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Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934
For the Quarter Ended December 31, 2010
Commission File No. 023018
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.) |
1195 NW Compton Dr., Beaverton, Oregon | 97006 | |
(Address of principal executive offices) | (zip code) |
Registrants telephone number, including area code: (503) 748-1100
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. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer non-accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
Number of common stock outstanding as of February 2, 2011
20,225,703 shares, no par value per share
Table of Contents
INDEX
Page | ||||||
Part I. | 3 | |||||
Item 1. | 3 | |||||
3 | ||||||
Consolidated Balance Sheets as of December 31, 2010 (unaudited) and September 24, 2010 |
4 | |||||
5 | ||||||
6 | ||||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
10 | ||||
Item 4. | 14 | |||||
Part II. | 15 | |||||
Item 1. | 15 | |||||
Item 1a. | 15 | |||||
Item 6. | 24 | |||||
25 |
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Item 1. | Financial Statements |
Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)
Three months ended | ||||||||
Dec. 31, 2010 | Dec. 25, 2009 | |||||||
Sales |
$ | 41,763 | $ | 43,004 | ||||
Cost of sales |
30,105 | 33,112 | ||||||
Gross profit |
11,658 | 9,892 | ||||||
Operating expenses: |
||||||||
Research and development, net |
2,764 | 2,304 | ||||||
Sales and marketing |
5,495 | 5,223 | ||||||
General and administrative |
4,228 | 4,375 | ||||||
Amortization of intangible assets |
512 | 622 | ||||||
Impairment and restructuring charges (Note 4) |
| 3,388 | ||||||
Total operating expenses |
12,999 | 15,912 | ||||||
Loss from operations |
(1,341 | ) | (6,020 | ) | ||||
Non-operating income (expense): |
||||||||
Interest, net |
(2 | ) | (5 | ) | ||||
Foreign exchange, net |
72 | 481 | ||||||
Other, net |
68 | (46 | ) | |||||
Net non-operating income |
138 | 430 | ||||||
Loss before income taxes |
(1,203 | ) | (5,590 | ) | ||||
Income tax expense (benefit) (Note 6) |
100 | (2,874 | ) | |||||
Net Loss |
$ | (1,303 | ) | $ | (2,716 | ) | ||
Net loss per share |
||||||||
Basic and diluted |
$ | (0.07 | ) | $ | (0.15 | ) | ||
Average shares outstandingbasic and diluted |
19,226 | 18,690 |
See accompanying notes to unaudited consolidated financial statements.
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Consolidated Balance Sheets
(In thousands)
Dec. 31, 2010 | Sept. 24, 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 31,858 | $ | 31,709 | ||||
Accounts receivable, net of allowance for doubtful accounts of $1,973 and $2,005 |
19,592 | 27,010 | ||||||
Inventories |
36,885 | 33,397 | ||||||
Other current assets |
5,362 | 3,924 | ||||||
Total current assets |
93,697 | 96,040 | ||||||
Property, plant and equipment, net |
4,716 | 5,347 | ||||||
Intangible assets, net |
2,741 | 3,253 | ||||||
Other assets |
4,200 | 3,794 | ||||||
$ | 105,354 | $ | 108,434 | |||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 16,566 | $ | 16,130 | ||||
Current portion of capital leases |
| 4 | ||||||
Deferred revenue |
1,538 | 1,611 | ||||||
Other current liabilities |
19,030 | 21,207 | ||||||
Total current liabilities |
37,134 | 38,952 | ||||||
Other long-term liabilities |
4,352 | 4,106 | ||||||
Total liabilities |
41,486 | 43,058 | ||||||
Shareholders equity: |
||||||||
Preferred stock, $0.01 par value, authorized 10,000,000 shares, no shares issued |
| | ||||||
Common stock |
180,813 | 180,289 | ||||||
Retained earnings (deficit) |
(114,318 | ) | (112,886 | ) | ||||
Accumulated other comprehensive loss |
(2,627 | ) | (2,027 | ) | ||||
Total shareholders equity |
63,868 | 65,376 | ||||||
$ | 105,354 | $ | 108,434 | |||||
See accompanying notes to unaudited consolidated financial statements.
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Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Three months ended | ||||||||
Dec. 31, 2010 | Dec. 25, 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (1,303 | ) | $ | (2,716 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities |
||||||||
Depreciation and amortization |
1,065 | 1,478 | ||||||
Impairment and restructuring charges |
| 3,388 | ||||||
Deferred taxes |
| (874 | ) | |||||
Share based compensation |
464 | 502 | ||||||
Decrease in accounts receivable |
7,341 | 3,604 | ||||||
Increase in inventories |
(3,604 | ) | (354 | ) | ||||
Increase in other current assets |
(1,880 | ) | (2,648 | ) | ||||
Increase in accounts payable |
409 | 2,649 | ||||||
Decrease in deferred revenue |
(79 | ) | (6 | ) | ||||
Decrease in other current liabilities |
(1,990 | ) | (527 | ) | ||||
Net cash provided by operating activities |
423 | 4,496 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of property, plant and equipment |
(237 | ) | (444 | ) | ||||
Net cash used in investing activities |
(237 | ) | (444 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments of capital lease obligations |
(4 | ) | (52 | ) | ||||
Value of shares withheld for tax liability |
(129 | ) | (144 | ) | ||||
Net proceeds from issuance of capital stock |
60 | | ||||||
Net cash used in financing activities |
(73 | ) | (196 | ) | ||||
Effect of exchange rate changes |
36 | (334 | ) | |||||
Net increase in cash and cash equivalents |
149 | 3,522 | ||||||
Cash and cash equivalents at beginning of period |
31,709 | 30,722 | ||||||
Cash and cash equivalents at end of period |
$ | 31,858 | $ | 34,244 | ||||
See accompanying notes to unaudited consolidated financial statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States. However, certain information or footnote disclosures normally included in such financial statements 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 periods presented. These financial statements should be read in connection with the Companys audited financial statements for the year ended September 24, 2010. All references to a year or a quarter in these notes are to the Companys fiscal year or quarter in the period stated.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Actual results may differ from those estimates.
The accompanying financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. The results of operations from the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the year ending September 30, 2011.
On September 25, 2010 the Company adopted the provisions of ASU 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elementsa consensus of the FASB Emerging Issues Task Force (ASU 2009-14), which changes the accounting model for revenue arrangements that include both tangible products and software elements. ASU 2009-14, which was issued in October 2009 by the Financial Accounting Standards Board (FASB), is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The adoption of this Update did not have a material impact on the Companys financial statements.
NOTE 2 - INVENTORIES
Inventories, stated at the lower of cost or market, consist of:
Dec. 31, 2010 | Sept. 24, 2010 | |||||||
Raw materials |
$ | 13,398 | $ | 12,895 | ||||
Work in process |
3,274 | 3,026 | ||||||
Finished goods |
20,213 | 17,476 | ||||||
$ | 36,885 | $ | 33,397 | |||||
NOTE 3 - SHAREHOLDERS EQUITY
In the first quarter of 2010 the Company adopted the 2009 Incentive Plan (the 2009 Plan). This plan replaced the Companys 1993 Stock Incentive Plan, the 1996 Stock Incentive Plan, the 1999 Non-Qualified Stock Option Plan, the 2007 New Hire Incentive Plan, the Clarity Visual Systems, Inc. 1995 Plan and Non-Qualified Stock Option Plan as well as any individual inducement awards, which are collectively referred to as the Prior Plans. The 2009 Plan authorizes the issuance of 1,300,000 shares of common stock. In addition, up to 2,963,375 shares subject to awards outstanding under the Prior Plans may become available for issuance under the 2009 Plan to the extent that these shares cease to be subject to the original awards (such as by expiration, cancellation or forfeiture of the awards). The maximum number of shares that may be issued under the 2009 Plan is 4,263,375 shares, including shares that may become available from the Prior Plans.
Stock options
The 2009 Plan provides for the granting of stock options. Options granted generally vest and become exercisable over a three-year period and expire seven to ten years after the date of grant. Options were last granted in the second quarter of fiscal 2008.
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Information regarding outstanding options is as follows:
Number of Shares |
Weighted Average Option Prices |
|||||||
Options outstanding at September 24, 2010 |
1,236,932 | $ | 10.41 | |||||
Granted |
| | ||||||
Exercised |
| | ||||||
Forfeited |
(1,112 | ) | 6.02 | |||||
Expired |
(32,568 | ) | 15.01 | |||||
Options outstanding at December 31, 2010 |
1,203,252 | $ | 10.29 | |||||
No options were exercised during the first quarter of 2011. As of December 31, 2010 the total intrinsic value of options outstanding was $9 and the options had a remaining contractual term of 4.0 years. As of December 31, 2010 there were 1,202,809 options exercisable with a weighted average exercise price of $10.30 per share, an aggregate intrinsic value of $9, and a weighted average contractual life of 4.0 years.
Restricted stock
The 2009 Plan provides for the issuance of restricted stock (nonvested shares per the FASB Accounting Standards CodificationTM (ASC) Topic 718, Compensation Stock Compensation. With the exception of certain grants made to the Companys Chief Executive Officer, Chief Financial Officer, and certain of its Vice Presidents, which vest upon the achievement of certain objective performance conditions, the shares issued generally vest over a one- to three-year period based upon the passage of time.
Information regarding outstanding restricted stock awards is as follows:
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||
Restricted stock outstanding at September 24, 2010 |
1,249,891 | $ | 3.98 | |||||
Granted |
571,667 | 2.19 | ||||||
Vested |
(185,763 | ) | 3.34 | |||||
Canceled |
(14,167 | ) | 2.67 | |||||
Restricted stock outstanding at December 31, 2010 |
1,621,628 | $ | 3.44 | |||||
Employee Stock Purchase Plan
In fiscal 2005 the Company adopted the 2004 Employee Stock Purchase Plan, which replaced the 1994 Employee Stock Purchase Plan. The 2004 Employee Stock Purchase Plan (the Plan) provides that eligible employees may contribute, through payroll deductions, up to 10% of their earnings toward the purchase of the Companys Common Stock at 85% of the fair market value at specific dates. The fair value of the purchase rights is estimated on the first day of the offering period using the Black-Scholes model. In 2010 the Companys shareholders approved an amendment to the Plan which increased the number of shares of common stock that may be purchased under the Plan from 400,000 shares to 1,400,000 shares. As of December 31, 2010, approximately 969,000 shares remained available for purchase.
Valuation and Expense Information
The following table summarizes share based compensation expense related to share based payment awards and employee stock purchases for the three months ended December 31, 2010 and December 25, 2009. The expense was allocated as follows:
Three Months Ended Dec. 31, 2010 |
Three Months Ended Dec. 25, 2009 |
|||||||
Cost of sales |
$ | 17 | $ | 76 | ||||
Research and development |
$ | 51 | $ | 72 | ||||
Sales and marketing |
119 | 163 | ||||||
General and administrative |
277 | 191 | ||||||
Share based compensation expense included in operating expenses |
$ | 447 | $ | 426 | ||||
Share based compensation expense related to employee stock options and restricted stock awards |
$ | 464 | $ | 502 | ||||
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The Company recognizes compensation expense for all share based payment awards made to its employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan based on estimated fair values. The Company calculates the value of employee stock options on the date of grant using the Black-Scholes model. This model is also used to estimate the fair value of employee stock purchases related to the Employee Stock Purchase Plan. The Company values restricted stock awards at the closing price of the Companys shares on the date of grant. As share based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures were estimated based on historical and anticipated future experience.
Dilutive Effect of Employee Stock Benefit Plans
Basic shares outstanding for the three months ended December 31, 2010 and December 25, 2009 were 19,226,000 and 18,690,000, respectively. ASC Topic 260, Earnings per Share, requires that employee equity share options, nonvested shares and similar equity instruments granted by the Company are treated as potential common shares in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits or deficiencies that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares. There was no dilutive effect of in-the-money employee stock options or nonvested shares as of December 31, 2010 and December 25, 2009 due to the Company incurring a net loss in both the three months then ended.
NOTE 4 - IMPAIRMENT AND RESTRUCTURING CHARGES
No impairment or restructuring charges were incurred in the first quarter of 2011. During the first quarter of 2010 the Company determined that its goodwill was impaired, and therefore recorded a $3,428 charge to write-off this balance. The goodwill impairment charge was recorded as a result of the impairment test conducted during the first quarter of 2010 following the Companys restructuring that resulted in one operating segment, which constituted a triggering event as described by paragraph 35-10 of ASC Subtopic 350-20 Goodwill. The impairment test considered the Companys average share price over a reasonable period of time and current projections of the underlying discounted cash flows of the Company. Neither of these approaches supported the carrying value of the asset.
During the first quarter of 2010 the Company determined that the severance benefits related to previously recorded restructuring charges would be less than initially estimated and reduced the liability to reflect the current estimate of amounts to be paid. This revision was recorded as a $40 reduction in operating expenses for the three months ended December 25, 2009.
The restructuring charges affected the Companys financial position as follows:
Accrued Compensation |
Other
Current Liabilities |
|||||||
Balance as of September 24, 2010 |
$ | 757 | $ | 336 | ||||
Cash paid |
(57 | ) | | |||||
Balance as of December 31, 2010 |
$ | 700 | $ | 336 | ||||
NOTE 5 - OTHER CURRENT LIABILITIES
Other current liabilities consist of:
Dec. 31, 2010 | Sept. 24, 2010 | |||||||
Warranty reserve |
$ | 3,803 | $ | 3,832 | ||||
Income taxes payable |
2,699 | 2,452 | ||||||
Accrued compensation |
6,512 | 7,236 | ||||||
Other |
6,016 | 7,687 | ||||||
Total |
$ | 19,030 | $ | 21,207 | ||||
The Company provides a warranty for its products and establishes an allowance at the time of sale which is sufficient to cover costs during the warranty period. The warranty period is generally between 12 and 36 months. This reserve is included in other current liabilities.
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Reconciliation of the changes in the warranty reserve is as follows:
Three months ended Dec. 31, 2010 |
||||
Balance at beginning of period |
$ | 3,832 | ||
Cash paid for warranty repairs |
(1,155 | ) | ||
Provision for current period sales |
1,126 | |||
Balance at end of period |
$ | 3,803 | ||
NOTE 6 - INCOME TAXES
The provision (benefit) for income taxes for the first quarter of 2011 was recorded based upon the current estimate of the Companys annual effective tax rate. Generally, the provision (benefit) for income taxes is the result of a mix of profits (losses) the Company and its subsidiaries earn in tax jurisdictions with a broad range of income tax rates. The tax expense of $100 for the three months ended December 31, 2010 was driven by taxes on foreign operations and state taxes.
The negative effective tax rate of 8.3% for the three months ended December 31, 2010 differs from the federal statutory rate largely as a result of the Companys valuation allowance on its U.S. net operating losses during the quarter. Other significant factors include the effects of the Companys profitable operations in foreign jurisdictions with different tax rates, and the provision for state income taxes.
The Company establishes a valuation allowance for deferred tax assets, when it is more likely than not that such deferred tax assets will not be realized. In fiscal 2007 the Company determined that a valuation allowance should be recorded against all of its United States and French deferred tax assets. As of December 31, 2010 the valuation allowance is still in place for all of its U.S. tax assets. While a valuation allowance is still in place for financial statement purposes as of December 31, 2010, the valuation allowance does not limit the Companys ability to utilize the loss-carryforwards or other deferred tax assets on future tax returns.
As of December 31, 2010 there have been no material changes to the amount of unrecognized tax benefits under ASC Topic 740, Income Taxes. The Company does not anticipate that total unrecognized tax benefits will change significantly within the next 12 months.
The Company is subject to taxation primarily in the United States, Finland, and France, as well as certain state (including Oregon and California) and other foreign jurisdictions. The Companys larger jurisdictions generally provide for statutes of limitations from three to five years. The Company has settled with the Internal Revenue Service on their examination of all U.S. federal income tax matters through fiscal year 2006. The Company has also settled the Finnish tax authoritys examination of the Companys returns for the tax years 2001 through 2006. The Company does not anticipate total gross unrecognized tax benefits will significantly change, either as a result of full or partial settlement of audits or the expiration of statutes of limitations within the next 12 months.
The Company has not provided for United States income taxes on the undistributed earnings of foreign subsidiaries because they are considered permanently invested outside of the United States. If repatriated, these earnings would generate foreign tax credits, which may reduce the federal tax liability associated with any future foreign dividend. As of December 31, 2010 the undistributed earnings of these foreign operations were approximately $4,200.
NOTE 7 - BORROWINGS
The Companys credit agreement was amended on November 18, 2010 and allows for borrowing up to 80% of its eligible domestic accounts receivable with a maximum borrowing capacity of $12.0 million. The credit agreement, as amended, has an interest rate of LIBOR + 3.0%, expires on December 1, 2011, and is secured by substantially all of the assets of the Company. There were no amounts outstanding under the Companys credit agreement as of December 31, 2010 and September 24, 2010. The credit agreement contains certain financial covenants, with which the Company was in compliance as of December 31, 2010.
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Item 2. | Managements 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 I of this Quarterly Report and with the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations contained in the Companys Annual Report on Form 10-K for the year ended September 24, 2010.
FORWARD-LOOKING STATEMENTS
This Managements Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Report include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are made pursuant to the safe harbor provisions of the federal securities laws. These and other forward-looking statements, which may be identified by the inclusion of words such as expects, anticipates, intends, plans, believes, seeks, estimates, goal and variations of such words and other similar expressions, are based on current expectations, estimates, assumptions and projections that are subject to change, and actual results may differ materially from the forward-looking statements. These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict. Many factors, including the following, could cause actual results to differ materially from the forward-looking statements: poor or further weakened domestic and international business and economic conditions; changes or continued reductions in the demand for products in the various display markets served by the Company; any reduction in or delay in the timing of customer orders or the Companys ability to ship product upon receipt of a customer order; the extent and timing of any additional expenditures by the Company to address business growth opportunities; any inability to reduce costs at all or to reduce costs quickly enough, in either case, in response to weakening economic conditions and/or unanticipated reductions in revenue; adverse impacts on the Company or its operations relating to or arising from any inability to fund desired expenditures, including due to difficulties in obtaining necessary financing; changes in the flat panel monitor industry; changes in customer demand or ordering patterns; changes in the competitive environment including pricing pressures or technological changes; technological advances; shortages of manufacturing capacity from the Companys third-party manufacturing partners or other interruptions in the supply of components the Company incorporates in its finished goods; future production variables impacting excess inventory and other risk factors described under Part II, Item 1A. 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, it should not be concluded that the Company will make additional updates with respect thereto or with respect to other forward-looking statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Except for the adoption of Accounting Standards Update No. 2009-14, as described below, the Company reaffirms the critical accounting policies and use of estimates reported in its Form 10-K for the year ended September 24, 2010.
On September 25, 2010 the Company adopted the provisions of ASU 2009-14, which changes the accounting model for revenue arrangements that include both tangible products and software elements. ASU 2009-14, which was issued in October 2009 by the Financial Accounting Standards Board, is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The adoption of this Update did not have a material impact on the Companys financial statements.
INTRODUCTION
Planar Systems, Inc. is a provider of specialty display products, solutions, and services for customers in a number of end-market segments. Products include display components, completed displays, and display solutions and systems based on a variety of flat panel and front- and rear-projection technologies. The Company has a global reach with sales offices in North America, Europe, and Asia.
The electronic specialty display industry is driven by the proliferation of display products, from both the increase in smart devices and the availability and versatility of LCD flat panel displays at increasingly lower costs; the ongoing need for system providers and integrators to rely on display experts to provide customized solutions; and from the growth in the market for targeted marketing and messaging to consumers using digital signage in a variety of form factors in both indoor and outdoor applications.
Unless context otherwise requires, or as otherwise indicated, we, us, our and similar terms, as well as references to the Company and Planar, refer to Planar Systems, Inc. and, unless the context requires otherwise, includes all of the Companys consolidated subsidiaries.
The Companys Strategy
For over a quarter century, Planar has been designing and bringing to market innovative display solutions. The Company focuses on customized or specialty display products and systems, generally in niche display markets where requirements are more stringent, innovation is valued, and the customer is not served or is underserved by the mass-market, commodity display providers.
The Companys Markets
Planar delivers products for a variety of uses and categorizes the markets it serves as follows: Custom and Embedded, Video Wall, Information Technology, and High-end Home.
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Custom and Embedded
The Company leverages its historical core competency in Electroluminescent (EL) technologies and employs these technologies to focus on providing customized, embedded, and ruggedized displays to Original Equipment Manufacturers (OEMs) and other system suppliers. Key technologies used in products sold to this market also include customized Active-Matrix Liquid Crystal Display (AMLCD) panels. These technologies are used in a variety of applications and industries including instrumentation, medical equipment, vehicle dashboards, indoor and outdoor digital signage (including quick serve restaurant outdoor menu boards), and military applications, all of which require functionality in demanding usage conditions such as rugged outdoor conditions, extreme temperatures, instances where shaking or shock is expected, or applications that necessitate 3-D imaging.
Video Wall
The Company serves the video wall display market by offering both high-resolution flat panel LCD video walls and rear-projection cube video walls for use in large venue digital signage as well as various control room installations. The Company has marketed these products under the Clarity brand since 2006 when the Company acquired Clarity Visual Systems, Inc. (Clarity). Digital signage video wall installations are used in a growing list of retail, airport, sports arena, and other locations while control room installations are typically found in the security, governmental, telecom, energy, industrial, broadcast, and transportation sectors. The market for control room video wall solutions is driven by the development, expansion, and upgrade of industrial infrastructure such as power plants, transportation systems, communication systems, and security monitoring. LCD flat panel video walls used in the retail and large venue end-markets are increasing as LCD costs have declined and as LCD technology has made advancements to allow panel tiling with smaller bezels (Super Narrow Bezel technology), enabling a growing number of installations especially in new digital signage applications.
Information Technology (IT)
The Company capitalizes on its strong supply chain, logistics, and distribution relationships to sell a variety of primarily LCD based displays to the IT market. These strong relationships give the Company the ability to drive revenues in a number of product categories, including desktop monitors, touch displays, widescreen monitors, and front-projection equipment through its network of IT resellers.
High-end Home
The Company serves the high-end home market with its high-performance home theater front-projection video systems, video processing equipment, large-format thin video displays, window wall video applications, and a number of accessories. The Company has sold these products under the Runco brand since 2007 when it acquired the business assets of Runco International, Inc. (Runco), an industry leader in high-end, luxury video products. Planars Runco products are primarily sold to its established network of custom home installation dealers in the United States.
Overview
The Company recorded sales of $41.8 million in the three months ended December 31, 2010 (the first quarter of 2011), which decreased $1.2 million, or 2.9%, as compared to sales of $43.0 million in the three months ended December 25, 2009 (the first quarter of 2010). The decrease in sales was primarily the result of lower sales of high-end home products, lower margin business projectors, and network desktop monitors in the first quarter of 2011, as compared to the same period of the prior year. These decreases were partially offset by increases in sales of digital signage products, including tiled flat panel LCD video wall systems, and increases in sales of touch monitors sold in the first quarter of 2011 as compared the first quarter of 2010.
In the first quarter of 2011 net loss was $1.3 million or $0.07 per basic and diluted share as compared to a net loss of $2.7 million or $0.15 per basic and diluted share in the first quarter of 2010. This $1.4 million improvement was due primarily to a decrease of $2.9 million in operating expenses and a $1.8 million improvement in gross profit. These improvements were partially offset by changes in income taxes resulting from a $2.9 million one-time tax benefit recorded in the first quarter of 2010, which reduced the net loss recognized in that period and which was not repeated in the first quarter of 2011.
In the first quarter of 2011 loss from operations was $1.3 million as compared to a loss from operations of $6.0 million in the first quarter of 2010. The $4.7 million improvement in loss from operations for the first quarter of 2011 as compared to the same period of the prior year was due primarily to the impairment and restructuring charges recorded in the first quarter of 2010, which increased operating expenses by $3.4 million in that period. The improved loss from operations was also a result of the increase in gross profit in the first quarter of fiscal 2011 as compared to the first quarter of fiscal 2010.
The Company continues to experience strong end-market demand for its LCD video wall systems and other custom digital signage products. Digital signage opportunities such as outdoor ruggedized custom displays, touch applications, and large venue viewing represent growing markets in the United States, Europe, and Asia and the Company believes that it can derive increased revenue related to new and emerging opportunities in this growing market. As the Company pursues opportunities in the digital signage market, it continues to drive focused investments in product development, sales, and marketing to better position itself to capitalize on these opportunities.
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Sales
The Companys sales of $41.8 million in the first quarter of 2011 decreased $1.2 million or 2.9% from $43.0 million in the first quarter of 2010. The decrease in sales was primarily due to decreases in sales of high-end home products, network display monitors, and business projectors, which were partially offset by increases in sales of digital signage products, including LCD video wall systems and other custom digital signage solutions. The decrease in sales was also partially offset by increases in sales of touch displays in the first quarter of 2011, as compared to the same period of the prior year.
Sales of high-end home products decreased in the first quarter of 2011, as compared to the same period of the prior year, due to a 16% decrease in volumes of high-end home products sold and a 14% decrease in average selling prices of these products. Sales volumes decreased as a result of lower demand in the first quarter of 2011 as compared to 2010. Average selling prices decreased due to changes in product mix, rather than changes in the relative pricing of these products. Sales of high-end home products were also impacted by the timing of new product introductions, as the first quarter of 2010 was positively impacted by introductory sales of lamp-less, LED-based projectors, including dealer demos, a new product offering which was launched in the first quarter of that year. The decrease in sales of network display monitors was due to this product reaching the end-of-life stage in the first quarter of 2010. The decrease in sales of business projectors was due to 36% and 25% decreases in volumes and average selling prices of these products, respectively. These decreases were primarily the result of changes in product offerings as the Company focused its efforts on higher margin product offerings and as other products reached the end-of-life stage. The decrease in sales was partially offset by increases in sales of digital signage products, including flat panel LCD video wall systems, and also by increases in sales of touch displays. Sales of digital signage products increased 13% in the first quarter of 2011 as compared to the first quarter of 2010. This increase was largely driven by a 76% increase in volumes of LCD video wall systems sold, which was primarily due to improved demand as the Companys existing customers increased investment in large capital projects and as new customers were added in new application areas such as indoor retail digital signage. The increase in sales of touch displays was primarily the result of the Company continuing to focus new sales and marketing resources on these products, which resulted in a 29% increase in units sold in the first quarter of 2011, as compared to the first quarter of 2010.
International sales decreased $0.3 million or 1.6% to $13.2 million in the first quarter of 2011 as compared to $13.5 million in the same quarter of the prior year. The decrease in international sales was primarily due to the Euro weakening against the U.S. Dollar in the first quarter of 2011 as compared to the first quarter of 2010. This decrease was partially offset by an increase in U.S. Dollar denominated sales to customers outside of the United States in the first quarter of 2011 as compared to the same period of the prior year. As a percentage of total sales, international sales increased to 31.7% in the first quarter of 2011 as compared to 31.3% in the first quarter of 2010. The Company does not have material sales to any particular country outside the United States.
Gross Profit
Gross profit as a percentage of sales increased to 27.9% in the first quarter of 2011 from 23.0% in the first quarter of 2010. Total gross profit increased $1.8 million or 17.9% to $11.7 million in the first quarter of 2011 as compared to $9.9 million in the same period of the previous year. The increase in gross profit was due primarily to a favorable product mix of higher margin products such as video wall systems and touch displays, relative to sales of lower margin products such as projectors sold in the High-end Home and IT end-markets. The increase in gross profit was also due to reductions in headcount related to manufacturing overhead.
Research and Development
Research and development expenses increased $0.5 million or 20.0% to $2.8 million in the first quarter of 2011 from $2.3 million in the same period of the prior year. The increase was primarily the result of increased headcount and increased spending on project supplies and professional services to support new product designs, as a part of the Companys initiative to drive future sales in higher margin growth markets. As a percentage of sales, research and development expenses increased to 6.6% in the first quarter of 2011 as compared to 5.4% in the same period of the prior year. The increase in research and development expenses as a percentage of sales for the three months ended December 31, 2010 as compared to the same period in the prior year was due primarily to increased research and development expenses and decreased sales.
Sales and Marketing
Sales and marketing expenses increased $0.3 million or 5.2% to $5.5 million in the first quarter of 2011 as compared to $5.2 million in the same period of the prior year. This increase was primarily due to an increase in program spending in an effort to drive growth and market penetration, especially in the growing markets that the Company serves such as touch display and digital signage. Sales and marketing expenses also increased due to higher headcount and sales commissions in the first quarter of 2011 as compared to the first quarter of 2010. As a percentage of sales, sales and marketing expenses increased to 13.2% in the first quarter of 2011 as compared to 12.1% in the same period of the prior year due to increased sales and marketing expenses and decreased sales.
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General and Administrative
General and administrative expenses decreased $0.2 million or 3.4% to $4.2 million in the first quarter of 2011 from $4.4 million in the first quarter of 2010. The decrease in general and administrative expenses was primarily due to reduced headcount, and decreases in external accounting related expenses. This decrease was partially offset by increased share based compensation in the first quarter of 2011 as compared to the first quarter of 2010. As a percentage of sales, general and administrative expenses were 10.1% in the first quarter of 2011 and 10.2% in the first quarter of 2010.
Amortization of Intangible Assets
Expenses for the amortization of intangible assets were $0.5 million and $0.6 million in the first quarters of 2011 and 2010, respectively. The $0.1 million decrease in amortization expenses was the result of certain intangible assets that became fully amortized in the fourth quarter of 2010 and as such had no related amortization expense in the first quarter of 2011. As of December 31, 2010 the consolidated identifiable intangible assets subject to amortization, net of accumulated amortization, consisted of $1.1 million for developed technology and $1.6 million for customer relationships. These assets are being amortized over their remaining estimated useful lives of approximately 1.9 years. When these assets were acquired, the amortization periods were between four and seven years.
Impairment and Restructuring Charges
No impairment or restructuring charges were incurred in the first quarter of 2011. During the first quarter of 2010, the Company recorded $3.4 million in impairment and restructuring charges. As discussed in Note 4Impairment and Restructuring Charges, the charges consisted primarily of a charge to write-off the goodwill previously reflected on the Companys balance sheet as it was determined to be impaired.
Total Operating Expenses
Total operating expenses decreased $2.9 million or 18.3% to $13.0 million in the first quarter of 2011, from $15.9 million in the same period of the prior year. The decrease in operating expenses was primarily due to the $3.4 million impairment and restructuring charges that were recorded in the first quarter of 2010, and continued reductions in general and administrative expenses. The decrease in operating expenses was partially offset by an increase in research and development and sales and marketing expenses. As a percentage of sales, total operating expenses decreased to 31.1% in the first quarter of 2011 from 37.0% in the same period of the prior year.
Non-operating Income and Expense
Non-operating income and expense includes interest income on investments, interest expense, net foreign exchange gain or loss and other income or expense. Net interest expense was $2 thousand in the first quarter of 2011 as compared to $5 thousand in the same period of the prior year.
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 exchange gains and losses amounted to a net gain of $0.1 million in the first quarter of 2011 as compared to a net gain of $0.5 million in the first quarter of 2010.
Net other income was $0.1 million in the first quarter of 2011 as compared to net other expense of $46 thousand in the first quarter of 2010.
Provision (Benefit) for Income Taxes
In the first quarter of 2011 the Company recorded an income tax expense of $0.1 million on a pretax loss of $1.2 million, resulting in a negative effective tax rate of 8.3%. Comparatively, income tax benefit was $2.9 million in the first quarter of 2010 on a pretax loss of $5.6 million, an effective tax rate of 51.4%. The tax expense for the first quarter of 2011 was largely driven by taxes in foreign jurisdictions and state taxes.
The difference between the effective tax rate and the federal statutory tax rate is due primarily to a valuation allowance on the Companys U.S. deferred tax assets, the provision for state income taxes, and the effects of the Companys operations in foreign jurisdictions with different tax rates. During periods of time in which a valuation allowance is required for GAAP accounting purposes, the effective tax rate recorded will not represent the Companys longer-term normalized tax rate in profitable times. Additionally, given the relationship between fixed dollar tax items and pretax financial results, the effective tax rate can change materially based on small variations of income.
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Net Loss
In the first quarter of 2011 net loss was $1.3 million or $0.07 per basic and diluted share. In the same period of the prior year, net loss was $2.7 million or $0.15 per basic and diluted share.
Liquidity and Capital Resources
Net cash provided by operating activities was $0.4 million in the first quarter of fiscal 2011 as compared to cash provided by operating activities of $4.5 million in the first quarter of fiscal 2010. Net cash provided by operations in the first quarter of 2011 primarily relates to a decrease in accounts receivable and non-cash charges including depreciation and amortization and share based compensation, which do not require a current cash outlay. These were offset by the net loss incurred in the first quarter of 2011, an increase in inventories, and a decrease in other liabilities.
Working capital decreased $0.5 million to $56.6 million at December 31, 2010 from $57.1 million at September 24, 2010. Current assets decreased $2.3 million at December 31, 2010 to $93.7 million as compared to $96.0 million at September 24, 2010 due to a decrease in account receivable, which was partially offset by increases in inventories and other current assets. The $7.4 million decrease in accounts receivable was primarily the result of the $6.4 million decrease in sales in the first quarter of 2011 as compared to the fourth quarter of 2010. Accounts receivable also decreased due to the timing of cash receipts. Inventories increased $3.5 million as a result of the timing of purchases and increases in the forecasts of future shipments. Other current assets increased $1.4 million due primarily to increases in prepaid inventory, prepaid expenses and non-trade receivables. Current liabilities decreased $1.8 million due primarily to decreases in accrued compensation and other current liabilities, which were partially offset by an increase in accounts payable associated with the increase in inventories. The changes in accrued compensation, accrued liabilities, and accounts payable were primarily due to the timing of payments made to the Companys employees and its vendors.
The Companys credit agreement was amended on November 18, 2010 and allows for borrowing up to 80% of its eligible domestic accounts receivable with a maximum borrowing capacity of $12.0 million. The credit agreement, as amended, has an interest rate of LIBOR + 3.0%, expires on December 1, 2011, and is secured by substantially all of the assets of the Company. There were no amounts outstanding under the Companys credit agreement as of December 31, 2010 and September 24, 2010. The credit agreement contains certain financial covenants, with which the Company was in compliance as of December 31, 2010.
The Companys position on indefinite reinvestment of unremitted earnings from foreign operations may limit its ability to transfer cash between or across foreign and U.S. operations.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements during the first quarter of 2011 that are of significance to the Company.
Item 4. | Controls and Procedures |
An evaluation was carried out under the supervision and with the participation of the Companys management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), of the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that the Companys disclosure controls and procedures are effective. There were no significant changes in the Companys internal controls or in other factors during the quarter ended December 31, 2010 that could significantly affect the Companys internal controls over financial reporting.
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Item 1. | Legal Proceedings |
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company is a party or to which any of its property is subject.
Item 1A. | Risk Factors |
The following issues, risks, and uncertainties, among others, should be considered in evaluating the Companys future financial performance and prospects for growth.
The risks inherent in the Companys operations could be heightened by an ongoing worldwide economic slowdown and lack of credit availability.
In the recent past, general worldwide economic conditions have experienced a dramatic downturn due to credit conditions, liquidity concerns, slower economic activity, concerns about inflation and deflation, decreased consumer confidence, reduced corporate profits and capital spending, and adverse business conditions. These conditions make it extremely difficult for the Companys customers, the Companys vendors, and the Company to accurately forecast and plan future business activities. In this time of economic difficulties, the Companys financial performance and prospects for growth are subject to heightened risks including, but not limited to, the risk that the poor and economic conditions could result in:
| vendors declaring bankruptcy or otherwise ceasing operations which could result in difficulties obtaining, or increases in the price of, components and materials required for Planars products; |
| a rapid or unexpected decrease in demand for the Companys products which could reduce sales and/or result in the Company carrying excess inventories; |
| reduced capital spending and difficulties in customers ability to obtain sufficient credit; and/or |
| a decline in customers businesses which could result in their inability to pay their vendors in a timely manner, declaring bankruptcy or otherwise ceasing operations, any of which could harm Planars ability to collect on amounts due from its customers in a timely manner, or at all. The Company does maintain allowances for estimated losses resulting from the inability of its customers to make required payments. |
The Company took a number of measures to reduce costs in response to the worldwide economic downturn over the past two years, and the related decreases in revenue levels. However, the Company has since begun to make additional expenditures to better position it for future sales growth given the general improvement in global economies, especially in the emerging world. If customer demand were to not improve, or slow down, the Company might be unable to adjust expense levels rapidly enough in response to falling demand or without changing the way in which it operates. If revenues were to decrease further and the Company was unable to adequately reduce expense levels, it might incur significant losses that could potentially adversely affect the Companys overall financial performance and the market price of the Companys common stock.
The Companys operating results can fluctuate significantly.
In addition to the variability resulting from the short-term nature of commitments from the Companys customers, other factors can contribute to significant periodic fluctuations in its results of operations. These factors include, but are not limited to, the following:
| the receipt and timing of orders and the timing of delivery of orders; |
| the inability to adjust expense levels or delays in adjusting expense levels, in either case in response to lower than expected revenues or gross margins; |
| the volume of orders relative to the Companys capacity; |
| product introductions and market acceptance of new products or new generations of products; |
| evolution in the lifecycles of customers products; |
| changes in cost and availability of labor and components; |
| variations in revenue and gross margins relating to the mix of products available for sale and the mix of products sold from period to period; |
| availability of sufficient quantities of the components of the Companys products; |
| variation in operating expenses; |
| vesting of restricted stock based upon achievement of certain performance measures; |
| pricing and availability of competitive products and services; |
| general economic conditions and changeswhether or not anticipatedin economic conditions; and |
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| the ability to use cash flow to fund working capital, capital expenditures, development projects, acquisitions, and other general corporate purposes, which could be limited by any Company indebtedness and the covenants of the Companys existing credit facility. |
Accordingly, the results of any past periods should not be relied upon as an indication of the Companys future performance. It is possible that, in some future period, the Companys operating results may be below expectations of public market analysts and/or investors. If this occurs, the Companys stock price may decrease.
The Company faces intense competition.
Each of the markets served by the Company is highly competitive, and the Company expects this to continue and even intensify. The Company believes that over time this competition will have the effect of reducing average selling prices of its products. Certain of the Companys competitors have substantially greater name recognition and financial, technical, marketing and other resources than does the Company. There is no assurance that the Company will not face additional competitors or that the Companys competitors will not succeed in developing or marketing products that would render the Companys products obsolete or noncompetitive. To the extent the Company is unable to compete effectively, its business, financial condition and results of operations would be materially adversely affected. The Companys ability to compete successfully depends on a number of factors, both within and outside its control. These factors include, but are not limited to:
| the Companys effectiveness in designing new product solutions, including those incorporating new technologies; |
| the Companys ability to anticipate and address the needs of its customers; |
| the Companys ability to develop innovative, new technologies; |
| the Companys ability to develop effective technology; |
| the quality, performance, reliability, features, ease of use, pricing and diversity of the Companys product solutions; |
| foreign currency fluctuations, which may cause competitors products to be priced significantly lower than the Companys product solutions; |
| the quality of the Companys customer services; |
| the effectiveness of the Companys supply chain management; |
| the Companys ability to identify new vertical markets and develop attractive products to address the needs of such markets; |
| the Companys ability to develop and maintain effective sales channels; |
| the rate at which customers incorporate the Companys product solutions into their own products; and |
| product or technology introductions by the Companys competitors. |
The Companys success depends on the development of new products and technologies.
Future results of operations will partly depend on the Companys ability to continue to improve and market its existing products, while also successfully developing and marketing new products and developing new markets for existing products and technologies. If the Company fails to do this, its existing products or technologies could become obsolete or noncompetitive. Additionally, if the Company were unable to successfully execute its transition from existing products to new offerings or technologies, it could result in the Company holding excess or obsolete inventory, which could have a material adverse effect on the Companys business, financial condition, and results of operations. In the past, the Company has reduced its spending on research and development projects as it focuses on overall cost reductions. The Company may be required to reduce research and development expenditures in future periods as a part of cost reduction programs. These reductions could impact the Companys ability to improve its existing products and to successfully develop new products in the future.
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New products and markets, by their nature, present significant risks and even if the Company is successful in developing new products, they typically result in pressure on gross margins during the initial phases as start-up activities are spread over lower initial sales volumes. The Company has experienced lower margins from new products and processes in the past, which have negatively impacted overall gross margins. In addition, customer relationships can be negatively impacted due to production problems and late delivery of shipments. Future operating results will depend on the Companys ability to continue to provide new product solutions that compare favorably on the basis of cost and performance with competitors. The Companys success in attracting new customers and developing new business depends on various factors, including, but not limited to, the following:
| developing and/or deploying advances in technology; |
| developing innovative products for new markets; |
| offering efficient and cost-effective services; |
| timely completing of the design and manufacture of new product solutions; and |
| adequately protecting the Companys proprietary property. |
The Company must continue to add value to its portfolio of offerings.
Traditional display components are subject to increasing competition to the point of commodification. In addition, advances in core LCD technology make standard displays effective in an increasing breadth of applications. The Company must add additional value to its products and services for which customers are willing to pay. These areas could be outside of the Companys historical business experience and it may not be successful at executing in such areas in the future. Failure to do so could adversely affect the Companys revenue levels and its results of operations.
Shortages of components and materials may delay or reduce the Companys sales and increase its costs.
The inability to obtain sufficient quantities of components and other materials necessary to produce the Companys displays could result in reduced or delayed sales. The Company obtains much of the material it uses in the manufacture of its products from a limited number of suppliers, and it generally does not have long-term supply contracts with vendors. For some of this material the Company does not generally have a guaranteed alternative source of supply. In addition, given the Companys cash management practices, vendors may not be willing to continue to ship materials on credit terms that are acceptable to the Company, or may impose lower than optimal credit lines for the Company. As a result, the Company is subject to cost fluctuations, supply interruptions and difficulties in obtaining materials. The Company has in the past and may in the future face difficulties ensuring an adequate supply of various display components such as quality high resolution glass used in its products. In the future the Company may also face difficulties ensuring an adequate supply of the rear-projection screens used in certain video wall products. The Company is continually engaged in efforts to address this risk area. In another recent example of such supply risks, in fiscal 2010 the U.S. International Trade Commission issued an exclusion order banning the import of certain LCD panels incorporated by the Company in certain of its specialty display products. While this matter has since been settled, any future inability of the Company to import adequate supplies of such panels, or products including such panels, or other products or components, could have a material adverse effect on the Companys business, financial condition, and results of operations. The Company is subject to vendor lead times that can vary considerably depending on capacity fluctuations and other manufacturing constraints of the Companys vendors. These lead times can be significant when vendors operate with diminished capacity or experience other restrictions that limit their ability to produce products in a timely manner. For most of the Companys products, vendor lead times significantly exceed its customers required delivery time causing the Company to order to forecast rather than order based on actual demand. Competition in the market continues to reduce the period of time customers will wait for product delivery. Ordering raw materials and building finished goods based on the Companys forecast exposes the Company to numerous risks including its inability to service customer demand in an acceptable timeframe, holding excess and obsolete inventory or having unabsorbed manufacturing overhead. The Company has increased its reliance on Asian manufacturing companies for the manufacture of displays that it sells in all of the markets served by the Company. The Company also relies on certain other contract manufacturing operations in Asia, including those that produce circuit boards and other components, and those that manufacture and assemble certain of its products. Most of the contract manufacturers with which the Company does business are located in Asia, which has experienced several earthquakes, tsunamis, typhoons, and interruptions to power supplies which resulted in business interruptions. The Companys business could suffer significantly if the operations of vendors in Asia or elsewhere were disrupted for extended periods of time.
The Company does not have long-term supply contracts with contract manufacturers on which it relies. If any of these manufacturers in Asia or elsewhere were to terminate its arrangements with the Company, make decisions to terminate production of these products, or become unable to provide these displays to the Company on a timely basis, the Company could be unable to sell its products until alternative manufacturing arrangements are made. Furthermore, there is no assurance that the Company would be able to establish replacement manufacturing or assembly relationships on acceptable terms, which could have a material adverse effect on the Companys business, financial condition and results of operation.
The Companys reliance on contract manufacturers involves certain risks, including, but not limited to:
| lack of control over production capacity and delivery schedules; |
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| unanticipated interruptions in transportation and logistics; |
| limited control over quality assurance, manufacturing yields and production costs; |
| potential termination by vendors of agreements to supply materials to the Company, which would necessitate the Companys contracting of alternative suppliers, which may not be possible; |
| risks associated with international commerce, including unexpected changes in legal and regulatory requirements, foreign currency fluctuations and changes in duties and tariffs; and |
| trade policies and political and economic instability. |
A significant slowdown in the demand for the products of certain of the Companys customers would adversely affect its business.
In the Companys Custom and Embedded market, the Company designs and manufactures display solutions that its customers incorporate into their products. As a result, the Companys success partly depends upon the market acceptance of its customers products. Accordingly, the Company must identify industries that have significant growth potential and establish relationships with customers who are successful in those industries. Failure to identify potential growth opportunities or establish relationships with customers who are successful in those industries would adversely affect the Companys business. Dependence on the success of products of the Companys customers exposes the Company to a variety of risks, including, but not limited to, the following:
| the Companys ability to match its 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 that the Company can manufacture and ship in a quarter; and |
| the cyclical nature of the industries and markets served by the Companys customers. |
These risks could have a material adverse effect on the Companys business, financial condition and results of operations.
The Company has aging information systems and the investment of dollars and management attention will be required over time to upgrade or replace such systems.
The Company maintains a variety of information systems in connection with the operation of its business, including an enterprise resource management system (ERP system) that is integral to the Companys ability to accurately and efficiently maintain its books and records, record its materials purchase transactions, manufacturing activities, and product sale transactions, provide critical business information to management, and prepare its financial statements. Certain of these systems, principally including the ERP system, are comprised of aging computer hardware and versions of software that are no longer actively supported by the vendor. The age of these systems heightens the risk of unanticipated difficulties, costs, disruptions and other adverse impacts and dictates that the Company take action over time to upgrade and improve the existing systems and possibly replace them. Upgrading or replacing the ERP system will cause the Company to incur costs, expend significant management time and attention and otherwise burden the Companys internal resources. Failure to successfully upgrade or replace the ERP system could damage the effectiveness of the Companys business processes and controls and could adversely impact the Companys ability to accurately and effectively forecast and manage sales demand, manage the Companys supply chain, identify and implement actions that improve the Companys operational effectiveness and margins, and report financial and management information on an accurate and timely basis.
Future viability of the Companys manufacturing facility located in Espoo, Finland is based on continued demand for EL products.
The majority of the products manufactured at the Companys facility located in Espoo, Finland are based on EL technology. If demand for EL technology-based products diminishes significantly in the future, it could become necessary to cease manufacturing operations at this facility, which would likely result in an impairment loss on the associated property, plant and equipment, and restructuring charges related to employee severance. While demand for EL products improved in fiscal 2010 as compared to 2009, future declines in demand could again result in unabsorbed manufacturing overhead, which could negatively impact the Companys results of operations.
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The Company faces risks associated with other operations outside the United States.
The Companys manufacturing, sales and distribution operations in Europe and Asia create a number of logistical, systems and communications challenges. The Companys international operations also expose the Company to various economic, political and other risks, including, but not limited to, 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; |
| employee turnover or labor unrest; |
| lack of developed infrastructure; |
| difficulties protecting intellectual property; |
| difficulties repatriating funds without adverse tax effects |
| risks associated with outbreaks of infectious diseases; |
| burdens and costs of compliance with a variety of foreign laws; |
| political or economic instability in certain parts of the world; |
| effects of doing business in currencies other than the Companys functional currency; |
| effects of doing business in countries where the local currency is pegged to the currency of another country (For instance the exchange rate of the Chinese RMB to the U.S. Dollar is closely monitored by the Chinese government and there have been recent increases in the value of the RMB relative to the U.S. Dollar. The Company purchases a significant amount of goods from Chinese suppliers and, while those purchases are typically denominated in U.S. Dollars, increases in the RMB relative to the U.S. Dollar would tend to cause the cost of such goods to increase); and |
| effects of foreign currency fluctuations on overall financial results. |
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, changes in environmental standards or regulations, or the expropriation of private enterprises also could have a materially adverse effect. Any actions by the Companys host countries to curtail or reverse policies that encourage foreign investment or foreign trade also could adversely affect its 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 the Companys services to its U.S. customers.
Future financial results of Planar could be adversely affected by changes in currency exchange rates.
While the Company is for the most part naturally hedged due to approximately equal foreign denominated sales and expenses, the Company is exposed to certain risks relating to U.S. denominated assets primarily held in Europe. In the past the Company has managed this non-cash GAAP income statement risk by periodically entering into forward exchange contracts to mitigate the income statement impact of fluctuations in the Euro value of certain U.S. Dollar denominated assets and liabilities. Due to volatility in the foreign exchange market and the Companys strategic shift to preserve cash the Company adjusted its hedging strategy and as of March 27, 2009 discontinued its previous practice of hedging foreign currency risk through forward exchange contracts. As a result the Company may experience non-cash GAAP income statement losses due to changes in the U.S. Dollar versus the Euro exchange rate.
The value of intangible assets may become impaired in the future.
The Company has intangible assets recorded on the balance sheet as a result of the acquisition of Clarity Visual Systems that relate primarily to developed technology, patents, and customer relationships. The initial value of intangible assets recorded at the time of acquisition represented the Companys estimate of the net present value of future cash flows which can be derived from the intangible assets over time, and is amortized over the estimated useful life of the underlying assets. The remaining $2.7 million of the intangible assets will be amortized over the useful lives of the respective assets of approximately 1.9 years and could, in the future, experience additional impairment. The estimated undiscounted future cash flows of the intangible assets are evaluated on a regular basis, and if it becomes apparent that these estimates will not be met, a reduction in the value of intangible assets will be required, as occurred in fiscal 2008. A determination of impairment of intangible assets could result in a material charge to operations in a period in which an impairment loss is recognized, as occurred in fiscal 2008. While such a charge would not have an effect on the Companys cash flows, it would impact the net income in the period it was recognized.
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Future indebtedness could reduce the Companys ability to use cash flow for purposes other than debt service or otherwise restrict the Companys activities.
The Companys amended and restated credit agreement, as amended on November 18, 2010, has a maximum borrowing capacity of $12 million and expires on December 1, 2011. As of December 31, 2010 there were no amounts outstanding under this credit agreement. If the Company incurred a significant amount of debt, the leverage would reduce the Companys ability to use cash flow to fund working capital, capital expenditures, development projects, acquisitions, and other general corporate purposes. High leverage would also limit flexibility in planning for, or reacting to, changes in business and increases vulnerability to a downturn in the business and general adverse economic and industry conditions. Substantially all of the assets of the Company are pledged as security under its credit agreement, which includes certain financial covenants, as discussed in Note 7Borrowings in the Notes to the Consolidated Financial Statements in this Report. The Company may not generate sufficient profitability to meet these covenants. Failure by the Company to comply with applicable covenants, or to obtain waivers therefrom, would result in an event of default, and could result in the Company being unable to borrow amounts under the agreement, or could result in the acceleration of any amounts outstanding at that time, which, in turn could lead to the Companys inability to pay its debts and the loss of control of its assets. In addition, the current credit agreement expires on December 1, 2011. If the Company were unable to renew or extend this agreement, the Company may need to pursue other sources of financing. Other sources of credit may not be available at all and, even if such credit is available, it may only be available on terms (including the cost of borrowing) that are unattractive to the Company. If credit is not available to fully satisfy the Companys liquidity needs, the Company may need to dispose of additional assets. In addition, the Companys position on indefinite reinvestment of unremitted earnings from foreign operations may limit its ability to transfer cash between or across foreign and U.S. operations as may be required.
The Company may experience losses selling certain desktop monitor other consumer based, lower margin products.
The market for the Companys desktop monitor products is highly competitive and subject to rapid changes in prices and demand. The Companys failure to successfully manage inventory levels or quickly respond to changes in pricing, technology or consumer tastes and demand could result in lower than expected revenue, lower gross margin and excess, obsolete and devalued inventories of its desktop monitor products which could adversely affect the Companys business, financial condition and results of operations. Market conditions were characterized by rapid declines in end user pricing during portions of 2005, 2006, 2007, and 2008. Such declines caused the Companys inventory to lose value and triggered price protection obligations for channel inventory. Supply and pricing of LCD panels has been volatile in the past and may be in the future. This volatility, combined with lead times of five to eight weeks, may cause the Company to pay too much for products or suffer inadequate product supply.
The Company does not have long-term agreements with its resellers, who generally may terminate their relationship with the Company with little or no notice. Such action by the Companys resellers could substantially harm the Companys operating results. Revenue could decrease due to reductions in demand, competition, alternative products, pricing changes in the marketplace and potential shortages of products which would adversely affect the Companys revenue levels and its results of operations. In addition, strategic changes made by the Companys management to invest greater resources in specialty display markets could result in reduced revenue from desktop monitors.
The disposal or elimination of a product-line could result in unabsorbed overhead costs that must be absorbed by the Companys remaining product-lines.
In the fourth quarter of fiscal 2008 the Company disposed of its subsidiary that sold products to the medical market and in the second quarter of 2009 the Company sold its digital signage software assets. If the Company were to discontinue or substantially reduce its efforts to sell its products to any of its targeted end-markets, or to discontinue certain product lines, for the purpose of reducing costs or losses or otherwise, it may not be possible to eliminate all associated fixed overhead costs which would have to be absorbed by the revenues generated by selling its other products to the remaining targeted end-markets. This could potentially adversely affect the Companys overall financial performance in the future.
Variability of customer requirements or losses of key customers may adversely affect the Companys operating results.
The Company must provide increasingly rapid product turnaround and respond to ever-shorter lead times, while at the same time meet its customers product specifications and quality expectations. A variety of conditions, including bankruptcy and other conditions both specific to individual customers and generally affecting the demand for their products, may cause customers to cancel, reduce, or delay orders. These actions by a significant customer or by a set of customers could adversely affect the Companys business. On occasion, customers require rapid increases in production, which can strain the Companys resources and reduce margins. The Company may lack sufficient capacity at any given time to meet customers demands. Products sold to one customer represented 11% of total consolidated sales in fiscal 2008. Sales to this customer were less than 10% in fiscal 2009 and 2010. Sales to this customer, if lost, could have a material, adverse impact on the results of operations. If accounts receivable from a significant customer or set of customers became uncollectible, a resulting charge could have a material, adverse effect on operations, although the Company does maintain allowances for estimated losses resulting from the inability of its customers to make required payments.
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The Company may lose key licensors, sales representatives, foundries, licensees, vendors, other business partners and employees due to uncertainties regarding the future results of Planar or the worldwide economic condition, which could seriously harm Planar.
Sales representatives, vendors, resellers, distributors, and others doing business with the Company may experience uncertainty about their future role with the Company, may elect not to continue doing business with Planar, may seek to modify the terms under which they do business in ways that are less attractive, more costly, or otherwise damaging to the business of Planar, or may declare bankruptcy or otherwise cease operations. Loss of relationships with these business partners could adversely affect Planars business, financial condition, and results of operations. Similarly, the Companys employees may experience uncertainty about their future role with the Company to the extent that its operations are unsuccessful or its strategies are changed significantly. This may adversely affect Planars ability to attract and retain key management, marketing and technical personnel. The loss of a significant group of key technical personnel would seriously harm the product development efforts of Planar. The loss of key sales personnel could cause the Company to lose relationships with existing customers, which could cause a decline in the sales of the Companys products.
The Company does not have long-term purchase commitments from its customers.
The Companys business is generally characterized by short-term purchase orders and contracts which do not require that purchases be made. The Company typically plans its production and inventory levels based on internal forecasts of customer demand which rely in part on nonbinding forecasts provided by its customers. As a result, the Companys backlog generally does not exceed three months, which makes forecasting its sales difficult. Inaccuracies in the Companys forecast as a result of changes in customer demand or otherwise may result in its inability to service customer demand in an acceptable timeframe, the Company 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, or otherwise, could have a material adverse effect on the Companys business, financial condition and results of operations. The Company has experienced such problems in the past and may experience such problems in the future.
Economic or industry factors could result in portions of the Companys inventory becoming obsolete or in excess of anticipated usage.
The Company is exposed to a number of economic and industry factors that could result in write-offs of inventory. These factors include, but are not limited to, technological and regulatory changes in the Companys markets, the Companys ability to meet changing customer requirements, competitive pressures in products and prices, forecasting errors, new product introductions, quality issues with key suppliers, product phase-outs, future customer service and repair requirements, and the availability of key components from the Companys suppliers. Additionally, while the Company does not generally enter into long-term purchasing commitments with its suppliers, there are certain suppliers of high-end home products with which the Company has long-term purchasing commitments. These commitments could require the Company to purchase inventory it considers obsolete.
The Company must protect its intellectual property, and others could infringe on or misappropriate its rights.
The Company believes that its continued success partly depends on protecting its proprietary technology. The Company relies on a combination of patent, trade secret, copyright and trademark laws, confidentiality procedures and contractual provisions to protect its intellectual property. The Company seeks to protect some of its technology under trade secret laws, which afford only limited protection. The Company faces risks associated with its intellectual property, including, but not limited to, the following:
| pending patent and copyright applications may not be issued; |
| patent and copyright applications are filed only in a limited number of countries; |
| intellectual property laws may not protect the Companys intellectual property rights; |
| others may challenge, invalidate, or circumvent any patent or copyright issued to the Company; |
| rights granted under patents or copyrights issued to the Company may not provide competitive advantages to the Company; |
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| unauthorized parties may attempt to obtain and use information that the Company regards as proprietary despite its efforts to protect its proprietary rights; and |
| others may independently develop similar technology or design around any patents issued to the Company. |
The Company may find it necessary to take legal action in the future to enforce or protect its intellectual property rights or to defend against claims of infringement. Litigation can be very expensive and can distract managements time and attention, which could adversely affect the Companys business. In addition, the Company may not be able to obtain a favorable outcome in any intellectual property litigation. Others could claim that the Company is infringing their patents or other intellectual property rights. In the event of an allegation that the Company is infringing on anothers rights, it may not be able to obtain licenses on commercially reasonable terms from that party, if at all, or that party may commence litigation against the Company. The failure to obtain necessary licenses or other rights or the institution of litigation arising out of such claims could materially and adversely affect the Companys business, financial condition and results of operations. For instance, a technology licensing company has recently asserted that various of the Companys products require a license under certain patents held by such party. In addition, the Company has been made party to two lawsuits (among many other defendants); in one case alleging infringement of a United States patent relating to stands for multiple displays, which the Company has tendered to its supplier for defense and indemnification. In the other case the lawsuit alleges that the Companys Indisys image processing products infringe upon a United States patent held by a third party. The Company will vigorously defend itself against the assertion of any liability. While the Company would, in each instance, seek indemnification from the manufacturer of such products if it were found to be liable, a determination of liability against the Company could have an adverse impact on the Companys business, financial condition, and results of operations.
The market price of the Companys common stock may be volatile.
The market price of the Companys common stock has been subject to wide fluctuations. During the Companys four most recently completed fiscal quarters, the closing price of the Companys stock ranged from $1.60 to $3.62. The market price of the Companys common stock in the future is likely to continue to be subject to wide fluctuations in response to various factors, including, but not limited to, the following:
| variations in the Companys operating results and financial condition; |
| public announcements by the Company as to its expectations of future sales and net income or loss; |
| actual or anticipated announcements of technical innovations or new product developments by the Company or its competitors; |
| changes in analysts estimates of the Companys 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 technology companies and that often have been unrelated to the operating performance of these companies. These broad market fluctuations and other factors may continue to adversely affect the market price of the Companys common stock.
The Company faces risks in connection with potential acquisitions.
The Company has made several acquisitions during its history. Not all of these acquisitions have been successful. It is possible that the Company will make additional acquisitions in the future. The Companys ability to effectively integrate any future acquisitions will depend on, among other things, the adequacy of its implementation plans, the ability of management to oversee and effectively operate the combined operations and the Companys ability to achieve desired operational efficiencies. The integration of businesses, personnel, product lines and technologies is often difficult, time consuming and subject to significant risks. For example, the Company could lose key personnel from companies that it acquires, incur unanticipated costs, lose major sources of revenue, fail to integrate critical technologies, suffer business disruptions, fail to capture anticipated synergies, or fail to establish satisfactory internal controls. Any of these difficulties could disrupt the Companys ongoing business, distract management and employees, increase expenses and decrease revenues. Furthermore, the Company might assume or incur additional debt or issue additional equity securities to pay for future acquisitions. Additional debt may negatively impact the Companys financial results and increase its financial risk, and the issuance of any additional equity securities could dilute the Companys then existing shareholders ownership. In addition, in connection with any future acquisitions, the Company could:
| incur amortization expense related to intangible assets; |
| uncover previously unknown liabilities; or |
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| incur large and immediate write-offs that would reduce net income. |
Acquisitions are inherently risky, and any acquisition may not be successful. If the Company is unable to successfully integrate the operations of any businesses that it may acquire in the future, its business, financial position, results of operations or cash flows could be materially adversely affected.
Changes in internal controls or accounting guidance could cause volatility in the Companys stock price.
If required, the Companys internal controls over financial reporting will be audited by its independent registered public accounting firm in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404). Guidance regarding implementation and interpretation of the provisions of Section 404 continues to be issued by the standards-setting community. As a result of the ongoing interpretation of new guidance and the audit testing to be completed in the future, the Companys internal controls over financial reporting may include an unidentified material weakness which would result in receiving an adverse opinion on the Companys internal controls over financial reporting from its independent registered public accounting firm. This could result in significant additional expenditures responding to the Section 404 internal control audit, heightened regulatory scrutiny and potentially an adverse effect to the price of the Companys stock. In addition, due to increased regulatory scrutiny surrounding publicly traded companies, the possibility exists that a restatement of past financial results could be necessitated by an alternative interpretation of present accounting guidance and practice. Although management does not currently anticipate that this will occur, a potential result of such interpretation could be an adverse effect on the Companys stock price.
The Company must maintain satisfactory manufacturing yields and capacity.
An inability to maintain sufficient levels of productivity or to satisfy delivery schedules at the Companys manufacturing facilities would adversely affect its operating results. The design and manufacture of the Companys EL displays involves 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 the Company has experienced lower-than-anticipated manufacturing yields and lengthened delivery schedules and may experience such problems again in the future, particularly with respect to new products or technologies. Any such problems could have a material adverse effect on the Companys business, financial condition and results of operations.
The Company cannot provide any assurance that current environmental laws and product quality specification standards, or any laws or standards enacted in the future, will not have a material adverse effect on its business.
The Companys operations are subject to environmental and various other regulations in each of the jurisdictions in which it conducts business. Some of the Companys products use substances, such as lead, that are highly regulated or will not be allowed in certain jurisdictions in the future. The Company has redesigned certain products to eliminate such substances in its products. In addition, regulations have been enacted in certain jurisdictions which impose restrictions on waste disposal of electronic products and electronics recycling obligations. If the Company fails to comply with applicable rules and regulations in connection with the use and disposal of such substances or other environmental or recycling legislation, it could be subject to significant liability or loss of future sales.
EL products are manufactured at a single location, with no currently available substitute location.
The Companys EL products, which are based on proprietary technology, are produced in its manufacturing facility located in Espoo, Finland. Because the EL technology and manufacturing process is proprietary and unique, there exists no alternative location where it may be produced, either by the Company, or by another manufacturer. As such, loss of or damage to the manufacturing facility, or attrition in the facilitys skilled workforce, could cause a disruption in the manufacturing of the EL products, which compose a significant portion of the Companys sales. Additionally, there are many fixed costs associated with such a manufacturing facility. If revenue levels were to decrease or other problems were encountered, this could have a material, adverse effect on the Companys business, financial condition, and results of operations.
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Item 6. | Exhibits |
(a)
10.1 | Second Amendment to Amended and Restated Credit Agreement by and between Planar Systems, Inc. and Bank of America, N.A., entered into effective as of November 18, 2010 (1) |
10.2 | Planar Amberglen 1195 Building Second Amendment to Lease by and between Planar Systems, Inc. and Amberglen Properties Limited Partnership, dated as of October 14, 2010 |
10.3 | Planar Amberglen 1400 Building First Amendment to Lease by and between Planar Systems, Inc. and Amberglen Properties Limited Partnership, dated as of October 14, 2010 |
10.4 | Form for Performance Share Amendment between Planar Systems, Inc. and Gerald Perkel, E. Scott Hildebrandt, Douglas Barnes, and Stephen Going dated September 22, 2010* |
10.5 | Form for Restricted Stock Notice and Form for Restricted Stock Agreement between Planar Systems, Inc. and Gerald Perkel, E. Scott Hildebrandt, Douglas Barnes, and Stephen Going dated September 27, 2010* |
31.1 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(1) | Incorporated by reference to the Companys Current Report on Form 8-K filed November 23, 2010 |
* | This exhibit constitutes a management contract or compensatory plan or arrangement |
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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 4, 2011 | /S/ SCOTT HILDEBRANDT | |||||||
Scott Hildebrandt | ||||||||
Vice President and Chief Financial Officer |
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