was $.9 million and $1.5 million, respectively.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
interim financial statements and the notes thereto in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the year ended September 25, 1998.
RESULTS OF OPERATIONS
Sales
The Company's sales decreased by 3.2% to $30,476,000 in the fiscal quarter ended
December 25, 1998 from $31,474,000 in the same quarter last fiscal year. The
decrease in sales was principally due to a slowdown across all of the Company's
component markets in both Europe and North America as customers pushed out
shipment dates and reduced orders due to weak end-product sales. International
sales, principally sales to Europe, decreased by 8.4% due to the decreased sales
of existing product lines in the Company's European target markets. For this
fiscal quarter, international sales were 20.1% of total sales compared to 21.2%
in the same period last fiscal year.
Gross Profit
The gross margin of 30.4% for this quarter compared to 29.0% in the same quarter
in the prior year. This increase relates to higher military application sales
and margins this quarter compared to the same quarter in the prior year.
Operating Expenses
The Company's operating expenses increased by 18.1% this fiscal quarter compared
to the same quarter last fiscal year. The increase was primarily in two areas:
1) research and development, reflecting additional expenses related to the
development of new technologies and product engineering, and; 2) sales and
marketing, reflecting additional marketing resources. Overall, operating
expenses as a percentage of sales increased to 25.8% in this fiscal quarter
compared to 21.2% in the same quarter last fiscal year.
Non-Operating Income and Expense
Net interest for this quarter versus the same period last fiscal year declined
due to the increase in debt associated with the new production facility and
equipment, and the discontinuance of capitalizing related interest expenses.
The Company experienced a net loss from foreign currency transactions of $7,000
during the first quarter of fiscal 1999 compared to a net gain of $219,000
during the first quarter of fiscal 1998. These amounts are comprised of
realized gains and losses on cash transactions involving various currencies and
unrealized gains and losses related to receivables and payables denominated in
foreign currencies resulting from exchange rate fluctuations between the various
currencies in which the Company conducts business.
The Company generally realizes about one fifth of its revenue outside the United
States and expects this to continue in the future. Additionally, the functional
currency of the Company's 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.
From September 25, 1998 to December 25, 1998, on average the U.S. Dollar
weakened by less than 1% against the Finnish Markka. This weakening of the U.S.
Dollar resulted in higher reported revenues and
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operating expenses due to translation of the Finnish Markka to U.S. Dollars for
consolidated financial reporting.
Provision for Income Taxes
The effective income tax rate for the quarter ended December 25, 1998 was 28.0%
versus 25.4% in the same quarter in the prior year. This change in effective
rates is due to the relative profitability of the U.S. and foreign taxable
entities.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended December 25, 1998, the Company used $1.0 million in
cash from operating activities compared to $3.3 million provided from operating
activities in the same period last fiscal year.
For the three month period ended December 25, 1998, additions to plant and
equipment were $1.6 million compared to $598,000 for the same period last fiscal
year. The principal acquisitions during the first quarter of fiscal 1999 were
related to the purchases of equipment for the military flat panel display
operations and equipment for the Finland manufacturing operations. The
principal acquisitions during the same period last fiscal year were related to
upgrading the EL production facility and equipment in North America.
Included in other assets of $14.1 million and $14.3 million as of December 25,
1998 and September 25, 1998, respectively, are assets associated with the
implementation of a new production facility and equipment which had not been
placed in service as of December 25, 1998 and September 25, 1998, in the amounts
of $12.7 million and $13.3 million, respectively.
At December 25, 1998, the Company had a bank line of credit agreement with a
borrowing capacity of $10.0 million and credit facilities for financing
equipment of $21.0 million. A similar bank line of credit was in place as of
September 25, 1998. As of December 25, 1998, and September 25, 1998, $5 million
and $10 million, respectively, was outstanding under the credit line. Under the
equipment financing lines, $18.7 million was outstanding at December 25, 1998
and $4.0 million at September 25, 1998.
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.
On April 23, 1997, the Company announced its intention to repurchase up to
400,000 shares of the Company's currently outstanding common stock from time to
time over the next twelve months in open market and negotiated transactions. On
May 13, 1998, the Company announced that it intends to repurchase up to an
additional $5 million of the Company's currently outstanding common stock from
time to time over the next twelve months in open market and negotiated
transactions. During the three months ended December 25, 1998, the Company
repurchased approximately 156,000 shares of its own common stock for $1,481,000.
At December 25, 1998, there still remained approximately $2 million of common
stock that had not yet been repurchased.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio, and short-term and long-term debt
obligations. The Company mitigates its risk by diversifying its investments
among high credit quality securities in accordance with the Company's investment
policy.
The Company believes that its net income or cash flow exposure relating to rate
changes for short-term and long-term debt obligations is immaterial. The
Company primarily enters into debt obligations to support capital expenditures
and working capital needs. The Company does not hedge any interest rate
exposures.
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Interest expense is affected by the general level of U.S. interest rates and/or
LIBOR. Increases in interest expense resulting from an increase in interest
rates would be offset by a corresponding increase in interest earned on the
Company's investments.
The Finnish Markka is the functional currency of the Company's subsidiary in
Finland. The Company does not currently enter into foreign exchange forward
contracts to hedge certain balance sheet exposures and intercompany balances
against future movements in foreign exchange rates. The Company does maintain
cash balances denominated in currencies other than the U.S. Dollar. If foreign
exchange rates were to weaken against the U.S. Dollar, the Company believes that
the fair value of these foreign currency amounts would decline by an immaterial
amount.
YEAR 2000 ISSUE
Like most other companies, the Year 2000 computer issue creates risks for the
Company. The Year 2000 issue exists because many computer programs use two
digit rather than four digit fields to define the applicable year. As a result,
computer equipment and software and devices with imbedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, production delays, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities. Incomplete or untimely resolution of the Year 2000
issue by the Company or critically important suppliers or customers of the
Company could have a materially adverse effect on the Company's business,
financial condition, or results of operations.
The Company has undertaken various initiatives intended to ensure that its
computer systems, software and other operational equipment will function
properly with respect to dates in the Year 2000 and thereafter. For this
purpose, the term "computer systems and software" includes systems that are
commonly thought of as information technology ("IT") systems, including
enterprise software, operating systems, networking components, application and
data servers, PC hardware, accounting, data processing and other information
systems, as well as systems that are not commonly thought of as IT systems, such
as telephone systems, fax machines, manufacturing equipment and other
miscellaneous systems and equipment. Both IT and non-IT systems may contain
imbedded technology, which complicates the Company's Year 2000 assessment,
remediation and testing efforts.
Based upon its assessment efforts to date, the Company believes that certain of
the computer systems and software it currently uses will require replacement or
modification. Specifically, the Company has determined that certain of its
personal computer software will require replacement and that software upgrades
will be required with respect to certain of its financial management information
systems. Excluding the Company's Finland facility, all of the Company's
financial and information systems are expected to be Year 2000 compliant by June
1, 1999. The Finland location is implementing a new Year 2000 compliant
Enterprise Resource Planning (ERP) system, which is expected to be fully
operational by October 1999. The Company expects to complete the process of
inventorying and assessing its primary manufacturing and other non-IT systems by
June 1999. To date, no significant issues have been identified with the
Company's manufacturing and other non-IT systems, and the Company expects to
resolve any compliance issues with these systems by September 1999.
The Company has been surveying its major venders, suppliers, and customers to
assess the potential impact on its operations of these key third parties. The
process includes obtaining information as to their efforts associated with Year
2000 compliance. To date, no significant compliance issues have been identified
with these third parties. The Company plans to continue to update and evaluate
compliance issues with the key third parties through 1999.
The Company currently estimates that the cost of its Year 2000 assessment,
remediation and testing efforts as well as current anticipated costs to be
incurred by the Company with respect to Year 2000 issues of third parties, will
not exceed $500,000. The expenditures will be funded from operating cash flows.
This estimate is subject to change as additional information is obtained in
connection with the Company's assessment of the Year 2000 issue. As of December
25, 1998, the Company had incurred costs of approximately $250,000 related to
its Year 2000 assessment, remedation, and testing efforts. In
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addition, the Company expects to incur approximately $1 million (which will be
capitalized and amortized over the expected useful life) associated with the
implementation of the new ERP system in its Finland facility, which will also be
funded from operating cash flows and existing cash balances.
The Company presently believes that Year 2000 issues will not pose significant
problems for the Company. However, if all Year 2000 issues are not properly
identified, or assessment, remediation and testing are not effected timely with
respect to Year 2000 problems that are identified, there can be no assurance
that the Year 2000 issue will not have a material adverse impact on the
Company's business, financial condition or results of operations, or adversely
affect the Company's relationships with customers, venders, and others.
Additionally, there can be no assurance that the Year 2000 issues of other
entities, such as one or more of the Company's critical customers or suppliers,
will not have a material adverse impact on the Company's systems or its
business, financial condition or results of operations. Finally, if there are
infrastructure failures, such as disruptions in the supply of power, water,
transportation, communications services, or if major institutions, such as the
government, foreign or domestic banking systems, are unable to continue to
provide their services or support resulting in a disruption in services or
support to the Company, the Company may be unable to operate for the duration of
the disruption.
The Company has begun, but not yet completed, a comprehensive analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for dealing with the
most reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company currently plans to complete such analysis and
contingency planning by December 31, 1999.
The costs of the Company's Year 2000 assessment, remediation and testing efforts
and the dates on which the Company believes it will complete such efforts are
forward-looking statements that are based upon management's best estimates,
which are derived using numerous assumptions regarding future events, including
the continued availability of certain resources, third party remediation plans
and certifications, and other factors. There can be no assurance that these
estimates will prove to be accurate and actual results could differ materially
from those currently anticipated. Specific factors that could cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in Year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer codes and embedded technology, the
reliability of third party assessments and certifications, and similar
uncertainties.
INTRODUCTION OF THE EURO
The Company has established a team to address the issues raised by the
introduction of the Single European Currency (Euro) for initial implementation
as of January 1, 1999 and during the transition period through to January 1,
2002. The Company expects that its internal systems that will be affected by
the initial introduction of the Euro will be Euro capable by January 1, 2000,
and does not expect the costs of system modifications to be material. The
Company does not presently expect that introduction and use of the Euro will
result in any material increase in costs to the Company. While the Company will
continue to evaluate the impact of the Euro introduction over time, based on
currently available information, management does not believe that the
introduction of the Euro currency will have a material adverse impact on the
Company's financial condition or overall trends in results of operation.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Report contain forward-looking statements
within the meaning of the Securities Litigation Reform Act of 1995 that 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
11
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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, but not limited
to those discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operation, as well as those discussed below and
elsewhere in this Report and from time to time in the Company's other Securities
and Exchange Commission filings and reports. In addition, such statements could
be affected by general industry and market conditions and growth rates, and
general domestic and international economic conditions. 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.
12
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PART II. OTHER INFORMATION
Item 2. Changes in Securities
(c) During the first fiscal quarter of 1999, 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 1,150 shares of Common
Stock were issued at an exercise price of $2.25. 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.
Item 5. Other Information
The following issues and uncertainties, among others, should be considered
in evaluating the Company's future financial performance and prospects for
growth. The following information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Item 7) contained in the Company's 10-K for the year ended September
25, 1998.
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. In
addition, 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 significant portion of the Company's flat panel products rely on EL
technology, which currently constitutes only a small portion of the information
display market. Through the acquisition of Standish Industries, Inc., in
September 1997, the Company diversified its display products and expanded its
addressable market significantly to include flat panel passive liquid crystal
display applications. The Company's future success will depend in part upon
increased market acceptance of existing EL and passive LCD technologies, and
other future technological developments. 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 an 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 significantly 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
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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 has 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, low power 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.
Within Congress, 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.
RELIANCE ON MEDICAL EQUIPMENT AND GAS PUMP MARKETS
Approximately thirty percent of the Company's sales in fiscal 1998 were
made to customers that manufacture and sell medical equipment to health care
providers worldwide. Also, over ten percent of the Company's sales in fiscal
1998 were made to customers in the gas pump industry. The Company believes that
sales in these markets will continue to be important to the Company. As a
result, developments that adversely impact the market for medical and gas pump
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
20.5%, 26.6%, and 37.1% of the Company's sales in fiscal 1998, fiscal 1997 and
fiscal 1996, 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).
DECLINING MILITARY EXPENDITURES
The Company's sales associated with military applications have been
increasing. However, 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.
14
<PAGE>
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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: 27.1 - Financial Data Schedule
(b) Reports on 8-K: none
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLANAR SYSTEMS, INC.
(Registrant)
DATE: February 5, 1999 /s/ Jack Raiton
---------------
Jack Raiton
Vice President and
Chief Financial Officer
16
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