10-Q 1 d10q.htm FORM 10-Q FOR QUARTER ENDED MARCH 29, 2002 Prepared by R.R. Donnelley Financial -- Form 10-Q for Quarter Ended March 29, 2002
Table of Contents
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 March 29, 2002
 
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
incorporation or organization)
  
(IRS Employer
Identification No.)
 
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 April 30, 2002
12,868,279 shares, no par value per share
 

Table of Contents
 
PLANAR SYSTEMS, INC.
 
INDEX
 
        
Page
Part I.
  
Financial Information
     
Item 1.
  
Financial Statements
     
      
3
      
4
      
5
      
6
Item 2.
     
12
Part II.
  
Other Information
     
Item 2.
     
17
Item 4.
     
17
Item 5.
     
17
Item 6.
     
24
  
25

2

Table of Contents
 
Part 1.    FINANCIAL INFORMATION
 
Item 1.    Financial Statements
 
PLANAR SYSTEMS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
    
Three months ended
     
Six months ended
  
    
Mar. 29 2002
     
Mar. 30, 2001
     
Mar. 29, 2002
     
Mar. 30, 2001
  
Sales
   
$
48,857
 
   
$
54,463
 
   
$
89,642
 
   
$
104,858
 
Cost of sales
   
 
35,658
 
   
 
37,460
 
   
 
63,991
 
   
 
72,620
 
    
  
  
  
Gross profit
   
 
13,199
 
   
 
17,003
 
   
 
25,651
 
   
 
32,238
 
Operating expenses:
                                    
Research and development, net
   
 
2,679
 
   
 
2,783
 
   
 
5,309
 
   
 
4,856
 
Sales and marketing
   
 
3,427
 
   
 
4,319
 
   
 
6,269
 
   
 
8,370
 
General and administrative
   
 
3,251
 
   
 
4,066
 
   
 
6,413
 
   
 
7,779
 
Total operating expenses
   
 
9,357
 
   
 
11,168
 
   
 
17,991
 
   
 
21,005
 
    
  
  
  
Income from operations
   
 
3,842
 
   
 
5,835
 
   
 
7,660
 
   
 
11,233
 
Non-operating income (expense):
                                    
Interest, net
   
 
(171
)
   
 
(21
)
   
 
(290
)
   
 
(100
)
Foreign exchange, net
   
 
(29
)
   
 
(47
)
   
 
(31
)
   
 
(421
)
    
  
  
  
Net non-operating expense
   
 
(200
)
   
 
(68
)
   
 
(321
)
   
 
(521
)
    
  
  
  
Income before income taxes
   
 
3,642
 
   
 
5,767
 
   
 
7,339
 
   
 
10,712
 
Provision for income taxes
   
 
1,237
 
   
 
1,902
 
   
 
2,494
 
   
 
3,533
 
    
  
  
  
Net income
   
$
2,405
 
   
$
3,865
 
   
$
4,845
 
   
$
7,179
 
    
  
  
  
Basic net income per share
   
$
0.19
 
   
$
0.32
 
   
$
0.39
 
   
$
0.60
 
Average shares outstanding—basic
   
 
12,578
 
   
 
12,100
 
   
 
12,563
 
   
 
11,963
 
Diluted net income per share
   
$
0.18
 
   
$
0.30
 
   
$
0.36
 
   
$
0.55
 
Average shares outstanding—diluted
   
 
13,415
 
   
 
13,086
 
   
 
13,323
 
   
 
12,959
 
 
See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents
 
PLANAR SYSTEMS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
    
March 29,
2002
     
September 28, 2001
  
    
(Unaudited)
         
ASSETS
                  
Current assets:
                  
Cash and cash equivalents
   
$
21,565
 
   
$
22,007
 
Accounts receivable, net
   
 
29,131
 
   
 
34,817
 
Inventories
   
 
25,069
 
   
 
23,192
 
Other current assets
   
 
9,383
 
   
 
5,989
 
    
  
Total current assets
   
 
85,148
 
   
 
86,005
 
Property, plant and equipment, net
   
 
33,760
 
   
 
35,460
 
Goodwill
   
 
3,428
 
   
 
3,428
 
Other assets
   
 
12,583
 
   
 
11,307
 
    
  
    
$
134,919
 
   
$
136,200
 
    
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                  
Current liabilities:
                  
Accounts payable
   
$
7,816
 
   
$
8,981
 
Accrued compensation
   
 
3,851
 
   
 
7,096
 
Current portion of long-term debt
   
 
2,083
 
   
 
2,019
 
Deferred revenue
   
 
504
 
   
 
478
 
Other current liabilities
   
 
5,265
 
   
 
8,145
 
    
  
Total current liabilities
   
 
19,519
 
   
 
26,719
 
Long-term debt, net of current portion
   
 
10,628
 
   
 
11,686
 
Other long-term liabilities
   
 
2,082
 
   
 
1,706
 
    
  
Total liabilities
   
 
32,229
 
   
 
40,111
 
    
  
Shareholders’ equity:
                  
Common stock
   
 
89,779
 
   
 
87,803
 
Retained earnings
   
 
24,361
 
   
 
19,554
 
Accumulated other comprehensive loss
   
 
(11,450
)
   
 
(11,268
)
    
  
Total shareholders’ equity
   
 
102,690
 
   
 
96,089
 
    
  
    
$
134,919
 
   
$
136,200
 
    
  
 
See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents
 
PLANAR SYSTEMS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
    
Six Months Ended
  
    
March 29, 2002
     
March 30, 2001
  
Cash flows from operating activities:
                  
Net income
   
$
4,845
 
   
$
7,179
 
Adjustments to reconcile net income to net cash provided by operating activities:
                  
Depreciation and amortization
   
 
3,819
 
   
 
3,242
 
Amortization of excess market value of acquired net assets over purchase price
   
 
—  
 
   
 
(120
)
Deferred taxes
   
 
18
 
   
 
(69
)
Foreign exchange loss
   
 
31
 
   
 
421
 
(Increase) decrease in accounts receivable
   
 
5,789
 
   
 
(6,010
)
Increase in inventories
   
 
(1,770
)
   
 
(3,678
)
(Increase) decrease in other current assets
   
 
(3,405
)
   
 
1,351
 
Decrease in accounts payable
   
 
(1,457
)
   
 
(281
)
Increase (decrease) in accrued compensation
   
 
(3,111
)
   
 
3,057
 
Increase (decrease) in deferred revenue
   
 
51
 
   
 
(514
)
Decrease in other current liabilities
   
 
(2,199
)
   
 
(2,028
)
    
  
Net cash provided by operating activities
   
 
2,611
 
   
 
2,550
 
    
  
Cash flows from investing activities:
                  
Purchase of property, plant and equipment
   
 
(4,065
)
   
 
(4,640
)
Investment in a business
   
 
—  
 
   
 
(1,533
)
Increase in other long-term liabilities
   
 
376
 
   
 
365
 
Net purchases of long-term investments
   
 
(25
)
   
 
(361
)
    
  
Net cash used in investing activities
   
 
(3,714
)
   
 
(6,169
)
    
  
Cash flows from financing activities:
                  
Net payments of long-term debt
   
 
(994
)
   
 
(1,482
)
Stock repurchase
   
 
(38
)
   
 
—  
 
Net proceeds from issuance of capital stock
   
 
1,976
 
   
 
3,526
 
    
  
Net cash provided by financing activities
   
 
944
 
   
 
2,044
 
    
  
Effect of exchange rate changes
   
 
(283
)
   
 
51
 
    
  
Net decrease in cash and cash equivalents
   
 
(442
)
   
 
(1,524
)
Cash and cash equivalents at beginning of period
   
 
22,007
 
   
 
16,456
 
    
  
Cash and cash equivalents at end of period
   
$
21,565
 
   
$
14,932
 
    
  
 
See accompanying notes to unaudited consolidated financial statements.

5

Table of Contents
 
PLANAR SYSTEMS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 28, 2001.
 
Note 2—INVENTORIES
 
Inventories, stated at the lower of cost or market, consist of:
 
    
March 29, 2002
   
September 28, 2001
    
(Unaudited)
     
Raw materials
   
$
12,633
   
$
12,824
Work in process
   
 
2,584
   
 
3,652
Finished goods
   
 
9,852
   
 
6,716
    
  
    
$
25,069
   
$
23,192
    
  
 
Inventory reserves for estimated inventory obsolescence were $2,706 and $2,997 as of March 29, 2002 and September 28, 2001, respectively. Included in cost of sales are $85 and $186 of charges related to inventory obsolescence reserves for the three month periods ended March 29, 2002, and March 30, 2001, respectively and $395 and $404 for the six month periods ended March 29, 2002 and March 30, 2001, respectively.
 
Note 3—OTHER ASSETS
 
Included in other assets of $12,583 and $11,307 as of March 29, 2002 and September 28, 2001, respectively, are assets associated with equipment which had not been placed in service as of March 29, 2002 and September 28, 2001 in the amounts of $5,943 and $4,947, respectively.
 
Note 4—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:
 
    
Three Months Ended
     
Six Months Ended
  
    
March 29, 2002
     
March 30, 2001
     
March 29, 2002
     
March 30, 2001
  
Research and development expense
   
 
3,436
 
   
 
3,966
 
   
 
6,569
 
   
 
6,998
 
Contract funding
   
 
(757
)
   
 
(1,183
)
   
 
(1,260
)
   
 
(2,142
)
    
  
  
  
Research and development, net
   
$
2,679
 
   
$
2,783
 
   
$
5,309
 
   
$
4,856
 
    
  
  
  

6

Table of Contents

PLANAR SYSTEMS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands)
(Unaudited)

 
Note 5—NON-RECURRING CHARGES
 
CRT CHARGES
 
During the third quarter of fiscal 2001, the Company made a decision to close its military CRT business. This business was a mature business, in which the customers had been converting to flat panel displays over the past few years. The Company received last time buy orders from customers and shipped all of those orders in the fourth quarter of fiscal 2001. The Company completed the closing of this business in the first quarter of fiscal 2002. As a result of this decision, the Company recorded non-recurring charges of $1,209, including charges for excess inventory, severance related to workforce reductions of 29 employees and lease cancellation costs. The inventory charge of $826 has been recorded as cost of sales and the remaining charges of $383 for severance charges and lease termination costs have been recorded as non-recurring charges in the Consolidated Statements of Operations in the third quarter of fiscal 2001. As of the end of the second quarter of 2002, cash of $85 is expected to be used in connection with the lease termination costs, which has not yet been paid.
 
MILITARY AMLCD CHARGES
 
In the fourth quarter of fiscal year 2000, the Company made a decision to exit its unprofitable business of supplying high performance, full-color AMLCD flat panel displays for military avionics. As a result of this decision, the Company recorded non-recurring charges of $12,963, including charges primarily for excess inventory, recognition of losses on contracts which will not be fulfilled and the expected losses to be incurred in fulfilling the existing contracts, impairment of fixed assets and workforce reductions of 27 people. The Company has completed the fulfillment of existing contracts during the third quarter of fiscal year 2001. Other actions were substantially completed by the end of fiscal year 2001.
 
During the third quarter of fiscal year 2001, the Company determined that $3,251 of the original $12,963 reserve was not required. The original estimates changed due to the unanticipated sale of inventory which had been fully reserved, the use of inventory to build warranty and replacement units, which was higher than originally anticipated, and the cancellation of firm purchase commitments all of which were included in the original inventory reserves. In addition, the estimates changed due to higher than anticipated yields resulting in lower losses on contracts which were included in the original reserve and the payment or anticipated settlement of contractual liabilities and commitments, which were lower than originally anticipated. These changes in estimates from the original reserve were not anticipated and resulted in a non-recurring gain in the third quarter of fiscal year 2001 of $2,178, which has been included in cost of sales and a non-recurring gain of $1,073, which has been included in non-recurring charges in the Consolidated Statements of Operations in the third quarter of fiscal 2001.
 
The non-recurring charges incurred affected the Company’s financial position as follows:
 
    
Inventories
     
Fixed Assets
       
Accrued Compensation
     
Other Liabilities
  
Balance as of September 29, 2000
   
$
—  
 
   
$
—  
 
     
$
405
 
   
$
6,413
 
2001 Activity:
                                      
Additional charges (adjustments)
   
 
330
 
   
 
(100
)
     
 
328
 
   
 
(2,023
)
Cash paid out
   
 
—  
 
   
 
—  
 
     
 
(336
)
   
 
(2,844
)
Non-cash (write-offs) adjustments
   
 
(330
)
   
 
100
 
     
 
—  
 
   
 
(1,150
)
    
  
    
  
Balance as of September 28, 2001
   
 
—  
 
   
 
—  
 
     
 
397
 
   
 
396
 
2002 Activity:
                                      
Cash paid out
   
 
—  
 
   
 
—  
 
     
 
(397
)
   
 
(311
)
    
  
    
  
Balance as of March 29, 2002
   
$
—  
 
   
$
—  
 
     
$
—  
 
   
$
85
 
    
  
    
  

7

Table of Contents

PLANAR SYSTEMS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands)
(Unaudited)

 
During the second quarter of 2002, the Company paid cash of $231 related to contractual liabilities, severance and lease termination costs. For the first six months of 2002 the cash paid was $708. The remaining amounts are expected to be paid by the end of fiscal year 2002.
 
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, research credits and the effects of the Company’s foreign tax rates.
 
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 837 and 986 for the quarters ended March 29, 2002 and March 30, 2001, respectively, were used in the calculations of diluted earnings per share. Incremental shares of 760 and 996 for the six month periods ended March 29, 2002 and March 30, 2001, respectively, were used in the calculations of diluted earnings per share.
 
Note 8—COMPREHENSIVE INCOME
 
Comprehensive income was $2,999 and $2,920 for the quarters ended March 29, 2002 and March 30, 2001, respectively. Comprehensive income for the six month periods ended March 29, 2002 and March 30, 2001 was $4,663 and $7,267, respectively.
 
Note 9—BUSINESS SEGMENTS
 
The Company is organized based upon the markets for the products and services that it offers. Under this organizational structure, the Company operates in four main segments: Industrial, Medical, Transportation, and Desktop monitors. Industrial and Medical derive revenue primarily through the development, marketing and selling of electroluminescent displays, liquid crystal displays and color active matrix liquid crystal displays. Transportation presently derives revenue from the development, marketing and selling of liquid crystal displays and color active matrix liquid crystal displays. In the past, Transportation also derived revenues from the development, marketing and selling of high performance taut shadow mask cathode ray tubes, which the Company discontinued in fiscal 2001. Desktop monitors derives revenue primarily through the marketing of color active matrix liquid crystal displays that are sold through distributors to end users.

8

Table of Contents

PLANAR SYSTEMS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands)
(Unaudited)

 
The information provided below is obtained from internal information that is provided to the Company’s chief operating decision-maker for the purpose of corporate management. Research and development expenses for future products are allocated to the segments based upon a percentage of sales. Depreciation expense, interest expense, interest income, other non-operating items and income taxes by segment are not included in the internal information provided to the chief operating decision-maker and are therefore not presented below. Inter-segment sales are not material and are included in net sales to external customers below. Prior year amounts have been reclassified to conform to the fiscal year 2002 presentation.
 
    
3 months ended
     
6 months ended
  
    
Mar. 29, 2002
     
Mar. 30, 2001
     
Mar. 29, 2002
     
Mar. 30, 2001
  
Net sales to external customers (by segment):
                                    
Medical
   
$
17,950
 
   
$
17,625
 
   
$
32,185
 
   
$
35,967
 
Industrial
   
 
12,681
 
   
 
17,447
 
   
 
25,090
 
   
 
34,907
 
Transportation
   
 
5,029
 
   
 
16,070
 
   
 
10,548
 
   
 
29,340
 
Desktop
   
 
13,197
 
   
 
3,321
 
   
 
21,819
 
   
 
4,644
 
    
  
  
  
Total sales
   
$
48,857
 
   
$
54,463
 
   
$
89,642
 
   
$
104,858
 
    
  
  
  
Operating income (loss):
                                    
Medical
   
$
3,160
 
   
$
969
 
   
$
5,467
 
   
$
3,070
 
Industrial
   
 
(468
)
   
 
1,038
 
   
 
(708
)
   
 
2,943
 
Transportation
   
 
809
 
   
 
3,908
 
   
 
2,338
 
   
 
5,280
 
Desktop
   
 
341
 
   
 
(80
)
   
 
562
 
   
 
(60
)
    
  
  
  
Total operating income
   
$
3,842
 
   
$
5,835
 
   
$
7,660
 
   
$
11,233
 
    
  
  
  
 
Note 10—SUBSEQUENT EVENT BORROWINGS
 
The Company entered into a new credit agreement on April 22, 2002. This agreement replaced the Company’s existing lines of credit. The total borrowings are $40,000, which consists of a revolving loan of $25,000 and a term loan of $15,000. The revolving loan is due in April 2004. The term loan is due in quarterly installments of $1,875. Amounts of $3,750, $7,500 and $28,750 are payable in 2002, 2003 and 2004, respectively. The loans bear interest at the Libor rate plus 200 basis points or the prime rate and are secured by substantially all assets of the Company. The interest rate can fluctuate quarterly based upon the actual leverage ratios between the lesser of the Libor rate plus 125 basis points or the prime rate and the greater of the Libor rate plus 325 basis points or the prime rate plus 50 basis points. The loans also include various financial covenants including a leverage ratio, a fixed charge coverage ratio, tangible net worth and capital expenditure limits.

9

Table of Contents

PLANAR SYSTEMS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands)
(Unaudited)

 
Note 11—SUBSEQUENT EVENT BUSINESS ACQUISITIONS
 
On April 22, 2002, the Company completed the acquisition of DOME imaging systems, inc. (“DOME”). DOME designs, manufactures and markets computer graphic imaging boards, flat panel displays and software for original equipment manufacturers in the medical field and other advanced image processing applications. As a result of the acquisition, the Company will be able to offer a broader range of medical display solutions which complements our medical business unit. The acquisition was accounted for as a purchase and, accordingly, the operations of DOME will be included in the consolidated financial statements after the date of acquisition.
 
The total consideration paid or to be paid is as follows:
 
Cash
   
$
52,216
Value of stock options assumed
   
 
11,276
Cash to be paid for stock options
   
 
1,232
Closing and related costs
   
 
775
    
Total
   
$
65,499
    
 
The stock options related to approximately 621 shares assumed by the Company were valued using the Black-Scholes option pricing model with the following assumptions: expected life of 2 to 4 years; 0% dividend yield; 76.6% volatility and risk free interest rate of 5.1%. The cash to be paid for stock options relates to certain stock options that were assumed by the Company but which were not converted into a right to receive the Company’s stock upon exercise. These options were valued based on the number of such options multiplied by $7.38 per share.
 
The total purchase price of the acquisition was allocated as follows:
 
Net tangible assets acquired
   
$
8,552
 
Identifiable intangible assets
   
 
14,559
 
In process research and development costs
   
 
2,258
 
Goodwill
   
 
45,954
 
Deferred tax liabilities
   
 
(5,824
)
    
Total
   
$
65,499
 
    
 
The net tangible assets are comprised of the following:
 
Cash
   
$
504
Accounts receivable
   
 
8,361
Inventories
   
 
6,571
Other current assets
   
 
1,254
    
Total current assets
   
 
16,690
Property, plant and equipment
   
 
919
Other assets
   
 
149
    
Total assets
   
 
17,758
Accounts payable
   
 
4,648
Accrued expenses
   
 
4,527
    
Total current liabilities
   
 
9,175
Other long-term liabilities
   
 
31
    
Total liabilities
   
 
9,206
    
Net tangible assets
   
$
8,552
    
 
The identifiable intangible assets consist primarily of developed technology and are being amortized over their estimated useful lives. The weighted average amortization period is approximately four years. The amortization expense is estimated to be $1,179, $2,830, $2,731, $2,213 and $1,680 in fiscal 2002 through 2006, respectively.
 
The in-process research and development costs of $2,258 will be recorded as Non-recurring charges in the Consolidated Statement of Operations. These in-process research and development costs will be written off at the date of acquisition in accordance with Financial Accounting Standards Board

10

Table of Contents

PLANAR SYSTEMS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands)
(Unaudited)

Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method.” These costs primarily relate to the development of a flat panel interface controller which is approximately 60% complete and is expected to be completed within the next year. The total estimated costs to complete are approximately $300. The value was determined by estimating the net cash flows from the sale of products from 2002 through 2011 resulting from the completion of the project, and discounting the net cash flows back to their present value using a risk adjusted discount rate of 25%. The estimated net cash flows from these products were based upon management’s estimates of related revenues, cost of sales, R&D costs, selling and marketing costs, general and administrative costs and income taxes.
 
Goodwill of $45,954 will be recorded as a result of consideration paid in excess of the fair value of net tangible and intangible assets acquired, principally due to the fair value of the revenue expected to be derived from future products and the value of the workforce acquired. Goodwill will not be amortized, but will be reviewed periodically for potential impairment. No amount of goodwill is expected to be deductible for tax purposes. The goodwill has been assigned to the medical business segment.
 
The purchase price and the related allocation are subject to further refinement and change as the Company is in the process of obtaining a third-party valuation of certain intangible assets.
 
Note 12—SUBSEQUENT EVENT—ISSUANCE OF COMMON STOCK
 
On May 9, 2002, the Company completed the sale of approximately 463 shares of newly issued common stock in a private placement transaction. The purchase price was $21.60 per share and resulted in gross proceeds of approximately $10,000.
 
Note 13—FUTURE ACCOUNTING PRONOUNCEMENTS
 
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations”, (“FAS 143”). FAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It is required to be adopted for fiscal years beginning after June 15, 2002. The Company has not yet determined the impact that this standard will have on its results of operations or its financial position.
 
The FASB also issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, (“FAS 144”). FAS 144 supercedes Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”. This new standard also supercedes certain aspects of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB 30”), with regard to reporting the effects of a disposal of a segment of a business and will require expected future operating losses from discontinued operations to be reported in the period incurred (rather than on the measurement date as required by APB 30). In addition, more dispositions will qualify for discontinued operations treatment. This statement is required to be adopted for fiscal years beginning after December 15, 2001 and interim periods within that fiscal year. The Company has not yet determined the impact that this standard will have on its results of operations or its financial position.

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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 28, 2001.
 
BUSINESS ACQUISITION
 
On April 22, 2002, the Company completed the acquisition of DOME imaging systems, inc. (“DOME”). DOME designs, manufactures and markets computer graphic imaging boards, flat panel displays and software for original equipment manufacturers in the medical field and other advanced image processing applications. As a result of the acquisition, the Company will be able to offer a broader range of medical display solutions which complements our medical business unit. The acquisition was accounted for as a purchase and, accordingly, the operations of DOME will be included in the consolidated financial statements after the date of acquisition. The total consideration paid or to be paid was $65.5 million which consisted of cash of $52.2 million, value of stock options assumed of $11.3 million, cash to be paid for stock options of $1.2 million and closing and related costs of $775,000. See Note 11-Subsequent Events Business Acquisitions in the Notes to Consolidated Financial Statements which is included in Item 1—Financial Statements in this report.
 
RESULTS OF OPERATIONS
 
Sales
 
The Company’s sales of $48.9 million in the second quarter of 2002 decreased $5.6 million or 10.3% as compared to $54.5 million in the second quarter of 2001. The decrease in sales was principally due to lower sales of $ 4.8 million and $11.0 million in the Industrial and Transportation markets, which decreased 27.3% and 68.7% respectively. Medical and Desktop sales increased by $325,000 and $9.9 million, respectively. Desktop sales increased 297.4% as compared to the second quarter of 2001. Sales in the Industrial market were lower and sales in the Medical market were flat due to the current economic conditions and due to softness across all applications as our customers continue to reduce their inventory levels. The decrease in sales in the Transportation market was primarily due to the exit from the military business and lower volumes in the vehicle market. Sales in the Desktop Monitor market have increased due to higher volumes and also due to increasing the number of resellers from the time we entered the market in October 2000. After adjusting for approximately $30.0 million of revenues related to the exited military businesses in fiscal 2001, and $15.0 million of revenues related to the acquisition of DOME, the Company’s revenue target for fiscal 2002 is $205.0 million. We expect our Desktop Monitor business will have sales of $45.0 to $50.0 million in fiscal 2002.
 
The Company’s sales of $89.6 million in the first six months of 2002 decreased $15.2 million or 14.5% as compared to $104.9 million in the first six months of 2001. The decrease in sales was principally due to lower sales of $9.8 million, $3.8 million and $18.8 million in the Industrial, Medical and Transportation segments, which decreased 28.1%, 10.5% and 64.0%, respectively. In the Desktop market segment sales increased by $17.2 million in the first six months of 2002 compared to the first six months of 2001. The increases and decreases were due to the same reasons as those noted above with respect to the second quarter of 2002.
 
International sales decreased by 7.6% to $13.2 million in the second quarter of 2002 as compared to $14.4 million recorded in the same quarter the prior year. International sales for the first six months of 2002 decreased by 9.4% to $24.0 million as compared to $26.5 million recorded in the comparable period a year ago. The decrease in international sales was due primarily to decreased sales in the industrial market segment. As a percentage of total sales, international sales decreased to 26.3% in the second quarter of 2002 as compared to 26.4% in same quarter for the prior year. For the first six months of 2002, international sales, as a percentage of total sales, were 26.7% as compared to 25.3% in the first six months of 2001. This decrease of international sales as a percentage of total sales is due to the sales growth in our desktop business which does not have an international component offset by the reduction of the military businesses which we exited in fiscal 2001.

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Gross Profit
 
The Company’s gross margin as a percentage of sales decreased to 27.0% in the second quarter of 2002 from 31.2% in the second quarter of 2001. For the first six months of 2002, the Company’s gross margins were 28.6% as compared to 30.7% in the same period in the prior year. This decrease was primarily due to a lower percentage of total sales coming from the Medical, Industrial and Transportation markets and a higher percentage of total sales coming from the Desktop Monitor market which has lower gross margins. For the remainder of 2002, the Company expects gross margins to be approximately 32.0%.
 
Research and Development
 
Research and development expenses in the second quarter of 2002 were reduced by $104,000 or 3.7% to $2.7 million as compared to $2.8 million in the second quarter of 2001. Lower research and development expenses in the second quarter were due to lower personnel costs offset by continued investment in quantum programs and the development of new products. For the first six months of 2002, research and development expenses increased $453,000 or 9.3% to $5.3 million from $4.9 million in the first six months of the prior year. The increase was due primarily to continued investment in quantum projects and the development of new products.
 
Sales and Marketing
 
Sales and marketing expenses decreased $892,000 or 20.7% to $3.4 million in the second quarter of 2002 as compared to $4.3 million in the same quarter of the prior year. Sales and marketing expenses decreased $2.1 million or 25.1% to $6.3 million in the first six months of 2002 as compared to $8.4 million in the same period of the prior year. These decreases were primarily due to lower commissions on lower sales volumes and the savings related to the completion of the strategic change to a direct sales force offset by increased headcount and higher advertising expenses associated with our desktop monitor business. As a percentage of sales, sales and marketing expenses decreased to 7.0% in the second quarter of 2002 as compared to 7.9% in the second quarter of the prior year. As a percentage of sales, sales and marketing expenses declined to 7.0% in the first six months of 2002 as compared to 8.0% in the same period of the prior year.
 
General and Administrative
 
General and administrative expenses decreased $815,000 or 20.0% to $3.3 million in the second quarter of 2002 from $4.1 million in the same period from the prior year. General and administrative expenses decreased $1.4 million or 17.6 % to $6.4 million in the first six months of 2002 from $7.8 million in the same period of the prior year. The decreases in general and administrative expenses were primarily due to lower personnel costs and lower acquisition costs which were included in the prior year related to the acquisition of AllBrite Technologies, Inc. As a percentage of sales, general and administrative expenses decreased to 6.7% in the second quarter of 2002 from 7.5% in the same period from the prior year. For the first six months of 2002, general and administrative expenses, as a percentage of sales, decreased to 7.2% from 7.4% for the same period of the prior year.
 
Total Operating Expenses
 
Total operating expenses decreased $1.8 million or 16.2% to $9.4 million in the second quarter of 2002 from $11.2 million in the same period a year ago. For the first six months of 2002, total operating expenses decreased $3.0 million or 14.3% to $18.0 million from $21.0 million in the same period of the prior year. The Company believes that operating expenses will be approximately 21.0% of revenues in 2002. The Company will continue to increase its investments in sales and marketing and employee development in order to strengthen its focus on markets and customer intimacy.

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Non-Recurring Charges
 
CRT Charges
 
During the third quarter of fiscal 2001, the Company made a decision to close its military CRT business. This business was a mature business, in which the customers had been converting to flat panel displays over the past few years. The Company received last time buy orders from customers and shipped all of those orders in the fourth quarter of fiscal 2001. The Company completed the closing of this business in the first quarter of fiscal 2002. As a result of this decision, the Company recorded non-recurring charges of $1.2 million, including charges for excess inventory, severance related to workforce reductions of 29 employees and lease cancellation costs. The inventory charge of $826,000 has been recorded as cost of sales and the remaining charges of $383,000 for severance charges and lease termination costs have been recorded as non-recurring charges in the Consolidated Statements of Operations in the third quarter of fiscal 2001. Cash of $85,000 is expected to be used in connection with the lease termination costs, which has not yet been paid.
 
Military AMLCD Charges
 
In the fourth quarter of fiscal year 2000, the Company made a decision to exit its unprofitable business of supplying high performance, full-color AMLCD flat panel displays for military avionics. As a result of this decision, the Company recorded non-recurring charges of $13.0 million, including charges primarily for excess inventory, recognition of losses on contracts which will not be fulfilled and the expected losses to be incurred in fulfilling the existing contracts, impairment of fixed assets and workforce reductions of 27 people. The Company has completed the fulfillment of existing contracts during the third quarter of fiscal year 2001. Other actions were substantially completed by the end of fiscal year 2001.
 
During the third quarter of fiscal year 2001, the Company determined that $3.3 million of the original $13.0 million reserve was not required. The original estimates changed due to the unanticipated sale of inventory which had been fully reserved, the use of inventory to build warranty and replacement units, which was higher than originally anticipated, and the cancellation of firm purchase commitments all of which were included in the original inventory reserves. In addition, the estimates changed due to higher than anticipated yields resulting in lower losses on contracts which were included in the original reserve and the payment or anticipated settlement of contractual liabilities and commitments, which were lower than originally anticipated. These changes in estimates from the original reserve were not anticipated and resulted in a non-recurring gain in the third quarter of fiscal year 2001 of $2.2 million, which has been included in cost of sales and a non-recurring gain of $1.1 million, which has been included in non-recurring charges in the Consolidated Statements of Operations in the third quarter of fiscal 2001.
 
During the second quarter of 2002, the Company paid cash of $231,000 related to contractual liabilities, severance and lease termination costs. For the first six months of 2002, the cash paid was $708,000. The remaining amounts are expected to be paid by the end of fiscal year 2002.
 
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. In the second quarter of 2002 net interest expense increased from $21,000 in the second quarter of the prior year to $171,000. Net interest expense for the first six months of 2002 increased from $100,000 in 2001 to $290,000 in fiscal 2002 due to lower interest income on cash and cash equivalents which was only partially offset by lower interest expense on decreased borrowings.
 
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 receivable and accounts payable denominated in foreign currencies to the applicable functional currency. Foreign currency exchange gains and losses amounted to a loss of $29,000 in the second quarter of 2002, as compared to a loss of $47,000 in the second quarter of 2001. In the first six months of 2002, foreign currency gains and losses amounted to a loss of $31,000 as compared to a loss of $421,000 in the same period of the prior year. In the prior year, the U.S. dollar was weakening against the Finnish Markka. Fluctuations in the exchange rate subsequent to January 1, 2001 were mitigated by the adoption of the Company’s hedging strategy. The actual exchange rates at the end of September 2000 were 6.73, which decreased to 6.31 at the end of December 2000.

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The Company currently realizes about one-fourth of its revenue outside the United States and expects this to continue in the future. Additionally, the functional currency of the Company’s foreign subsidiary is the Euro which must be translated to U.S. Dollars for consolidation. Beginning January 1, 2001, the Company began hedging its Euro exposure with foreign exchange forward contracts. The Company believes that this hedging will mitigate the risks associated with foreign currency fluctuations.
 
Provision for Income Taxes
 
The Company’s effective tax rate for the quarter ended March 29, 2002 was 34.0% and for the quarter ended March 30, 2001 was 33.0%. The differences between the effective tax rate and the federal statutory rate was due to state income taxes, permanent differences, research credits and the effects of the Company’s foreign tax rates.
 
Net Income
 
In the second quarter of fiscal 2002, net income was $2.4 million or $0.18 per diluted share. In the same quarter of the prior year, net income was $3.9 million or $0.30 per diluted share. For the first six months of fiscal 2002, net income was $4.8 million or $0.36 per diluted share as compared to $7.2 million or $0.55 in the comparable period of the prior year. The Company expects net income of $0.77 per diluted share in fiscal 2002.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Net cash provided by operating activities was $2.6 million in the first six months of 2002, which is the same as net cash provided by operating activities in the first six months of 2001. The net cash provided by operations of $2.6 million in the first six months of 2002 primarily related to the reduction of accounts receivable and increased depreciation and amortization which offset the decrease in accrued compensation and accounts payable as well as the increase in inventories and other current assets.
 
Additions to plant and equipment were $4.1 million in the first six months of 2002. The significant acquisitions during the first six months of 2002 were expenditures primarily related to additional costs associated with the ERP implementation and improvements to the information systems.
 
The Company entered into a new credit agreement on April 22, 2002. This agreement replaced the company’s existing lines of credit. The total borrowings are $40.0 million, which consists of a revolving loan of $25.0 million and a term loan of $15.0 million. The revolving loan is due in April 2004. The term loan is due in quarterly installments of $1.9 million. The loans bear interest at the Libor rate plus 200 basis points or the prime rate and are secured by substantially all assets of the Company. The interest rate can fluctuate quarterly based upon the actual leverage ratio between the lesser of the Libor rate plus 125 basis points or the prime rate and the greater of the Libor rate plus 325 basis points or the prime rate plus 50 basis The loans also include various financial covenants including a leverage ratio, a fixed charge coverage ratio, tangible net worth and capital expenditure limits. Borrowings outstanding under the equipment financing loans were $12.7 million and $13.7 million as of March 29, 2002 and September 28, 2001, respectively. 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 May 9, 2002, The Company completed the sale of approximately 463,000 shares of newly issued common stock in a private placement transaction. The purchase price was $21.60 per share and resulted in gross proceeds of approximately $10.0 million.
 
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.

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The Company believes that its net income or cash flow exposure relating to rate changes for short-term and long-term debt obligations is not material. The Company primarily enters into debt obligations to support capital expenditures and working capital needs. The Company does not hedge any interest rate exposures.
 
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 Euro is the functional currency of the Company’s subsidiary in Finland. The Company enters into foreign exchange forward contracts to hedge certain balance sheet exposures and intercompany balances against future movements in foreign exchange rates. The forward exchange contracts are settled and renewed on a monthly basis in order to maintain a balance between the balance sheet exposures and the contract amounts. The Company maintains open contracts of approximately $7.0 million. If rates shifted dramatically, the Company believes it would not be materially impacted. In addition, 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 not decline by a material amount.
 
FORWARD-LOOKING STATEMENTS
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Report contain statements, including statements regarding the Company’s expectations as to sales, gross margins, operating expenses and net income for fiscal 2002, that are forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Such statements based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors including the following: domestic and international business and economic conditions, changes in growth in the flat panel monitor industry, changes in customer demand or ordering patterns, changes in the competitive environment including pricing pressures or technological changes, continued success in technological advances, shortages of manufacturing capacities from our third party partners, final settlement of contractual liabilities, future production variables impacting excess inventory and other risk factors described below under “Outlook: Issues and Uncertainties”. The forward-looking statements contained in this Report speak only as of the date on which they are made, and the Company does not undertake any obligation to update any forward- looking statement to reflect events or circumstances after the date of this Report. If the Company does update one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates with respect thereto or with respect to other forward-looking statements.

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Part II.    OTHER INFORMATION
 
Item 2.    Changes in Securities
 
(c)  During the second fiscal quarter of 2002, the Company sold securities without registration under the Securities Act of 1933, as amended (the “Securities Act”) upon the exercise of certain stock options granted under the Company’s stock option plans. An aggregate of 21,344 shares of Common Stock was issued at exercise prices ranging from $2.50 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.
 
Item 4.    Submission of Matters to a Vote of Shareholders
 
The Company’s 2002 Annual Meeting of Shareholders was held January 31, 2002, at which the following actions were taken by a vote of shareholders:
 
 
1.
 
The following nominees were elected as Directors by the votes and for the terms as indicated below:
 
Nominee
   
For
   
Withheld
   
Term Ending
Carl Neun
   
11,581,237
   
134,785
   
2005
Gregory H. Turnbull
   
11,581,617
   
134,405
   
2005
Steven E. Wynne
   
11,517,343
   
198,679
   
2005
 
 
2.
 
The proposal to approve the amendment to the Company’s 1994 Stock Incentive Plan by a vote of 11,347,470 to 123,368 (with 245,184 abstentions) was approved.
 
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 28, 2001.
 
Outlook:  Issues and Uncertainties
 
The following issues and uncertainties, among others, should be considered in evaluating the Company’s future financial performance and prospects for growth.
 
A significant slowdown in the demand for our customers’ products would adversely affect our business.
 
We generally do not sell products to end users. Instead, we design and manufacture various display solutions that our customers incorporate into their products. As a result, our success depends almost entirely upon the widespread market acceptance of our customers’ products. Accordingly, we must identify industries that have significant growth potential and establish relationships with Original Equipment Manufacturers (OEMs) in those industries. Our failure to identify potential growth opportunities or establish relationships with OEMs in those industries would adversely affect our business. Our dependence on the success of the products of our customers exposes us to a variety of risks, including the following:
 
 
•
 
our ability to match our design and manufacturing capacity with customer demand and to maintain satisfactory delivery schedules;
 
 
•
 
customer order patterns, changes in order mix and the level and timing of orders placed by customers that we can manufacture and ship in a quarter; and
 
 
•
 
the cyclical nature of the industries and markets our customers serve.

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Our failure to address these risks may have an adverse affect on our revenues and operating results.
 
We are subject to lengthy development periods and product acceptance cycles.
 
We generally sell our displays to OEMs, which then incorporate them into the products they sell. OEMs make the determination during their product development programs whether to incorporate our displays or pursue other alternatives. This requires us to make significant investments of time and capital in the custom design of display modules well before our customers introduce their products incorporating these displays and before we can be sure that we will generate any significant sales to our customers or even recover our investment. During a customer’s entire product development process, we face the risk that our display will fail to meet our customer’s technical, performance, or cost requirements or will be replaced by a competing product or alternative technological solution. Even if we complete our design process in a manner satisfactory to our customer, the customer may delay or terminate its product development efforts. The occurrence of any of these events would adversely affect our operating results.
 
We do not have long-term purchase commitments from our customers.
 
Our customers generally do not provide us with firm, long-term volume purchase commitments. Although we have begun to enter into more longer term supply contracts with our customers, our business is generally characterized by short-term purchase orders. We typically plan our production and inventory levels based on internal forecasts of customer demand which rely in part on nonbinding forecasts provided by our customers. As a result, our noncancellable backlog generally does not exceed three or four months, which makes forecasting our revenues difficult. Inaccuracies in our forecast as a result of changes in customer demand or otherwise may result in our holding excess and obsolete inventory or having unabsorbed manufacturing overhead. The failure to obtain anticipated orders and deferrals or cancellations of purchase commitments because of changes in customer requirements could have a material adverse affect on our business and operating results. We have experienced such problems in the past and may experience such problems in the future.
 
We face intense competition.
 
The market for information displays is highly competitive, and we expect this to continue. We believe that over time this competition will have the effect of reducing average selling prices of our flat panel displays. Certain of our competitors have substantially greater name recognition and financial, technical, marketing and other resources than we do. In addition, certain of our competitors have made and continue to make significant investments in the construction of manufacturing facilities for AMLCDs and other advanced displays. We cannot assure you that our competitors will not succeed in developing or marketing products that would render our products obsolete or noncompetitive. To the extent we are unable to compete effectively against our competitors, whether due to such practices or otherwise, our financial condition and results of operations would be materially adversely affected.
 
Our ability to compete successfully depends on a number of factors, both within and outside our control. These factors include the following:
 
 
•
 
our success in designing and manufacturing new product solutions, including those implementing new technologies;
 
 
•
 
our ability to address the needs of our customers;
 
 
•
 
the quality, performance, reliability, features, ease of use, pricing and diversity of our product solutions;
 
 
•
 
foreign currency fluctuations, which may cause a foreign competitor’s products to be priced significantly lower than our product solutions;
 
 
•
 
the quality of our customer services;
 
 
•
 
our efficiency of production;
 
 
•
 
the rate at which customers incorporate our product solutions into their own products; and
 
 
•
 
product or technology introductions by our competitors.

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Shortages of components and materials may delay or reduce our sales and increase our costs.
 
Our inability to obtain sufficient quantities of components and other materials necessary to produce our displays could result in reduced or delayed sales or lost orders. Any delay in or loss of sales could adversely impact our operating results. We obtain many of the materials we use in the manufacture of our displays from a limited number of suppliers, and we do not have long-term supply contracts with any of them. As a result, we are subject to increased costs, supply interruptions and difficulties in obtaining materials. Our customers also may encounter difficulties or increased costs in obtaining from others the materials necessary to produce their products into which our displays are incorporated.
 
We depend on Topvision Display Technologies, Inc., which is located in Taiwan, for the manufacture of the displays that we sell in the medical monitor and desktop monitor markets. We also rely on certain other contract manufacturing operations in Asia for the manufacture of circuit boards and other components and the manufacture and assembly of certain of our products. We do not have a long-term supply contract with Topvision or the other Asian contract manufacturers on which we rely. If Topvision were to terminate its arrangements with us or become unable to provide these displays to us on a timely basis, we would be unable to sell our medical monitor and desktop monitor products until alternative manufacturing arrangements could be made. If one or more of the other contract manufacturers on which we rely were to terminate its arrangements with us or become unable to provide products or services to us, our ability to sell certain products would be impaired until alternative arrangements could be made. Furthermore, we cannot assure you that we would be able to establish replacement manufacturing or assembly arrangements and relationships on acceptable terms, which could have a material adverse effect on our revenue and earnings.
 
Our reliance on Topvision and other contract manufacturers involves certain risks, including:
 
 
•
 
the lack of control over production capacity and delivery schedules;
 
 
•
 
limited control over quality assurance, manufacturing yields and production costs;
 
 
•
 
the risks associated with international commerce, including unexpected changes in legal and regulatory requirements, foreign currency fluctuations and changes in tariffs; and
 
 
•
 
trade policies and political and economic instability.
 
Topvision, as well as other third parties with which we do business, are located in Taiwan. In 1999, Taiwan experienced several earthquakes which resulted in many Taiwanese companies experiencing related business interruptions. Our business could suffer significantly if Topvision’s or other significant vendors’ operations were disrupted for an extended period of time.
 
Our exit from the military flat panel AMLCD business will reduce our revenues and may be more costly than we expect.
 
We have fixed price contracts for flat panel AMLCD displays with a small number of military avionics customers. As a result of the performance requirements for these displays and difficulties in the manufacturing process, we have experienced difficulties in satisfying our obligations under these contracts and generally have not realized a profit selling these products. Although we have successfully renegotiated specifications and prices under certain of these contracts, we have not been able to renegotiate the terms of all such contracts or achieve a level of profitability on these products that would justify continuing sales. As a result, we announced in September 2000 that we were exiting the military flat panel AMLCD business and would not seek new military flat panel AMLCD supply contracts or contract extensions when the existing contracts expire in fiscal 2001. At that time, we recorded a non- recurring charge of approximately $13 million to cover excess inventory, expected losses on contracts which will not be fulfilled, expected losses on contracts that will be fulfilled, impairment of fixed assets and workforce reductions, all in connection with the decision to exit the military flat panel AMLCD business. Our inability to satisfy our obligations under existing contracts could result in contractual liabilities, including warranty obligations, that exceed the amounts we have recorded, which would adversely affect our earnings. In addition, our decision to exit this business could impair our ability to continue to participate in the military avionics market and potentially the commercial avionics market, which would adversely affect our revenues and earnings.
 
We must maintain satisfactory manufacturing yields and capacity.
 
Our inability to maintain high levels of productivity or to satisfy delivery schedules at our manufacturing facilities would adversely affect our operating results. The design and manufacture of our displays involves

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highly complex processes that are sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in the materials used and the performance of personnel and equipment. At times we have experienced lower than anticipated manufacturing yields and lengthening of delivery schedules and may experience such problems in the future, particularly with respect to new products or technologies. Any such problems could have a material adverse effect on our revenue and earnings.
 
Our continued success depends on the development of new products and technologies.
 
Our future results of operations will depend in part on our ability to improve and market our existing products and to successfully develop, manufacture and market new products. If we are not able to continue to improve and market our existing products, develop and market new products and continue to make technological developments, our products or technology could become obsolete or noncompetitive. Even if we are successful in developing new products, new products 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. We have experienced lower than expected yields with respect to new products and processes in the past. These low yields have a negative impact on gross margins. In addition, customer relationships can be negatively impacted due to production problems and late delivery of shipments.
 
A portion of our display products rely on EL technology, which currently constitutes only a small portion of the information display market. Through the acquisition of Standish Industries, Inc., we have diversified our display products and expanded our addressable market significantly to include flat panel PMLCD applications. Our future success will depend in part upon increased market acceptance of existing EL, PMLCD and AMLCD technologies and other future technological developments. Some of our competitors are investing substantial resources in the development and manufacture of displays using a number of alternative technologies. If these efforts result in the development of products that offer significant advantages over our products, and we are unable to improve our technology or develop or acquire an alternative technology that is more competitive, our business and results of operations will be adversely affected.
 
Our future operating results will depend to a significant extent on our ability to continue to provide new product solutions that compare favorably on the basis of time to introduction, cost and performance with the design and manufacturing capabilities of OEMs and competitive third-party suppliers. Our success in attracting new customers and developing new business depends on various factors, including the following:
 
 
•
 
utilization of advances in technology;
 
 
•
 
innovative development of new solutions for customer products;
 
 
•
 
efficient and cost-effective services; and
 
 
•
 
timely completion of the design and manufacture of new product solutions.
 
Our efforts to develop new technologies may not result in commercial success.
 
Our research and development efforts with respect to new technologies may not result in customer or widespread market acceptance. Some or all of those technologies may not successfully make the transition from the research and development lab to cost-effective production as a result of technology problems, competitive cost issues, yield problems and other factors. Even when we successfully complete a research and development effort with respect to a particular technology, our customers may determine not to introduce or may terminate products utilizing the technology for a variety of reasons, including the following:
 
 
•
 
difficulties with other suppliers of components for the products;
 
 
•
 
superior technologies developed by our competitors;
 
 
•
 
price considerations;
 
 
•
 
lack of anticipated or actual market demand for the products; and
 
 
•
 
unfavorable comparisons with products introduced by others.

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Our efforts to sell desktop monitors in the end-user market may not be successful.
 
We sell flat panel AMLCD monitors in the desktop market The market for desktop monitors is highly competitive, subject to rapid technological change and subject to changes in consumer tastes and demand. Our failure to successfully monitor and control inventory levels or quickly respond to pricing changes, technological changes or changes in consumer tastes and demand could result in excess and obsolete inventories of our desktop monitor products which could adversely affect our business and operating results.
 
We face risks associated with international operations.
 
Our manufacturing, sales and distribution operations in Europe and Asia create a number of logistical and communications challenges. Our international operations also expose us to various economic, political and other risks, including the following:
 
 
•
 
management of a multi-national organization;
 
 
•
 
compliance with local laws and regulatory requirements as well as changes in those laws and requirements;
 
 
•
 
employment and severance issues;
 
 
•
 
overlap of tax issues;
 
 
•
 
tariffs and duties;
 
 
•
 
possible employee turnover or labor unrest;
 
 
•
 
lack of developed infrastructure;
 
 
•
 
the burdens and costs of compliance with a variety of foreign laws; and
 
 
•
 
political or economic instability in certain parts of the world.
 
Changes in policies by the United States or foreign governments resulting in, among other things, increased duties, higher taxation, currency conversion limitations, restrictions on the transfer or repatriation of funds, limitations on imports or exports, or the expropriation of private enterprises also could have a material adverse effect on us. Any actions by our host countries to reverse policies that encourage foreign investment or foreign trade also could adversely affect our operating results. In addition, U.S. trade policies, such as “most favored nation” status and trade preferences for certain Asian nations, could affect the attractiveness of our services to our U.S. customers.
 
Variability of customer requirements may adversely affect our operating results.
 
Custom manufacturers for OEMs must provide increasingly rapid product turnaround and respond to ever-shorter lead times. A variety of conditions, both specific to individual customers and generally affecting the demand for their products, may cause customers to cancel, reduce, or delay orders. Cancellations, reductions, or delays by a significant customer or by a group of customers could adversely affect our business. On occasion, customers require rapid increases in production, which can strain our resources and reduce our margins. Although we have increased our manufacturing capacity, we may lack sufficient capacity at any given time to meet our customers’ demands if their demands exceed anticipated levels.
 
Our operating results have significant fluctuations.
 
In addition to the variability resulting from the short-term nature of our customers’ commitments, other factors contribute to significant periodic quarterly fluctuations in our results of operations. These factors include the following:
 
 
•
 
the timing of orders;
 
 
•
 
the volume of orders relative to our capacity;
 
 
•
 
product introductions and market acceptance of new products or new generations of products;
 
 
•
 
evolution in the life cycles of customers’ products;
 
 
•
 
timing of expenditures in anticipation of future orders;
 
 
•
 
effectiveness in managing manufacturing processes;
 
 
•
 
changes in cost and availability of labor and components;
 
 
•
 
product mix;
 
 
•
 
pricing and availability of competitive products and services; and
 
 
•
 
changes or anticipated changes in economic conditions.

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Accordingly, you should not rely on the results of any past periods as an indication of our future performance. It is likely that in some future period, our operating results may be below expectations of public market analysts or investors. If this occurs, our stock price may decrease.
 
We must effectively manage our growth.
 
The failure to manage our growth effectively could adversely affect our operations. We have increased the number of our manufacturing and design programs and may expand further the number and diversity of our programs in the future. Our ability to manage our planned growth effectively will require us to:
 
 
•
 
enhance our operational, financial and management systems;
 
 
•
 
expand our facilities and equipment; and
 
 
•
 
successfully hire, train and motivate additional employees.
 
The expansion and diversification of our product and customer base may result in increases in our overhead and selling expenses. We also may be required to increase staffing and other expenses as well as our expenditures on capital equipment and leasehold improvements in order to meet the anticipated demand of our customers. Any increase in expenditures in anticipation of future orders that do not materialize would adversely affect our profitability. Customers also may require rapid increases in design and production services that place an excessive short-term burden on our resources.
 
We must protect our intellectual property, and others could infringe on or misappropriate our rights.
 
We believe that our continued success depends in part on protecting our proprietary technology. We rely on a combination of patent, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect our intellectual property. We seek to protect certain of our technology under trade secret laws, which afford only limited protection. We face risks associated with our intellectual property, including the following:
 
 
•
 
pending patent applications may not be issued;
 
 
•
 
intellectual property laws may not protect our intellectual property rights;
 
 
•
 
third parties may challenge, invalidate, or circumvent any patent issued to us;
 
 
•
 
rights granted under patents issued to us may not provide competitive advantages to us;
 
 
•
 
unauthorized parties may attempt to obtain and use information that we regard as proprietary despite our efforts to protect our proprietary rights; and
 
 
•
 
others may independently develop similar technology or design around any patents issued to us.
 
We may find it necessary to take legal action in the future to enforce or protect our intellectual property rights or to defend against claims of infringement. Litigation can be very expensive and can distract our management’s time and attention, which could adversely affect our business. In addition, we may not be able to obtain a favorable outcome in any intellectual property litigation.
 
Third parties could claim that we are infringing their patents or other intellectual property rights. In the event that a third party alleges that we are infringing its rights, we may not be able to obtain licenses on commercially reasonable terms from the third party, if at all, or the third party may commence litigation against us. The failure to obtain necessary licenses or other rights or the institution of litigation arising out of such claims could materially and adversely affect us.
 
The market price of our common stock may be volatile.
 
The market price of our common stock has been subject to wide fluctuations. During the last twelve months, the closing market price of our stock has ranged from $12.375 to $32.00. The trading price of our common stock in the future is likely to continue to be subject to wide fluctuations in response to various factors, including the following:
 
 
•
 
variations in our quarterly operating results;
 
 
•
 
actual or anticipated announcements of technical innovations or new product developments by us or our competitors;

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•
 
changes in analysts’ estimates of our financial performance;
 
 
•
 
general conditions in the electronics industry; and
 
 
•
 
worldwide economic and financial conditions.
 
In addition, the public stock markets have experienced extreme price and volume fluctuations that have particularly affected the market prices for many high-technology companies and that often have been unrelated to the operating performance of these companies. These broad market fluctuations and other factors may adversely affect the market price of our common stock.
 
We must finance the growth of our business and the development of new products.
 
To remain competitive, we must continue to make significant investments in research and development, equipment and facilities. As a result of the increase in fixed costs and operating expenses related to these capital expenditures, our failure to increase sufficiently our net sales to offset these increased costs would adversely affect our operating results.
 
From time to time, we may seek additional equity or debt financing to provide for the capital expenditures required to maintain or expand our design and production facilities and equipment. We cannot predict the timing or amount of any such capital requirements at this time. If such financing is not available on satisfactory terms, we may be unable to expand our business or to develop new business at the rate desired and our operating results may suffer. Debt financing increases expenses and must be repaid regardless of operating results. Equity financing could result in additional dilution to existing stockholders.
 
We may pursue acquisitions and investments that could adversely affect our business.
 
In the past we have made, and in the future we may make, acquisitions of and investments in businesses, products and technologies that are intended to complement our business, expand the breadth of our markets, enhance our technical capabilities, or otherwise offer growth opportunities. If we make any future acquisitions, we could issue stock, incur substantial debt, or assume contingent liabilities. Any acquisitions that we undertake, including our recent acquisition of AllBrite Technologies, Inc., could be difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results. Any such acquisitions also involve numerous risks, including the following:
 
 
•
 
problems assimilating the purchased operations, technologies, or products
 
 
•
 
unanticipated costs associated with the acquisition;
 
 
•
 
diversion of management’s attention from our core businesses;
 
 
•
 
adverse effects on existing business relationships with suppliers and customers;
 
 
•
 
risks associated with entering markets in which we have no or limited prior experience; and
 
 
•
 
potential loss of key employees of purchased organizations.
 
We cannot assure you that we would be successful in overcoming problems encountered in connection with such acquisitions, and our inability to do so could adversely affect our business and operating results.

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Item 6.    Exhibits and Reports on Form 8-K.
 
 
(a)
 
Exhibits:
 
2.1
   
Agreement and Plan of Merger dated as of March 18, 2002 by and among Planar Systems, Inc., DOME imaging systems, inc., Bone Doctor Acquisition Corporation and certain stockholders of DOME (incorporated by reference to the Company's Current Report on Form 8-K filed on May 3, 2002).
10.1
   
Stock Purchase Agreement dated April 22, 2002 by and among Planar Systems, Inc., Marlin E. Cobb, G. Richard Fryling II, Karen D. Miller and Peter M. Steven (incorporated by reference to the Company's Current Report on Form 8-K filed on May 3, 2002).
10.2
   
Credit Agreement dated April 22, 2002 by and among Planar Systems, Inc., U.S. Bank National Association and Wells Fargo Bank, National Association (incorporated by reference to the Company's Current Report on Form 8-K filed on May 3, 2002).
10.3
   
Securities Purchase Agreement dated May 9, 2002 by and among Planar Systems, Inc. and the Purchaser (incorporated by reference to the Company's Current Report on Form 8-K filed on May 9, 2002).
10.4
   
Registration Rights Agreement dated May 9, 2002 by and among Planar Systems, Inc. and the Purchaser (incorporated by reference to the Company's Current Report on Form 8-K filed on May 9, 2002).
 
 
(b)
 
Reports on Form 8-K:
 
The Company filed a report on Form 8-K on January 16, 2002 in which it reported the issuance of a press release announcing its financial results for the quarter ended December 28, 2001.
 
The Company filed a report on Form 8-K on March 19, 2002 in which it announced the signing of a definitive agreement to acquire DOME imaging systems, inc.
 
The Company filed a report on Form 8-K on April 4, 2002 in which it reported the issuance of a press release announcing its financial results for the quarter and six months ended March 29, 2002.
 
The Company filed a report on Form 8-K on May 3, 2002 in which it reported the acquisition of assets related to DOME imaging systems, inc. on April 22, 2002.
 
The Company filed a report on Form 8-K on May 9, 2002 in which it reported the issuance of common stock in a private placement transaction.

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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:  May 13, 2002
          
/S/    STEVEN J. BUHALY        
               
Steven J. Buhaly
Vice President and Chief Financial Officer

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