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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 23103
APPLIED FILMS CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-1311581
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9586 I-25 Frontage Road, Longmont CO 80504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 774-3200
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange
Title of Each Class on Which Registered
Common Stock Nasdaq National Market
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. _____
The aggregate market value of the common stock held by non-affiliates of the
Registrant, based on a per share price of $24.50 as of July 28, 2000, was
$148,000,972. As of July 28, 2000, there were outstanding 6,040,856 shares of
the Company's Common Stock (no par value).
Documents Incorporated by Reference: Portions of the Company's Proxy Statement
for the 2000 Annual Meeting of Shareholders are incorporated by reference into
Part III of this Report.
PART I
ITEM 1: Business
The following discussion contains trend information and other
forward-looking statements (including statements regarding future operating
results, future capital expenditures, new product introductions, technological
developments and industry trends) that involve a number of risks and
uncertainties. Our actual results could differ materially from our historical
results of operations and those discussed in the forward-looking statements.
Factors that could cause actual results to differ materially include, but are
not limited to, those identified in "ITEM 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the section
entitled "Certain Factors." All period references are to our fiscal periods
ended July 1, 2000, July 3, 1999 or June 27, 1998, unless otherwise indicated.
ITEM 1(a): General Development of Business
General
We are a leading solutions provider of thin film technology for the flat
panel display ("FPD") industry. We use our proprietary in-line coating systems
to produce thin film coated glass for use in a variety of displays incorporated
in products ranging from calculators to wireless communication devices. We also
design and manufacture thin film coating equipment for display manufacturers
across the entire continuum of the FPD industry. These manufacturers use our
equipment to apply thin films to glass for use in FPDs, including liquid crystal
displays ("LCDs"), touch panels, active matrix computer displays and high end
plasma displays for high definition televisions. Our ability to produce both
thin film coated glass and thin film coating equipment enables us to leverage
our expertise and provide effective solutions to the FPD market.
FPDs are found in a wide variety of consumer and industrial products,
including cellular telephones, personal digital assistants ("PDAs"),
calculators, laptop computers, flat desktop monitors, pagers, scientific
instruments, televisions, video games, gasoline pumps, automotive instruments,
point-of-sale terminals and a number of other electronic devices. Most FPDs
require optically transparent, electrically conductive thin films coated on
glass substrates. These thin films transmit electrical power to picture elements
of the displays and allow light to pass to the viewer. As FPDs become larger,
thinner, and more information intensive, the thin film coated glass used in the
displays must meet more demanding performance standards.
We address two distinct markets within the FPD industry: the market for
thin film coated glass and the market for thin film coating equipment. The
market for our thin film coated glass is primarily comprised of manufacturers of
products using black and white displays, such as those used in cellular
telephones, calculators, or electronic games. These manufacturers typically
purchase thin film coated glass from specialized suppliers such as ourselves.
The market for our thin film coating equipment is primarily made up of
manufacturers of products using high information content, color displays, such
as high resolution LCDs and plasma display panels ("PDPs") used in computer
monitors and high definition televisions. The processes used to produce these
displays involve intermediate process steps more suitably performed in-house by
the display manufacturers. Consequently, these manufacturers have a need for
thin film coating equipment to internally apply thin film coatings in their own
display fabrication facilities. To a lesser extent, the market for thin film
coating equipment also includes manufacturers of lower information content
displays that choose to vertically integrate and produce thin film coated glass
internally.
We offer FPD customers a fully integrated solution that supports the
customer through all phases of development and product life cycle. We are the
only company that supplies both thin film coated glass for low resolution
displays and also the coating equipment for manufacturers of both low and high
resolution displays. Our ability to supply both coated glass and coating process
systems enables us to supply and support a broad range of FPD technologies. Our
increasing emphasis on coating process systems and the introduction of the
ATX-700 advanced coating platform positions us to take advantage of anticipated
growth in the markets for high resolution LCD and plasma displays.
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Thin Film Coating Equipment. To address the evolving needs of FPD
manufacturers and leverage our expertise in process technology, we recently
developed and introduced the ATX-700. The ATX-700 is a modular and scalable
advanced thin film coating system that answers the needs of the PDP and active
matrix markets for small, flexible systems that minimize particulate generation
and can easily be adapted to automation. The advanced ATX-700 platform, coupled
with our process technology and extensive experience in operating our own
coating equipment, provides us with significant competitive advantages in
selling our coating equipment. In December 1999, we announced our first contract
for the sale of an ATX-700 system. We have sold a total of three (3) ATX-700
systems. We are actively soliciting and negotiating additional system orders. As
of July 1, 2000, our backlog from such equipment sales was approximately $8.8
million.
We believe our proprietary technology and know-how enables us to
effectively address the advanced technical requirements of FPD manufacturers.
For example, we developed and applied for patent protection for a process which
materially increases the reactive sputtering speed of magnesium oxide ("MgO").
We believe this process may represent a significant competitive advantage in the
emerging market for coating equipment for plasma displays. In addition, we have
designed our advanced platforms to provide technical, processing, and
operational advantages to our customers. We believe our technological expertise
will be of increasing importance to our equipment business as the technical
requirements of FPDs continue to evolve.
Thin Film Coated Glass. We are the leading worldwide supplier of thin film
coated glass for low resolution black and white LCDs and we have a smaller, but
growing share of the market for thin film coated glass for high resolution black
and white LCDs. Our design, construction and operation of our own coating
equipment to supply these markets gives us a significant cost advantage over our
competitors, most of which must purchase equipment from third parties. In
addition, our hands-on operating experience provides us competitive advantages,
including:
- the ability to make continuous process and system improvements
resulting in higher throughput, better yields, greater equipment uptime
and more efficient target utilization;
- our expertise in substrates, coating materials and glass preparation
under cleanroom conditions; and
- the development of reliable, cost effective conveyance systems enabling
movement of the glass at varied speeds in a controlled fashion.
We meet our customers' needs by supplying glass from our plant in Longmont,
Colorado and increasingly from our joint venture in Suzhou, China. This joint
venture is strategically positioned in southeast Asia in close proximity to our
customer base, enabling just-in-time delivery, minimizing working capital
requirements, and reducing raw glass, direct labor and transportation costs.
We were originally incorporated in Colorado as Applied Films Lab, Inc. on
March 2, 1976. On May 1, 1992, we merged with Donnelly Coated Corporation, a
wholly owned subsidiary of Donnelly Corporation of Holland, Michigan. During
fiscal 1994, we ceased using capacity in Holland, Michigan and began operating
solely in Boulder, Colorado. In fiscal 1998 and 1999, we moved all of our office
and manufacturing facilities to Longmont, Colorado.
Strategy
Our objective is to enhance our position as a leading global supplier of
coating process technology and equipment, and coated glass to the entire FPD
industry. Essential elements of our strategy include the following:
Leverage our Leadership in Providing Effective Thin Films Solutions. We
leverage our thin film technology and process capabilities to address the
evolving requirements for more sophisticated, technologically advanced FPDs. The
FPD industry includes a broad range of technologies used in a wide variety of
products. We supply coating process systems and coated glass, enabling our
customers to produce a full range of FPDs. We believe our technological
capabilities, our history of designing, developing and improving our own thin
film manufacturing systems, and our extensive operational experience provide us
with competitive advantages in selling thin film coating equipment and coated
glass to FPD manufacturers.
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Capture Opportunities Created by Growing Demand in High-End FPD Markets. As
consumers continue to demand more sophisticated displays, FPD manufacturers are
focusing on and increasing capacity to produce high resolution displays. The
recovery of the Asian economy is creating increasing demand for coating systems
as Asian manufacturers establish new production facilities and build production
capacity to satisfy market demand. To address this need, we have developed the
ATX-700, a modular and scalable advanced thin film coating system. The ATX-700
provides a large area sputtering solution for ease of automation, increasing
display size and low-particulate requirements of FPD manufacturers. We provide a
complete solution to our customers' needs by offering all necessary stages of
the coating process, from the first step of glass cleaning through the final
stage of inspection, packaging and shipment. The ATX-700 platform can be
configured to address a variety of manufacturing requirements through the entire
FPD continuum, including advanced, high resolution active matrix and plasma
displays.
Reduce our Equipment Manufacturing Time. Competitive lead times are a key
to our success. As demand continues to rise and customers commit to new
production facility construction, we will experience pressure on manufacturing
lead times. We are currently expanding our in-house capacity and working with
our suppliers to ensure that our manufacturing lead times will satisfy our
customer needs.
Capture Opportunities in the Coated Glass Market Driven by Growth in
Wireless Communications. The proliferation of wireless communication devices
such as cellular telephones and PDAs is creating increased demand for thin film
coated glass used in these devices. As the leading supplier of thin film coated
glass, we are well positioned to take advantage of this opportunity. We are
aggressively pursuing the opportunity by seeking to be a low cost producer, by
continuing to upgrade our own coating systems and by achieving technology-based
manufacturing efficiencies. In particular, our joint venture in China, which is
strategically located near several major manufacturers of displays for wireless
communication devices, allows us to most effectively service these customers. We
also seek continued growth in other areas of our thin film coated glass business
by leveraging our long-standing relationships with many of the world's key FPD
manufacturers.
Continue to Develop New Coating and Process Technologies for Existing and
Emerging Markets. We are using our thin films expertise to address the evolving
needs of the FPD industry. For example, we pioneered the commercialization of
several advanced process technologies including the application of MgO, indium
tin oxide ("ITO") and chrome copper chrome ("CrCuCr") on glass. In addition, we
recently developed coatings for the touch screen market and announced the
introduction of our commercial thin films for use in organic light-emitting
diodes ("OLEDs"). We are developing a low temperature ITO process to meet the
growing needs of the active matrix LCD market. We intend to continue to develop
new coating and process technologies to meet the evolving needs of our
customers.
Deliver Superior Service and Support. We meet our customers' FPD needs by
providing in-house and on-site training, ongoing customer service, and support
through all phases of development and production. Our expertise and experience
as a supplier of thin film coated glass is a competitive advantage that enables
us to better assist customers in installing, testing and operating the coating
equipment we provide. Our fully operational commercial coating lines enable us
to demonstrate equipment and train customers in an actual production environment
at our facilities. This hands-on training and support, combined with our modular
design, benefits our customers by reducing start-up times, maximizing equipment
uptime and improving operational efficiencies.
ITEM 1(b): Financial Information About Industry Segments
We supply thin film coated glass and thin film coating equipment primarily
to LCD manufacturers, which are currently considered to be separate industry
segments. For further discussion see "ITEM 8: Financial Statements and
Supplementary Data -- Note 11: Segment Information."
ITEM 1(c): Narrative Description of Business
Products and Manufacturing
Our thin film coated glass and processing systems are used in a broad
spectrum of FPD displays. We design and manufacture thin film coating equipment
for FPD manufacturers and for our own in-house production of coated glass. We
also supply thin film coated glass primarily for LCDs used in wireless
communication devices and other electronic
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devices.
The following table illustrates the FPD markets we serve:
-------------------------------------------------------------------------------
Market
-------------------------------------------------------------------------------
Black and Touch Color Active
TN White STN Panel STN Matrix PDP
-- --------- ----- --- ------ ---
Thin Film Coated Glass........... SiO2 SiO2 ITO (1) (1) (1)
ITO Thick ITO Optical
Coatings
Coating Process Systems.......... Venture Venture 5000 ATX-700 ATX-700 ATX-700 ATX-700
5000 or ATX-700
- ----------
(1) For the color STN, active matrix and PDP markets where thin films are used
as intermediate layers, we supply process qualification samples of coated
glass for the development and prototyping needs of actual and prospective
equipment customers.
The following table sets forth our gross sales by (excluding returns and
allowances) our major product categories and industry segments for our last
three fiscal years:
---------------------------------------------------------------
Fiscal Year Ended
---------------------------------------------------------------
July 1, 2000 July 3, 1999 June 27, 1998
------------ ------------ -------------
(In thousands)
TN Glass...................................... $ 17,880 $ 19,963 $ 29,189
STN Glass..................................... 14,800 4,703 4,844
Other Coated Glass............................ 3,739 3,449 7,211
---------- ---------- -----------
Total Thin Film Coated Glass.................. 36,212 28,115 41,244
Thin Film Coating Equipment................... 7,133 4,617 13,908
---------- ---------- -----------
Total Gross Sales $ 43,552 $ 32,732 $ 55,152
========== ========== ===========
Thin Film Coating Equipment
Our coating equipment product line includes two platforms:
The ATX-700 Series. The recently introduced ATX-700 is an advanced thin
film coating system that provides a large area coating solution to the
increasing display size and low-particulate requirements of PDPs and other FPDs.
The ATX-700 features near vertical sputtering of glass substrates, a large
coating window, a minimized footprint (half of a traditional in-line system),
lower particulate levels, and reduced manual labor requirements because of
robotic handling. The selling price of the ATX-700 typically ranges from $4
million to $7 million, depending on system configuration. In December 1999, we
announced our first contract for the sale of an ATX-700 system. This sale to a
Taiwanese company is expected to be delivered late in calendar year 2000. In
March 2000, we executed a contract with a manufacturer of plasma display panels
to purchase an ATX-700, and following the year end in July 2000, we announced
the sale of an ATX-700 to a major Japanese manufacturer of PDPs for delivery in
early 2001. We also offer the ATX-700P, a pilot version of the ATX-700 for small
volume production. The selling price of the ATX-700P typically ranges from $1
million to $2 million.
The ATX-700 is modular and can be configured to meet multiple thin film
coating requirements for the high-end FPD market, including plasma displays and
active matrix LCDs. The ATX-700 is particularly well suited for the high growth
plasma display market where we can offer our unique patent-pending magnesium
oxide sputtering process. We believe this process allows MgO to be applied with
greater uniformity over a large area than the current vacuum
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evaporation method. We believe the process also results in increased yields,
increased throughput and reduced costs. The ATX-700 platform is designed to
apply other critical coatings in the plasma display fabrication facility,
including ITO and CrCuCr. This capability allows the display manufacturer to use
a common platform in multiple locations in the manufacturing line, creating
operational efficiencies. The ATX-700 can also be configured for the low
temperature ITO and chrome black matrix processes used to produce active matrix
LCDs.
The Venture Series. The Venture Series platform is an in-line vertical
system used to apply ITO, silicon dioxide ("SiO2") and other thin films,
primarily in producing coated glass for black and white LCDs. The Venture Series
platform features high throughput, reduced particle defects and the capability
for double sided coatings. The selling price of the Venture Series system ranges
from $4 million to $7 million. We will continue to market this system to LCD
manufacturers in selected markets.
Thin Film Coated Glass
TN Coated Glass. We are one of the world's leading producers of twisted
nematic ("TN") coated glass, which is used for low resolution black and white
LCDs. Our customers incorporate these LCDs into consumer products that include
watches, calculators, and electronic instruments. To produce TN coated glass, we
use our proprietary in-line coating systems to deposit SiO2 and ITO onto high
quality glass panels. We then package and ship the coated glass panels to our
customers for incorporation into their products.
STN Coated Glass. The most rapidly growing portion of our coated glass
business is the market for STN coated glass. STN coated glass is used for high
resolution black and white LCDs used in cellular telephones, personal digital
assistants, office copiers, portable video games and related products. The
growing market for STN coated glass is particularly impacted by increased demand
for wireless communication devices. STN coated glass requires thicker thin film
coating layers and greater uniformity to improve conductivity. Because it is
more complex and expensive to produce than TN coated glass, STN coated glass
presently provides us with higher revenues and gross margins for each panel of
glass produced. Our joint venture in Suzhou, China is especially focused on the
STN market where proximity to critical customers allows us to meet just in time
delivery requirements.
Touch Screens. In June of 1999, we entered into a joint marketing agreement
with Information Products, Inc., covering worldwide marketing and distribution
of coated glass for touch screen applications. We began commercial production
and shipment of touch screen products in the fourth calendar quarter of 1999.
Touch screens are used as the input interface on a variety of consumer and
industrial products, including the high growth PDA and related communication
markets.
Organic LEDs. In July 2000, we announced the development of our smooth ITO
for use in OLEDs. OLEDs require ITO glass with a smooth surface to ensure that
the thin organic film layer that is deposited by OLED manufacturers is uniform.
To produce this smooth ITO, which has 1/10 the surface roughness of other
commercially available ITO, we use a proprietary deposition process. OLED
technology is viewed as one of the future growth segments in the flat panel
display market. These displays are expected to be less expensive to manufacture
than LCDs. The technology does not require a backlight, thus allowing the device
to be lighter, thinner and less consumptive of power. Current applications
include car audio and cell phones.
Other Thin Film Coated Glass. Our other thin film coated glass includes ITO
coatings for automatically dimming electrochromic mirrors, and chrome and
rhodium coatings for dental mirrors. We also produce more limited quantities of
advanced coated glass panels for the development and prototype needs of our
coating equipment customers and prospective customers. These thin film coated
glass products involve complex coatings for a variety of high resolution color
FPDs including microdisplays, color STN displays, active matrix LCDs, and PDPs.
Sales, Marketing and Customers
Sales of our equipment involve a broad-based effort at various levels
within our organization. Much of the sales effort in the equipment area is
undertaken by our technical and marketing groups, including sales offices in
Japan and China. Other personnel, including our Chief Executive Officer and Vice
President -- Sales and Marketing, make regular trips to visit foreign customers
to finalize contracts and ensure proper customer service. The sales cycle for
thin film
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coating equipment is long, involving multiple visits to and by the customer, and
up to eighteen months of technical sales effort. Equipment sales efforts are
assisted by independent sales and service representatives in each region who
have been selected with an emphasis on their ability to provide post sales
service and support. We generally sell our thin film coating equipment on a
progress payment basis. The majority of our thin film coated glass is sold on
open account, backed by a letter of credit or insured. Our customer payment
history has been excellent.
Approximately 93% of our fiscal 2000 gross sales were derived from exports,
primarily to Asia. In the same period, we served 76 customers in 13 countries.
In fiscal 2000, our ten largest customers accounted for approximately 79% of our
gross sales. The principal demand for thin film coated glass is in Asia and our
customers for thin film coating equipment have historically been located in
Korea, China, Taiwan and the United States. We believe our potential geographic
market for thin film coating equipment includes all the major geographic regions
in which FPD manufacturing takes place. Sales to two customers, Nippon Sheet
Glass Co., Ltd. ("NSG") and Gemtech, represented approximately 29% and 11% of
gross sales for fiscal 2000, respectively. Sales to NSG for fiscal 2000
consisted solely of sales of thin film coated glass, and sales to Gemtech
consisted solely of revenues of thin film coating equipment.
Net sales of thin film coated glass and equipment by geographic region
during each of the last three fiscal years were as set forth below. Sales are
assigned to a region based upon where the contract for purchase is formed.
------------------------------------------------------------------
Fiscal Year Ended
------------------------------------------------------------------
July 1, 2000 July 3, 1999 June 27, 1998
------------ ------------ -------------
(In thousands)
Asia (other than Japan)....................... $ 25,901 $ 18,900 $ 32,800
Japan......................................... $ 13,929 $ 7,645 $ 7,824
United States................................. $ 2,934 $ 4,924 $ 12,224
Europe and Other.............................. $ 788 $ 1,263 $ 2,304
---------- ---------- -----------
Total $ 43,552 $ 32,732 $ 55,152
========== ========== ===========
Technology
Virtually all FPDs require optically transparent, electrically conductive
thin films coated on substrates such as glass. These thin films transmit
electrical power to picture elements of the displays and allow light to pass to
the viewer, creating the actual picture on the screen. The FPD market is placing
increasing performance and other demands on the thin film coated glass used in
FPDs, particularly with regard to imperfections, which must be fewer and
smaller. As FPDs become larger and more resolution and information intensive, it
becomes more crucial to maintain the lack of pinholes in the film, the absence
of contamination on or under the film, and the physical, chemical and electrical
uniformity, as well as the micro flatness of the substrate. In addition, the
substrate cleaning process becomes more critical, and handling of the glass
through the system must be more carefully controlled for quality.
Process. We believe that we are a world leader in thin film process
technology. One of our primary process elements and core competencies in the
manufacture of thin film coated glass is the preparation of the glass for
coating in high volumes. The cleaning process, the lack of pinholes in the
coating, and the absence of any contamination on or under the coating are
critical in the manufacturing process. After cleaning and preparation, the glass
enters a HEPA filtered Class 1000 clean room where it is loaded into the coating
system. After removal of the substrate from the system, it must be inspected for
defects and optical, electrical and thickness properties. We continually work to
improve our glass cleaning and product inspection capabilities.
The coating equipment which we design and produce enables us and other
manufacturers of thin film coated glass to apply very thin, transparent layers
of thin film coatings to glass. The coatings which we apply are deposited in
microscopic thicknesses by physically bombarding, or sputtering, a cathode
source coating material (a chemical compound or element) with argon ions.
Individual atoms and molecules of the source material are separated from the
source by bombardment to form a vapor that condenses as a film onto the glass.
Sputtering provides many advantages including material flexibility, thickness
consistency, adaptability to large substrates and high volume production, defect
and contamination control, adhesion and thin film density. Our technology of
applying a thin film coating to glass or other substrate enables the display
into which the glass or substrate is incorporated to function as a complex
switch
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which controls light emission or transmission from each of the thousands of
segments or pixels that comprise an FPD. Our primary thin film coated glass
product is made by applying a thin layer of SiO2 to prevent sodium in glass from
leeching into the thin film conductive coatings which are subsequently applied.
After the SiO2 is deposited, ITO is applied to provide conductive properties,
permitting the glass to be used for various FPD applications. Particularly in
FPDs, optically transparent, electrically conductive films, such as those we
apply, find common application in transferring electrical power to the picture
elements of the displays and allowing light to pass to the viewer.
The quality of the coatings, the cycle time of the process, the utilization
of materials, and other factors are controlled by our proprietary information
and technology. For example, we are improving the utilization of the cathode
source material. We also developed a method of reducing cathode voltage and are
developing the application of this method to ITO coatings. We believe this will
improve the conductivity of the ITO coating. Our glass coating process has
declined from approximately 11 hours in-process-time and nine separate manual
handling steps in 1985, to approximately 30 minutes and four manual handling
steps currently. All of the coating and heat treating steps now occur within the
equipment. The glass must be moved in a carefully controlled fashion at high
temperatures over a wide range of speeds through a vacuum system. We have
developed a simple, cost effective and reliable means of moving glass with high
yields. We are continually enhancing our technology to improve the performance
of our equipment, both in terms of the characteristics of the coating obtained
and the efficiency of the equipment. We also are working on improving the
conductivity of our ITO coatings and the barrier qualities of our SiO2, and on
improving our systems not only to obtain better quality coatings, but also to
obtain better utilization of coating materials.
We continue seeking advances to thin film technologies which have
commercial promise. We developed the GEMs process, which increases the speed of
reactive sputtering of certain materials such as MgO. A patent application is
pending with respect to this process.
Technological Foundations. John S. Chapin, Vice President--Research and
Development and one of our founders, invented the planar magnetron which first
enabled manufacturers of thin film coated glass (as well as of semiconductor
chips) to economically deposit sputtered thin film coatings. Another founder,
Research Engineer Richard Condon, was a pioneer in the development of the
in-line coating process which is currently used by much of the industry. We
believe we maintain a competitive advantage because we design, build and operate
our own thin film coating equipment for thin film coated glass. Further, because
our primary business has been producing thin film coated glass, we are able to
effectively incorporate our production know-how into new generation coating
equipment and improvements in existing coating equipment. We believe this
provides us with a capital cost advantage over most of our competitors. This
also enables us to compete effectively in the market for thin film coated glass
manufacturing equipment.
Research and Development
Our success can be attributed to focused research and development programs
in thin film technology, processes and equipment. We will continue to emphasize
improvements in current equipment technology, the development of new film
deposition capabilities, and the modification of thin film material properties.
The foundations of our success are based on engineering solutions for efficient
ITO and SiO2 deposition for the FPD industry. These solutions include cost
effective reactive depositions, simplified process control, and innovative
coating equipment designs. We continue to build on these traditions in the
development of process control and coater design which lower the cost of
ownership.
We are innovators in developing coating equipment systems. Our ATX-700
platform meets demanding specifications for the reduction of film defects and
the elimination of particulates and provides major advances through glass
fixturing in a near vertical configuration. We continue to reconfigure and
incorporate available hardware into the ATX-700 to further reduce film defects.
Additionally, the heart of the film deposition system, the sputtering cathode,
will continue to be improved. Improvements in cathode design will increase the
utilization of the source cathode material which will lower operating costs and
extend the time between source cathode material changes.
We are also innovators in developing new thin film technologies for
emerging markets:
- Plasma displays. We are capable of applying the three films (MgO, ITO
and CrCuCr) required in the production of PDPs. We work closely with
all the major PDP manufacturers in Asia, the United States and
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Europe to develop the highest quality films. We will continue to work
to align MgO material properties with panel quality requirements.
- Active matrix LCDs. The active matrix LCD and high resolution display
markets require thick ITO coatings deposited at low temperatures. These
markets are also demanding additional films with low particulate and
defect levels. We are developing new coating methods to meet the
requirements of these films.
- Touch screens. We are producing the basic film required for the touch
panel market and are pursuing the development of new alloys which will
meet evolving touch panel market needs.
- OLEDs. This is the term used for a new class of organic materials that
emit light when a voltage is applied to them. We have commercialized
our smooth ITO film for use in OLEDs. This coating is a very smooth ITO
layer which avoids electrical shorting through the organic layer.
Intellectual Property
We believe that due to the rapid pace of innovation within our industry,
factors such as technological and creative skilled personnel, the ability to
develop and enhance systems, knowledge and experience of management, reputation,
product quality and customer service and support are more important for
establishing and maintaining a competitive position within the industry than
patent or other legal protections for our technology. We, nevertheless, rely on
confidentiality agreements, licensing agreements and other forms of contractual
provisions to protect our intellectual property. We currently have one patent
application pending for the GEM's sputtering process. There can be no assurance,
however, that the steps taken by us to protect our proprietary rights will be
adequate to prevent misappropriation of such rights or that third parties will
not independently develop a functionally equivalent or superior technology.
Manufacturing and Facilities
Our Longmont, Colorado headquarters consists of approximately 127,000
square feet and includes our general offices, research and development
facilities, and manufacturing and production facilities. This facility is leased
from an independent third party. We design and manufacture our thin film coating
equipment and produce coated glass at these facilities. In Longmont, we
currently operate three coated glass production lines and three development
lines for developing coating and equipment processes. We can concurrently build
three coating systems at our Longmont facility and have sufficient space to
build up to six coating systems with minor facility upgrades.
In fiscal 1999, we entered into a joint venture with Nippon Sheet Glass
Co., Ltd., a major Japanese glass manufacturer to supply the low and high
resolution coated glass market from a production base in Suzhou, China. The
joint venture facilities were incorporated into existing NSG glass production
facilities and contain approximately 40,000 square feet. This joint venture,
Suzhou NSG -- AFC Thin Film Electronics LTD, known as "STEC", has involved the
transfer of thin film coated glass manufacturing capacity to China. The joint
venture presently operates two coating systems. We are currently transferring a
Venture 5000 system from our Longmont facility to STEC which will bring the
number of coating systems to three, as of the end of the first quarter of fiscal
2001. We believe we have built sufficient inventory to meet customer needs while
the Venture 5000 system is being transferred from Longmont to STEC. We do not
consolidate the revenues from the joint venture, and although a portion of the
revenues from the Venture 5000 system production will not flow through us, we do
not expect the transfer of the system to materially affect revenues. STEC's
location in Asia allows us to produce coated glass in facilities immediately
adjacent to our source of raw glass, NSG, and in close proximity to our Asian
customer base. This arrangement has reduced our labor, shipping and freight
costs while allowing us to improve customer service. In its first twelve months
of operations, STEC was cash flow positive and profitable. We intend to continue
to leverage STEC's strategic position by expanding its manufacturing capacity in
the future. We will also continue to evaluate business opportunities that
strengthen our position with our customers in other regions of Southeast Asia.
In addition to our Longmont and STEC facilities, we have leased warehouse
space in Japan and Hong Kong from which we supply coated glass customers on a
just-in-time basis.
9
Suppliers
Thin Film Coating Equipment. In our thin film coating equipment business,
we use various suppliers of machined components, pump systems, logic controllers
and other commercially available components and features. We have multiple
sources for the principal components in this aspect of our business. We own and
control the proprietary parts of the process. For the proprietary fabricated
parts there are various suppliers who can produce components to our
specifications.
Thin Film Coated Glass. The raw glass that we use in our manufacturing
process represents our most significant material cost. The required quality, in
terms of thickness, flatness and visible imperfections, limits the number of
available suppliers. We currently purchase raw glass from four of the five
companies worldwide that currently manufacture to these quality standards. We
are vulnerable to increased costs of raw glass. We regularly evaluate methods of
reducing our cost of glass. Our other primary raw materials for thin film coated
glass are SiO2 and ITO. We currently purchase SiO2 and ITO from two suppliers
and believe alternative sources of supply could be developed if necessary.
Competition
Thin Film Coating Equipment. In manufacturing thin film coating equipment,
we compete against two established equipment manufacturers which are much larger
than the we are: Ulvac Japan, Ltd. in Japan and Balzers Process Systems in
Germany. Competition is based on performance and process technology, after-sales
support and service, and price. We believe we compete favorably with respect to
each of these factors. Key performance and technology issues include technical
capability, systems design, product uniformity, yields, target utilization and
throughput. We are the only major thin film coating equipment manufacturer that
also manufactures thin film coated glass for the FPD market. We believe the
experience, expertise and synergy resulting from this provide us with a
competitive advantage.
Thin Film Coated Glass. Competition in the market for thin film coated
glass for FPDs is intense. Competition is based primarily on price,
availability, and to a lesser extent on quality, delivery, and customer service.
In addition, we believe the ability to anticipate shifts in the market and
customer needs for thin film coated glass features are important competitive
factors. We are aware of approximately ten thin film coated glass competitors
worldwide. Certain of these competitors are also manufacturers of thin glass
required for thin film components and several are users of thin film coated
glass. These are large companies with significant research and development
funding and extensive thin film technology background. All of our principal thin
film coated glass competitors are located in Asia. Our primary competitors for
thin film coated glass are Samsung/Corning, Merck Display Technology, Wellite,
and Shenzhen Leybold.
STEC Joint Venture
STEC was formed as a limited liability company under the laws of the
People's Republic of China. NSG and we are each 50% joint venture partners, and
the term of the joint venture is 50 years. Profits, dividends, risks and losses
are also shared by the partners in proportion to their equity contributions. The
total initial investment plan for STEC involves $16 million, of which $6.4
million is currently in equity and up to $9.6 million in debt. Each party has
made its $3.2 million equity contribution in cash.
Governance. The STEC board of directors is comprised of three appointees
for each partner with each director serving a two year term. For the first two
year term after formation, we have the right to appoint the chairman of the
board, and NSG has the right to appoint the general manager, who may serve
concurrently as a director.
All board actions require a unanimous vote of the directors present.
Matters subject to board decision include approval of annual operating and
capital budgets; distribution of profits and losses; hiring, compensation and
retention of senior management; lease, sale, pledge or other encumbrance of all
or a substantial portion of STEC's assets; increase in required capital of STEC;
borrowing; significant purchase, product sales and other important contracts;
amendments of the Articles of Association; and merger or dissolution of STEC.
10
In the event of deadlock, the conflict is referred to our President and the
corporate officer in charge of the Fine Glass Division of NSG. If the parties
fail to reach agreement within six months and the deadlock materially impairs
the continued operation of STEC in a manner consistent with past practice or an
agreed business plan, either partner may notify the other that it wishes to
withdraw from the joint venture. In the event of such withdrawal, the fair
market value of STEC will be agreed by the parties or by an appraiser if they
cannot agree. The party receiving the notice has the option to purchase the
interest of the other party at 85% of the fair market value attributable to the
withdrawing party's ownership interest, or to require the other party to
purchase its interest at 115% of the fair market value of its interest.
Relationship Between Partners and Joint Venture. Each joint venture partner
provides marketing, promotion and sales assistance to STEC. NSG has agreed to
cause its subsidiary SNSG to sell glass substrate to STEC, and the joint venture
will purchase all of its glass substrate from SNSG unless a customer specifies
substrate from another manufacturer.
Financing. If the Board approves third party debt financing with a lender
who requires the guarantee of the parties, each party must provide a several
guaranty of such borrowings in accordance with its then current equity interest.
Guarantors will receive a guarantee fee to be agreed by the parties, and STEC
will indemnify the guarantors. STEC has entered into a $3.5 million revolving
credit agreement with Sumitomo Bank, which we and NSG have guaranteed. NSG's
guarantee is secured by all of the assets of the joint venture.
Restrictions on Transfer. Neither party may sell, pledge or otherwise
dispose of all or any portion of its equity interest in STEC to any third party
without the prior written consent of the other party and approval by the Chinese
regulatory authorities. Each party has a right of first refusal regarding
transfers by the other party.
If NSG sells its subsidiary SNSG to an entity not controlled by it, we have
the option to purchase NSG's equity interest in STEC, or to sell our equity
interest to NSG. Following determination of the fair market value of STEC by
agreement of the parties or by an appraisal, we may elect to purchase NSG's
interest in STEC at its fair market value, or to sell our interest in STEC at
120% of its fair market value.
Employees
As of July 1, 2000, we employed 200 people, versus 161 people at the end of
fiscal 1999. None of the employees are unionized. We consider our relationship
with our employees to be good.
We focus on enhancing sound manufacturing systems and applying key concepts
of high performance work systems to improve our ability to grow rapidly, excel
at product cost, quality, and delivery, and encourage continuous improvement and
innovation. Our fundamental work units are teams, including multi-skilled
production teams responsible for start-to-completion manufacturing and teams
focused on technology development, and innovation. Coordination and direction
are established through extensive work force education, participative leadership
and management, and shared goal setting, communication, and performance
feedback.
We operate under a participative management system which we believe
enhances productivity by emphasizing individual employee opportunity and
participation both in operating decisions and in our profitability. We maintain
a discretionary monthly profit sharing plan for full-time nonexecutive
employees. We believe this emphasis assists with enhanced productivity, cost
control, and product quality and has helped us attract and retain capable
employees.
Seasonality
Our business is not especially seasonal, however, production output is
affected by holidays, vacations and available workdays. Our business may be
subject to significant quarterly and annual fluctuations.
Environmental Regulations
Our operations create a small amount of hazardous waste. The amount of
hazardous waste we produce may increase in the future depending on changes in
our operations. The general issue of the disposal of hazardous waste has
received increasing focus from federal, state, local, and international
governments and agencies and has been subject to
11
increasing regulation.
One Time Charges
No one-time charges were reported during fiscal 2000, however, we
restructured our workforce during the 1999 fiscal year. This restructuring along
with the cost to complete the move of the company to its current manufacturing
and headquarters site generated one time charges to earnings in fiscal 1999
totaling $433,000.
Executive Officers, Directors and Key Employees
The executive officers, directors and key employees of the Company are as
follows:
Name Age Position
---- --- --------
Cecil Van Alsburg........................... 63 Director, Chairman of the Board
Thomas T. Edman............................. 38 Director, President, Chief Executive Officer
John S. Chapin.............................. 59 Director, Vice President - Research, Secretary
Graeme Hennessey............................ 62 Vice President - Sales and Marketing
Lawrence D. Firestone....................... 42 Chief Financial Officer and Treasurer
Chad D. Quist............................... 38 Director
Richard P. Beck............................. 67 Director
Vincent Sollitto, Jr........................ 52 Director
Roger Smith................................. 59 Director of Materials
Jim Scholhamer.............................. 34 Director of Operations - Thin Film Coatings
Russell W. Black............................ 40 Director of Operations - Thin Films Systems
John J. Kester.............................. 50 Director of Advanced Development
Cecil Van Alsburg co-founded Applied Films Lab, Inc. in 1976 and served as
our President and Chief Executive Officer from 1976 to May 1998. Mr. Van Alsburg
has also served as a director our company since its inception and has been
Chairman of the Board since January 1998. Prior to 1976, Mr. Van Alsburg was
employed in various capacities by Donnelly Corporation for which he had worked
since 1957. Mr. Van Alsburg majored in civil engineering and architecture at the
University of Michigan.
Thomas T. Edman has been employed by our company since June 1996 and has
served as our President and Chief Executive Officer since May 1998. From June
1996 until May 1998, Mr. Edman served as Chief Operating Officer and Executive
Vice President. Mr. Edman has also served as a director of our company since
July 1998. From 1993 until joining our company, he served as General Manager of
the High Performance Materials Division of Marubeni Specialty Chemicals, Inc., a
subsidiary of a major Japanese trading corporation. Mr. Edman has a bachelors of
arts in East Asian studies (Japan) from Yale and, in June 1993, received a
masters degree in business administration from The Wharton School at the
University of Pennsylvania.
John S. Chapin co-founded Applied Films Lab, Inc. in 1976 and has served as
Vice President - Research, Corporate Secretary, and a director of our company
since its inception. Mr. Chapin is the inventor of the planar magnetron and
co-inventor of a reactive sputtering process control. Mr. Chapin has a bachelors
of science degree in geophysics from the Colorado School of Mines and a masters
degree in electrical engineering from the University of Colorado.
Graeme Hennessey has served as our Vice President - Sales and Marketing
since April 1993. From 1980 until he joined our company, Mr. Hennessey was
employed by Donnelly Corporation as a product line manager where he was
responsible for sales and marketing as well as manufacturing. Mr. Hennessey
obtained a bachelors of science degree in physics from Catholic University of
America and a masters degree in physics from Fordham University.
Lawrence D. Firestone has served as our Chief Financial Officer and
Treasurer since July 1999. From March 1996 until March 1999, Mr. Firestone
served as Vice President and Chief Operating
12
Officer of Avalanche Industries, Inc., a custom cable and harness manufacturer.
From 1993 to 1996, Mr. Firestone served as Director of Finance and Operations
for the Woolson Spice and Coffee Company, a gourmet coffee roasting and
distribution company, and from 1988 to 1993, as Vice President and Chief
Financial Officer for TechniStar Corporation, a manufacturer of robotic
automation equipment. From 1981 to 1988, Mr. Firestone served in various
capacities and finally as Vice President and Chief Financial Officer at Colorado
Manufacturing Technology, a contract manufacturer that specialized in PC board
and cable assembly. Mr. Firestone has a bachelors of science degree in
business/accounting from Slippery Rock State College.
Chad D. Quist has been a director of our company since April 1997. Mr.
Quist is the President of Information Products, Inc., a wholly-owned subsidiary
of Donnelly Corporation, and has recently assumed responsibility for the
electrochromic mirror business unit for Donnelly Corporation as its Vice
President. Mr. Quist has been employed by Donnelly since 1995. Information
Products, Inc. is a leading supplier of glass components for the touch screen
industry. From 1989 to 1995, Mr. Quist served as Vice President of
Fisher-Rosemont, Inc., an industrial instrumentation company. Mr. Quist has a
bachelors degree in engineering from Stanford University and a masters degree in
business administration from the Kellogg Graduate School of Business at
Northwestern University.
Richard P. Beck has been a director of our company since May 1998. Since
1992, Mr. Beck has served as Chief Financial Officer of Advanced Energy
Industries, Inc., a manufacturer of power conversion and control systems. Since
1995, Mr. Beck has also served as a director of Advanced Energy Industries, Inc.
From 1987 to 1992, Mr. Beck served as Executive Vice President and Chief
Financial Officer of Cimage Corporation, a computer software company. Mr. Beck
has a bachelors of science degree in accounting and a masters degree in business
administration in finance from Babson College.
Vincent Sollitto, Jr. has been a director of our company since October
1999. Mr. Sollitto has been the Chief Executive Officer since June 1996 and a
member of the Board of Directors since July 1996 at Photon Dynamics, Inc. From
August 1993 to 1996, Mr. Sollitto was the General Manager of Business Unit
Operations for Fujitsu Microelectronics, Inc. From April 1991 to August 1993, he
was the Executive Vice President of Technical Operations at Supercomputer
Systems, Incorporated. Mr. Sollitto spent 21 years in various positions,
including Director of Technology and Process at International Business Machines
Corporation, before joining Supercomputer Systems, Incorporated. Mr. Sollitto
serves as a director of Irvine Sensors Corp. Mr. Sollitto is a graduate of Tufts
College where he received a B.S.E.E. in 1970.
Roger Smith has served our company since July 1998 as our Director of
Materials. From May 1993 until July 1998, Mr. Smith served our company's
Treasurer. Prior to joining our company, Mr. Smith was employed for 33 years by
Donnelly Corporation in various capacities, including controller and project
manager.
Jim Scholhamer has been employed by us since August 1997. Mr. Scholhamer
currently is the Director of Operations for Thin Film Coatings and was
previously the Engineering Manager. From 1992 until he joined the Company, Mr.
Scholhamer held the titles of Manufacturing Manager and Process Engineer at
Viratec Thin Films, Inc., located in Minnesota. From 1989 to 1992, Mr.
Scholhamer served as Production Manager and Process Engineer at Ovonic Synthetic
Materials, Inc., a division of Energy Conversion Devices, located in Michigan.
Mr. Scholhamer obtained his bachelors of science degree in engineering from the
University of Michigan.
Russell W. Black has been employed by us since December 1996 as its
Director of Operations -- Thin Film Systems. From 1994 until March 1996, Mr.
Black served as Engineering Manger at Applied Komatsu Technology, a capital
equipment supplier to the FPD industry, and from 1990 to 1993, as an Engineering
Manager at Varian Associates, Inc., a capital equipment supplier to the
semiconductor industry. Mr. Black obtained a bachelors of science degree in
engineering technology from California State Polytechnic University. In 1995,
Mr. Black pleaded guilty to one count of wire fraud in United States District
Court. Mr. Black was sentenced to 18 months probation and 50 hours of community
service and was ordered to pay approximately $7,500 in fines and restitution.
Mr. Black's probation was terminated by the court after 10 months.
John J. Kester has been employed by us since June 1997 as our Advanced
Development Director. From 1995 until he joined us, Dr. Kester served as
Research and Development Manager for the photovoltaic
13
module manufacturer, Golden Photon Inc., a subsidiary of ACX Inc. From 1989
to 1995, he was the Physics Division Chief at the Seiler Research Laboratory at
the United States Air Force Academy. From 1982 to 1989 he worked in the Central
Research Laboratory of Dow Chemical Company. Dr. Kester hs a bachelors degree
from The Colorado College and a masters and doctorate in physics from Washington
University in St. Louis, Missouri.
Our Board of Directors is currently composed of six directors, divided into
three classes. Messrs. Edman and Sollitto serve in the class whose term expires
in 2000; Messrs. Van Alsburg and Chapin serve in the class whose term expires in
2001; and Messrs Beck and Quist serve in the class whose term expires in 2002.
Upon the expiration of the term of each class of directors, directors comprising
that class will be elected for a three-year term at the next succeeding annual
meeting of shareholders. Each director holds office until that director's
successor has been duly elected and qualified. Selection of the nominees for the
Board of Directors is made by the entire Board of Directors.
The Board of Directors elects executive officers on an annual basis.
Executive officers serve until their successors have been duly elected and
qualified.
ITEM 1 (d): Information About Foreign Operations
See "ITEM 1(c): Narrative Description of Business -- Sales, Marketing, and
Customers" and "--STEC Joint Venture." See also "ITEM 7: Management's Discussion
and Analysis of Financial Condition and Results of Operations - Overview - China
Joint Venture."
ITEM 2: Properties
Our headquarters and the majority of our manufacturing facilities are
located in Longmont, Colorado in approximately 127,000 square feet of leased
space. We have sales offices in China and Japan and utilize inventory warehouses
in Japan and Hong Kong.
Our facilities are modern, well-maintained and adequately insured and are
well-utilized.
ITEM 3: Legal Proceedings
We are presently not involved in any legal proceedings which, if not
settled in our favor would individually or collectively, have a material adverse
impact on its financial condition.
ITEM 4: Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of fiscal 2000 to a
vote of the Company Shareholders.
14
CERTAIN FACTORS
Described below are certain risks that we face. The risks described below
are not the only ones that we face. Additional risks and uncertainties not
presently known to us or that are currently deemed immaterial may also impair
our business operations. Our business, operating results or financial condition
could be materially adversely affected by, and the trading price of our common
stock could decline due to, any of these risks.
This Report contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. Our actual results could differ materially from those anticipated in
the forward-looking statements for many reasons, including the factors described
below and elsewhere in this Report. You should not place undue reliance on these
forward-looking statements.
Our operating results may fluctuate.
We have experienced and may continue to experience significant annual and
quarter-to-quarter fluctuations in our operating results. Our annual and
quarterly operating results have fluctuated and may fluctuate in the future as a
result of a variety of factors including:
- customer demand, which is influenced by a number of factors, including
general economic conditions in the FPD industry, market acceptance of
our products and the products of our customers, changes in the product
mix demanded and offered, and the timing, cancellation or delay of
customer orders and shipments;
- competition, including competitive pressures on prices of our products
and those of our customers (for example, although thin film coated
glass prices were stable in fiscal 2000, prices declined approximately
29% during fiscal 1999, adversely affecting our net income in that
fiscal year), the introduction or announcement of new products by
competitors and the addition of new production capacity by competitors;
- the cyclical nature of the capital equipment market;
- manufacturing and operational issues that arise due to, among other
things, fluctuations in availability and cost of raw materials and
production capacity, the transfer of equipment and personnel to
manufacturing facilities at our joint venture in China, and the hiring
and training of additional staff;
- issues related to new product development, including most significantly
our ability to introduce new products and technologies on a timely
basis and the increased research, development and engineering costs and
marketing expenses associated with new product introductions;
- the timing of the recognition of revenues from capital equipment orders
can materially impact our operating results on a quarterly basis due to
the magnitude of each capital equipment order;
- sales and marketing issues, including our concentration, particularly
in the equipment area, on a small number of customers and discounts
that may be granted to certain customers; and
- fluctuations in foreign currency exchange rates.
The coated glass market is highly competitive and subject to pricing pressures.
The market to supply thin film coated glass to LCD manufacturers is highly
competitive. Many of our competitors have substantially greater financial,
technical, marketing and sales resources than we have. Prices for much of our
low resolution thin film coated glass products supplied to the LCD market
declined in past years, with a 29% price decrease during fiscal 1999. Recent
pricing stabilization in fiscal 2000 may not continue, and we may in the future
experience pricing pressures as a result of a decline in industry demand, excess
inventory levels, increases in industry capacity or the introduction of new
technologies. Many of our customers are under continuous pressure to reduce
prices and we expect to continue to experience downward pricing pressures on our
thin film coated glass products. We are
15
frequently required to commit to price reductions before we know that the cost
reductions required to maintain profitability can be achieved. To offset
declining sales prices, we must achieve manufacturing efficiencies and cost
reductions and obtain orders for higher volume products. If we are unable to
offset declining sales prices, our gross margins will decline.
Additional competitors may enter our markets, certain of which may offer
lower prices. For example, our suppliers and customers could vertically
integrate to manufacture the products we produce. Our suppliers of thin glass
are large, well-capitalized companies that could enter the LCD market by coating
the glass they produce and supplying LCD manufacturers directly. Because glass
is by far our largest material cost, a manufacturer of glass desiring to enter
this market could have a significant cost advantage if they chose to vertically
integrate. We are aware of one manufacturer of thin glass, Asahi Glass Company,
that also coats glass for the LCD market. Further, companies that manufacture
thin film glass coating equipment could begin producing thin film coated glass.
In addition, certain LCD manufacturers have vertically integrated to coat glass
for LCDs, and we expect further vertical integration into certain areas of LCD
manufacturing. Any such vertical integration or other competition could lead to
reduced sales and gross margins and could have a material adverse effect on our
business, operating results, financial condition and prospects.
Our entry into the thin film coating equipment business exposes us to risks
associated with new business ventures in emerging markets.
Until fiscal 1997, our business was focused almost exclusively on the sale
of thin film coated glass. Since then, we have devoted substantial resources to
the development and sale of the equipment for thin film coating, and we believe
our future growth depends significantly upon our success in the equipment
market.
We are subject to the risks inherent in the operation or the development of
a new business, including risks associated with attracting and servicing a
customer base, manufacturing products in a cost-effective and profitable manner,
managing the expansion of a business operation and attracting and retaining
qualified engineering, manufacturing, service and marketing personnel. We
entered the equipment business because of our expectations regarding continuing
rapid growth of the FPD market, but it is difficult to anticipate the direction
of future growth and to design equipment to meet the needs of a changing market.
Changes in technology could render our systems less attractive. If the market
for our thin film coating equipment fails to grow, or grows more slowly or in a
different direction than anticipated, we may be unable to realize the expected
return on our investment in developing the equipment market, and our business,
operating results, financial condition and prospects could be materially
adversely affected. In particular, we are anticipating growth in PDP
applications over the next two years. If commercialization of that technology
develops more slowly than we expect, our future results will be negatively
affected.
Sales of our thin film coating equipment depend in large part upon a
prospective customer's decision to increase manufacturing capabilities and
capacities or to respond to consumer demands for greater cost efficiencies by
upgrading or expanding existing manufacturing facilities or constructing new
manufacturing facilities, all of which typically involve significant capital
expenditures. Customers may postpone decisions regarding major capital
expenditures, such as our coating equipment, due to the rapid technological
change in the thin film coated glass industry. Customers that purchase thin film
coated glass from us could decide to purchase thin film coating equipment to
bring some or all of their thin film coated glass requirements in-house, thus
adversely affecting our sales of thin film coated glass to such customers.
The sales cycle of our thin film coating equipment is lengthy due to the
customized nature of the process, the customer's evaluation of its ordered
system and completion of any necessary upgrades, and the expansion or
construction of facilities. We may expend substantial funds and management
effort during the sales cycle, particularly in initial installations of newly
developed, complex products, which could have a negative impact on gross
margins.
We must continue to invest in research and development to compete successfully
in a rapidly changing marketplace.
The market for thin film coated glass and coating equipment is
characterized by rapid change. Our future success depends upon our ability to
introduce new products, improve existing products and processes to keep pace
with
16
technological and market developments, and to address the increasingly
sophisticated and demanding needs of our customers. Technological changes,
process improvements, or operating improvements that could adversely affect us
include:
- development of new technologies that improve manufacturing efficiency
of our competitors;
- changes in product requirements of our customers, as illustrated by the
shift in the FPD market from lower information content applications to
higher information content FPDs such as supertwisted nematic ("STN")
high resolution, active matrix LCDs and plasma displays;
- changes in the way coatings are applied to glass for LCDs;
- development of new materials that improve the performance of thin film
coated glass; and
- improvements in the alternative to the sputtering technology we use in
plasma displays.
We may not have sufficient funds to devote to research and development, or
our research and development efforts may not be successful in developing
products in the time, or with the characteristics, necessary to meet customer
needs. If we do not adapt to such changes or improvements, our competitive
position, operations and prospects would be materially adversely affected.
A significant part of our business is done in Asia and any downturn in the Asian
economy could adversely affect us.
Sales to international customers represented approximately 78%, 85% and 93%
of our gross sales in fiscal 1998, 1999 and fiscal 2000, respectively. The
principal international markets in which we and our STEC joint venture operate
are China (including Hong Kong), Korea, Japan, Taiwan and Malaysia. Recent
banking and currency problems in Asia have had and may continue to have an
adverse impact on our revenue and operations. We believe international sales
will continue to represent a significant portion of our sales, and that we will
be subject to the normal risks of conducting business internationally. Such
risks include:
- the burdens of complying with a wide variety of foreign laws;
- unexpected changes in regulatory requirements, and the imposition of
government controls;
- political and economic instabilities;
- export license requirements;
- foreign exchange risks;
- protective trade activities, such as tariffs and other barriers;
- difficulties in staffing and managing foreign sales operations; and
- potentially adverse tax consequences.
In addition, the laws of certain foreign countries may not protect our
proprietary rights to the same extent as do the laws of the United States. Other
risks inherent in our international business include greater difficulties in
accounts receivable collection, which we have attempted to mitigate by insuring
our foreign accounts receivable.
We depend on the continuing cooperation of our joint venture partner in China.
Our future results will depend significantly on the results of our fifty
percent owned STEC joint venture with Nippon Sheet Glass Co., Ltd. ("NSG") in
China. The results of the joint venture depend on the continuing cooperation of
17
NSG. The success of the STEC joint venture is subject to a number of risks, over
many of which we have limited control. We rely on our joint venture partner,
NSG, to house the STEC joint venture within its glass fabrication facility and
to supply glass to the joint venture. We also rely on NSG's management personnel
to manage the day-to-day operations of the joint venture, and the president of
STEC is employed by the joint venture as well as by NSG. We do not have
employment agreements with any of the management at STEC. STEC's future success
will be dependent in part on our ability to continue to effectively participate
in the joint venture and manage our relationship with NSG. Our business,
operating results, financial condition or growth could be materially adversely
affected if NSG ceases to supply glass to the joint venture, focuses its
management and operational efforts on other activities or terminates the joint
venture.
Our operations and assets in China are subject to significant political,
economic, legal and other uncertainties in China. China currently does not have
a comprehensive and highly developed system of laws, particularly with respect
to foreign investment activities and foreign trade. Enforcement of existing and
future laws and contracts is uncertain, and implementation and interpretation of
laws may be inconsistent. We could also be adversely affected by a number of
factors, including inadequate development or maintenance of infrastructure,
inability to repatriate funds or a deterioration of the general political,
economic or social environment in China.
Our stock price may fluctuate significantly.
The market price of our common stock has been, and we expect will continue
to be, subject to significant fluctuations. Factors affecting our market price
include:
- quarterly variations in our results of operations;
- the announcement of new products or product enhancements by us or our
competitors;
- changes in earnings estimates or buy/sell recommendations by analysts;
- the limited number of shares of common stock available for purchase or
sale in the public markets;
- the operating and stock price performance of comparable companies;
- technological innovations by us or our competitors; and
- general market conditions or market conditions specific to the
industries in which we operate.
Recently, stock prices for many technology companies have fluctuated in
ways unrelated or disproportionate to the operating performance of the
companies. Such fluctuations may adversely affect the market price of our common
stock. The market price of our common stock has risen dramatically in recent
months, from $3.00 per share at October 26, 1999 to $39.13 per share at June 30,
2000. We cannot assure that the market price at any particular date will remain
the market price in the future.
Our operating results depend on market conditions in the flat panel display
industry.
Our business depends on the purchasing requirements of manufacturers of
FPDs, which, in turn, depends upon the current and anticipated market demand for
FPDs. We cannot assure you that the FPD market will continue to grow, or that
any growth will have a positive impact on our future business or results of
operations. Unfavorable economic conditions that relate to the consumer
electronics or other industries in which we operate, or that result in
reductions in capital expenditures by our customers, could have a material
adverse effect on the FPD market. Our business, operating results, financial
condition and prospects would be materially adversely affected by any future
downturns in the FPD market.
We are dependent on a small number of suppliers of certain raw materials and are
vulnerable to increased prices for raw materials.
18
We currently rely on four glass suppliers, Pilkington Micronics, Ltd.,
Glaverbel Societe Anonyme, Central Glass Co., Ltd. and Nippon Sheet Glass Co.,
Ltd. for most of our thin glass. All of these manufacturers are located outside
the United States. We do not have long-term supply contracts with any of these
suppliers, and thus have no contractual assurance of a firm price, over an
extended term, of a long-term commitment to supply our principal raw material.
In periods of short supply, we could have difficulty obtaining the necessary
quantities of glass at a competitive cost. Such interruptions could occur for
numerous reasons, including labor difficulties at some point in the chain of
manufacturing or distribution. If the price of glass increases, we may not be
able to pass the price increases along to our customers, especially in periods
of soft demand for our products or excess capacity. Current and potential
competitors that both manufacture and coat glass could be better able to absorb
raw material cost increases due to their vertical integration. We also have a
limited number of qualified suppliers of target materials for our coating
process. If we were to experience significant delays, interruptions, or
shortages in the supply of raw material or material price increases for raw
materials, our business, operating results, financial condition and prospects
could be materially adversely affected.
We depend on a small number of significant customers.
Our ten largest customers accounted for approximately 78%, 62% and 79% of
our gross sales in fiscal 1998, 1999 and fiscal 2000, respectively. In fiscal
2000, sales to NSG and Gemtech represented 29% and 11% of gross sales,
respectively. The loss of, or a significant reduction of purchases by, one or
more of these customers would materially adversely affect our business,
operating results, financial condition and prospects. There are a limited number
of potential customers in the LCD market and we expect that sales to a
relatively small number of customers will continue to account for a high
percentage of our revenues in the LCD market in the foreseeable future. We have
not entered into long-term agreements with our thin film coated glass customers
and they are not obligated to continue to buy their thin film coated glass from
us. Moreover, in the event that customers purchase thin film coating equipment
from us or from one of our competitors and begin coating glass in-house, sales
to those customers may decrease sharply. If such lost sales are not replaced on
a timely basis by new orders of thin film coated glass or equipment from other
customers, our business, operating results, financial condition and prospects
could be materially adversely affected.
We conduct business in foreign currencies, and fluctuation in the values of
those currencies could result in foreign exchange losses.
In fiscal 2000, approximately 29% and 71% of our total gross sales were
denominated in yen and dollars, respectively. Any strengthening of the dollar in
relation to the currencies of our competitors or customers, or strengthening or
weakening of the yen in relation to other currencies in which our customers or
competitors do business, could adversely affect our competitiveness. Although a
strengthening dollar may result in some offsetting cost reductions on the raw
materials we import, such cost reductions may not be sufficient to enable us to
remain competitive. Moreover, a strengthening of the dollar or other competitive
factors could put pressure on us to denominate a greater portion of our Japanese
sales in yen, thereby increasing our exposure to fluctuations in the dollar-yen
exchange rate. Our joint venture in China transacts much of its business in
Chinese Yuan Renminbi. While this currency has remained fairly constant in
value, any devaluation of the Chinese Yuan Renminbi would adversely affect our
business, operating results, financial conditions and prospects. We cannot
assure you that fluctuations in exchange rates will not adversely affect our
competitive position or result in foreign exchange losses, either of which could
materially adversely affect our business, operating results, financial
conditions and prospects.
The loss of key personnel could adversely affect our ability to manage our
business.
Our future success will depend largely upon the continued services of our
executive officers and certain other key employees. The loss of the services of
one or more of the executive officers or other key employees could materially
adversely affect our business. We do not have employment agreements with or
key-man life insurance on any of our executive officers or other key employees.
Our future success will depend in part upon our ability to attract and retain
additional qualified managers, engineers and other employees. Our business,
operating results, financial condition or growth could be materially adversely
affected if we were unable to attract, hire, assimilate, and train these
employees in a timely manner.
Our rapid growth may make it more difficult to manage our business effectively.
19
In order to support potential future growth, we will need to improve our
productivity, invest in additional research and development, enhance our
management information systems and add management personnel. We cannot assure
you that we will continue to grow or be effective in managing our future growth,
expanding our facilities and operations or attracting and retaining qualified
personnel. Failure to do these things could have a material adverse effect on
our business, operating results, financial condition, and prospects.
We may not be able to adequately protect or enforce our intellectual property
rights.
We rely primarily upon trade secret laws and employee and third-party
nondisclosure agreements to protect our proprietary technology. The steps we
have taken to protect our proprietary rights might not be adequate to prevent
misappropriation of such rights. We are not aware that our products or other
proprietary rights infringe the proprietary rights of third parties. However,
third parties may assert infringement claims against us in the future and such
claims may require us to enter into license agreements or result in protracted
and costly litigation, regardless of their merits. We may not be able to obtain
licenses to use third-party technology and such licenses, if available, may not
be available to us on commercially reasonable terms. These factors may adversely
affect our business, operating results, financial condition or growth.
Some anti-takeover provisions may affect the price of our common stock.
Our articles of incorporation and bylaws contain various provisions,
including notice provisions, provisions for staggered terms of office of the
Board of Directors, fair price provisions, and provisions authorizing us to
issue preferred stock, that may make it more difficult for a third-party to
acquire, or may discourage acquisition bids for, our company. Such provisions
could limit the price that certain investors would be willing to pay in the
future for shares of the our common stock. In addition, the rights of holders of
common stock may be adversely affected by the rights of holders of any preferred
stock that may be issued in the future that would be senior to the rights of the
holders of the common stock.
If we fail to comply with environmental regulations, our operations could be
suspended.
We use hazardous chemicals in producing our products. As a result, we are
subject to a variety of local, state and federal governmental regulations
relating to the storage, discharge, handling, emission, generation, manufacture
and disposal of toxic or other hazardous substances used to manufacture our
products, compliance with which is expensive. The failure to comply with current
or future regulations could result in the imposition of substantial fines,
suspension of production, alteration of its manufacturing processes or cessation
of operations.
20
PART II
ITEM 5: Market for Registrant's Common Stock and Related Security Holder
Matters
Prior to November 21, 1997, there was no public market for our Common
Stock. The Common Stock was approved for quotation on the Nasdaq National Market
under the symbol AFCO, beginning November 21, 1997. At July 28, 2000, the number
of common Shareholders of record was 30.
The range of high and low bid quotations for our Common Stock as quoted
(without retail markup or markdown and without commissions) on the Nasdaq
National Market since its initial public offering is provided below. They do not
necessarily represent actual transactions.
High Bid Low Bid
Fiscal 2000
Fourth Quarter..................................... 39 7/8 13 1/8
Third Quarter...................................... 35 3/4 12 7/8
Second Quarter..................................... 14 3/4 3
First Quarter...................................... 4 3 1/8
Fiscal 1999
Fourth Quarter..................................... 4 1/4 2 1/2
Third Quarter...................................... 4 1/4 1 13/16
Second Quarter..................................... 3 7/8 2 5/8
First Quarter...................................... 5 5/8 2 7/8
Fiscal 1998
Fourth Quarter..................................... 9 5/8 4 9/16
Third Quarter...................................... 11 5/16 7 1/8
Second Quarter (since November 21, 1997)........... 9 1/8 8 1/4
We have not declared or paid any cash dividends on our capital stock. We
currently intend to retain all future earnings to finance our business.
Accordingly, we do not anticipate paying cash or other dividends on our Common
Stock in the foreseeable future. Furthermore, our revolving credit facility
prohibits the declaration or payment of any cash dividends on the Common Stock.
See "ITEM 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
21
ITEM 6: Selected Financial Data
The following selected consolidated financial data is qualified by
reference to, and should be read in conjunction with, our fiscal 2000
Consolidated Financial Statements and notes thereto and the discussion thereof
included elsewhere in this Form 10-K. The selected consolidated statements of
operations for the fiscal years ended June 1998, July 1999 and July 2000 and the
related balance sheet data as of the fiscal years ended July 1999 and July 2000
derived from consolidated financial statements have been audited by Arthur
Andersen LLP, independent public accountants, whose report with respect thereto
is included elsewhere in this Form 10-K. The selected consolidated statements of
operations data for the fiscal year ended June 1996 and 1997 and the related
consolidated balance sheet data as of June 1996, 1997 and 1998 have been derived
from audited consolidated financial statements of the Company not included in
this Form 10-K.
Summary Consolidated Financial Data
(In thousands, except per share data)
-------------------------------------------------------------
Fiscal Year Ended
-------------------------------------------------------------
July 1, July 3, June 27, June 28, June 29,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Statement of Operations Data
Net sales..................................... $42,292 $31,523 $53,041 $34,050 $21,738
Gross profit.................................. 5,659 4,453 10,891 6,698 2,720
Operating income (loss)....................... (74) (351) 4,581 2,953 (478)
Net income (loss)............................. 3,073 (224) 2,857 1,621 (1,078)
Diluted net income (loss) per common share.... $ 0.69 $ (0.06) $ 0.85 $ 0.58 $ (0.39)
Weighted average common shares outstanding,
diluted................................ 4,439 3,478 3,375 2,814
2,798
Balance Sheet Data
Working capital............................... $63,785 $11,812 $ 10,747 $ 5,534 $ 6,232
Total assets.................................. 87,478 30,195 28,697 21,541 18,198
Long term debt, net of current portion........ 0 7,180 4,175 6,448 8,501
Total shareholders' equity.................... 73,197 14,658 14,826 6,740 5,058
22
ITEM 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and notes thereto included in this Report.
This Report, including the disclosures below, contains certain
forward-looking statements that involve substantial risks and uncertainties.
When used herein, the terms "believe," "anticipate," "intend," "goal," "expect"
and similar expressions may identify forward-looking statements. Our actual
results, performance or achievements may differ materially from those expressed
or implied by such forward-looking statements. Factors that could cause or
contribute to such material differences include those disclosed in the "Certain
Factors" section of this Report.
Overview
We were incorporated in Colorado as Applied Films Labs, Inc. on March 2,
1976, with our main offices located in Boulder, Colorado. Since inception, our
business has evolved from applied thin films research and development to the
production and sale of thin film coated glass and coating equipment. During
fiscal years 1998 and 1999, we relocated our Boulder operations to a new
headquarters and manufacturing facility in Longmont, Colorado.
In March 1999, we completed the development of our latest coating platform,
the ATX-700. In the second half of fiscal 2000, we experienced a shift in
revenue with increasing revenues from the equipment side of the business due to
the order volume of ATX-700's. Net revenues of coating equipment are recognized
primarily on the percentage-of-completion method, measured by the percentage of
the total costs incurred and applied to date in relation to the estimated total
costs to be incurred for each contract. The lead time for the sale of coating
equipment is generally six to nine months. To date, we have priced our coating
equipment in U.S. dollars. Net sales of thin film coating equipment in fiscal
years 1998, 1999 and fiscal 2000 were $13.9 million, $4.6 million and $7.1
million, respectively. Coating equipment backlog as of July 1, 2000 was $8.8
million, compared to $423,000 as of July 3, 1999.
The majority of our net sales to date have been from the sale of thin film
coated glass to manufacturers of LCDs. Thin film coated glass sales and related
costs are recognized when products are shipped. Historically, net sales have
varied substantially from quarter to quarter, and we expect such variations to
continue. We are typically able to ship our thin film coated glass within 30
days of receipt of the order and, therefore, do not have a significant long-term
backlog of thin film coated glass orders. Our ten largest customers for thin
film coated glass accounted for, in the aggregate, approximately 78%, 62% and
79% of gross sales in fiscal 1998, 1999 and fiscal 2000, respectively.
The principal demand for our thin film coated glass is by LCD
manufacturers, most of which are located in Asia. Total gross sales to
international customers represented approximately 78%, 85% and 93% of our gross
sales in fiscal 1998, 1999 and fiscal 2000, respectively. We expect
international sales will continue to represent a significant portion of our net
sales. We sell most of our thin film coated glass to foreign customers in U.S.
dollars except for sales to certain Japanese customers that are in yen. Gross
sales denominated in yen were approximately $6.0 million, $6.7 million and $12.7
million in fiscal 1998, 1999 and fiscal 2000, respectively. Beginning in fiscal
2001, certain customers and suppliers will be converted to U.S. Dollars,
reducing our exposure to foreign currency translation charges.
In fiscal 2000, the FPD industry experienced very favorable market
conditions in both thin film coating equipment and the coated glass markets.
Capital equipment spending grew compared to the prior year as FPD manufacturers
began investing in FPD production facilities. PDP and active matrix LCD
manufacturing facility growth is increasing at an unprecedented rate.. The thin
film coated glass market is also very strong, led by wireless devices such as
PDA's and cell phones, evidenced by our growth in STN revenues.
In fiscal 1999, the FPD industry experienced adverse market conditions in
both the thin film coated glass market and the thin film coating equipment
market. During fiscal 1999, there was a downturn in the Asian economy and many
FPD manufacturers located in Asia delayed capital spending on new coating
equipment. In addition, market prices for thin film coated glass declined
approximately 29% during fiscal 1999. During the course of this downturn we
reduced costs in our U.S. operations and expanded our lower cost operations at
our joint venture in China. Recently, the Asian economy has improved and
worldwide demand for FPDs has risen, resulting in increasing demand for coated
23
glass and thin film coating equipment.
China Joint Venture. In April 1999, we entered into our STEC joint venture
with NSG to produce coated glass in Suzhou China for resale through our company,
NSG, and others. The joint venture represents a strategic effort to establish
manufacturing capacity in the Far East and reduce our total manufacturing costs.
Upon formation of the joint venture, each partner sold a production coater to
the joint venture and moved a portion of its manufacturing capacity to STEC. We
have sold one additional production coater to the joint venture to be delivered
in the fall of 2000. The equipment sold is a Venture 5000 system that was in
operation in our Longmont, Colorado facility. We believe sales to the joint
venture are on arms-length terms. One-half of the anticipated gain on the sale
of the Venture 5000 to the Joint Venture will be deferred and amortized into
income over the remaining estimated useful life of the system.
We recognize 50% of STEC's net income as "Equity earnings in affiliate" on
our consolidated statement of operations. We buy coated glass manufactured by
the joint venture and resell it to our customers in Asia. The income from these
sales will continue to flow through our consolidated statement of operations. We
expect that the lower cost structure from reduced labor, materials and
transportation costs will result in higher margins on our sales of glass
manufactured by STEC.
The joint venture has determined that it will utilize available cash flows
for operating purposes and to repay debt. Accordingly, we do not expect to
receive dividends from the joint venture in the foreseeable future. See "Results
of Operations -- Income Tax Benefit (Provision)." The only cash flow we will
receive from the joint venture will be 50% of the 2% royalty on all joint
venture sales, payable quarterly. We expect that the joint venture will not
materially affect our revenues, operating income or cash flows from operating
activities, but will increase our net income.
24
Results of Operations
The following table sets forth information derived from our consolidated
statements of operations expressed as a percentage of net sales for the periods
indicated.
--------------------------------------------------------------
Fiscal Year Ended
--------------------------------------------------------------
July 1, 2000 July 3, 1999 June 27, 1998
------------ ------------ -------------
Statement of Operations Data:
Net sales.................................... 100.0% 100.0% 100.0%
Cost of goods sold........................... 86.6 85.9 79.5
------ ------ ------
Gross profit.................................... 13.4 14.1 20.5
Operating expenses:
Selling, general & administrative............ 10.2 11.9 9.6
Research and development..................... 3.3 3.3 2.3
----- ------ ------
Operating income (loss)......................... (0.1) (1.1) 8.6
Interest income (expense)....................... 1.1 (1.8) (0.9)
Other income (expense).......................... 0.6 0.0 0.5
Income from joint venture....................... 5.6 1.4 --
------ ------ ------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle......................... 7.2 (1.5) 8.2
Income tax benefit (provision).................. 0.2 0.8 (2.8)
----- ------ -----
Net income (loss) before cumulative
effect of change in accounting principle..... 7.4% (0.7)% 5.4%
Cumulative effect of change in
accounting principle......................... (0.1) -- --
----- ---- ----
Net income (loss)............................... 7.3% (0.7)% 5.4%
===== ===== =====
Sales
Net sales were $42.3 million, $31.5 million and $53.0 million in fiscal
years 2000, 1999 and 1998, respectively. This represented a 34% increase from
fiscal 1999 to fiscal 2000, and a decrease of 41% from fiscal 1998 to fiscal
1999. Thin film coated glass sales increased 31% to $35.2 million from fiscal
1999 to fiscal 2000 and dropped from $39.1 million to $26.9 million from fiscal
1998 to fiscal 1999. The increase in fiscal 2000 was due to strong demand for
coated glass for both TN and STN coated glass. Because it is more complex and
expensive to produce than TN coated glass, STN coated glass provides us with
higher revenues and gross margins for each panel of glass produced. Also, the
growth in demand for wireless communication devices fueled our increased
production and sale of STN coated glass in fiscal 2000. In fiscal 1999, coated
glass prices dropped approximately 29%, which had an adverse impact on coated
glass sales. Sales of thin film coating equipment increased 54% to $7.1 million
in fiscal 2000 from $4.6 million in fiscal 1999. This growth was driven by the
sales of the ATX-700. During fiscal 2000 and shortly after, we sold three
ATX-700 systems and recognized partial revenue and margin on two of those
systems in the second half of fiscal 2000. The FPD industry has appropriated
capital for growth in production facilities for both the PDP and active matrix
LCD markets for which the ATX-700 is particularly well suited.
Gross Profits
Gross profits were $5.7 million, $4.5 million and $10.9 million in fiscal
years 2000, 1999, and 1998, respectively. As a percentage of net sales, gross
profit margins were 13.4%, 14.1% and 20.5% in fiscal years 2000, 1999 and 1998,
respectively. Gross profits increased in fiscal 2000 from fiscal 1999 due
primarily to the high concentration in sales levels of thin film coated glass as
well as gross profit contribution from thin film coating equipment revenue that
began in the second half of fiscal 2000. Gross profits for fiscal 2000 were also
positively impacted by the sale of the refurbished coater to the Joint Venture.
25
Selling, General and Administrative
Selling, general and administrative expenses totaled $4.3 million, $3.8
million and $5.1 million for fiscal years 2000, 1999 and 1998, respectively.
SG&A increased 15% from $3.8 million in fiscal 1999 to $4.3 million in fiscal
2000 due to the sales commissions from systems sales. We use commissioned sales
representative firms in partnership with our sales team for the thin film
equipment portion of our business. As a percentage of sales, selling, general
and administrative costs were 10.2%, 11.9% and 9.6% for fiscal years 2000, 1999
and 1998, respectively.
Research and Development
Research and development expenses totaled $1.4 million, $1.0 million and
$1.2 million for fiscal years 2000, 1999 and 1998, respectively. Research and
development expenditures consisted primarily of salaries, outside contractor
expenses and other expenses related to our ongoing product development efforts.
The increase from fiscal 1999 to fiscal 2000 was primarily attributable to
changes in staffing and material and supplies expense related to advanced
development projects in fiscal 1999. The advanced development team completed the
design, fabrication, process proving and debugging of our latest ATX-700
technology in March of 1999. This team is currently engaged in several
development projects that will allow us to maintain our industry leadership
position. As a percentage of net sales, research and development expenses were
3.3%, 3.3% and 2.3% in fiscal years 2000, 1999 and 1998, respectively.
Interest Income (Expense)
Interest income (expense) was $447,000, ($533,000) and ($441,000) for
fiscal years 2000, 1999 and 1998, respectively. The shift from interest
(expense) in fiscal 1999 and prior years to interest income in fiscal 2000, was
related to the investment of the proceeds of $55 million secondary offering that
was completed in March 2000. The increase in long-term borrowings in fiscal 1999
funded the $3.2 million up front capital infusion of the STEC joint venture in
China. As of fiscal year end 2000, we had no bank debt. Total bank debt was $7.4
million and $4.3 million as of fiscal year end 1999 and 1998, respectively.
Other Income (Expense)
Other income (expense) was $272,000, $40,000 and $197,000 in fiscal years
2000, 1999 and 1998, respectively. In fiscal 2000, other income consisted
primarily of royalties from the joint venture of $284,000 that were partially
offset by a small foreign currency loss. The decrease in other income from 1998
to 1999 was the absence of foreign currency gains in fiscal 1999 that drove the
gain in fiscal 1998. It is uncertain whether foreign exchange gains or losses
will be incurred in the future.
Income Tax Benefit (Provision)
The income tax provision was $1,480,000 for fiscal year 1998. The effective
tax rate for fiscal 1998 was 34%. We recorded a $258,000 tax benefit during
fiscal year 1999. We received a refund of $522,000 in fiscal 1999 for estimated
payments and because we applied the tax loss carryback to previous fiscal years.
The income tax benefit for fiscal 2000 was $97,000, representing an effective
tax rate of a negative 3.3%. This benefit was primarily derived from the
reversal of the income tax accrual on the equity income from the joint venture
that was accrued in fiscal 1999. Other factors contributing to the relatively
low effective tax rate in fiscal 2000 were interest and current year equity in
earnings in the Joint Venture income that are not subject to tax.
26
Quarterly Results of Operations
The following table sets forth summary unaudited quarterly financial
information for the last eight fiscal quarters. In the opinion of management,
such information has been prepared on the same basis as the audited financial
statements appearing elsewhere in this Report and reflects all necessary
adjustments (consisting of only normal, recurring adjustments) for a fair
presentation of such unaudited quarterly results when read in conjunction with
the audited financial statements and notes thereto. The operating results for
any quarter are not necessarily indicative of results for any future period and
there can be no assurance that any trends reflected in such results will
continue in the future. Our results of operations may be subject to significant
quarterly variations. See also " Certain Factors -- Our Operating Results May
Fluctuate."
-------------------------------------- --------------------------------------------
Fiscal 2000 Fiscal 1999
Quarter Ended Quarter Ended
-------------------------------------- --------------------------------------------
July April January October July March December September
2000 2000 2000 1999 1999 1999 1998 1998
Net Sales..................... $ 14,837 $ 11,759 $ 8,308 $ 7,388 $ 7,779 $ 8,216 $ 6,176 $ 9,351
Cost of goods sold............ 12,815 10,301 7,042 6,475 6,798 6,622 5,493 8,158
------ ------ ----- ----- ----- -----
Gross profit.................. 2,022 1,458 1,266 913 981 1,594 683 1,193
Operating expenses:
Selling, general and
Administrative.............. 1,529 1,084 902 809 750 911 794 1,304
Research and development...... 385 360 315 349 297 274 212 260
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss)....... 108 14 49 (245) (66) 409 (323) (371)
Interest income (expense)..... 655 32 (101) (139) (147) (167) (140) (112)
Other income (expense)........ (47) 125 14 180 78 (27) (135) 136
Equity earnings in affiliate.. 866 697 369 449 382 -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Income (loss) before income
taxes....................... 1,582 868 331 245 247 215 (598) (347)
Income tax benefit (provision) (102) (61) 343 (83) (86) (72) 286 130
---- ---- ---- ---- ---- ---- ---- ----
Net income (loss) before
cumulative effect of change
in accounting principle....... 1,480 807 674 162 161 143 (312) (217)
Cumulative effect of change
in accounting principle....... -- -- -- (50) -- -- -- --
Net income (loss)............. $ 1,480 $ 807 $ 674 $ 112 $ 161 $ 143 $ (312) $ (217)
======= ===== ===== ===== ===== ===== ====== ======
27
The following table sets forth the above unaudited information as a percentage
of total net sales.
-------------------------------------- --------------------------------------------
Fiscal 2000 Fiscal 1999
Quarter Ended Quarter Ended
-------------------------------------- --------------------------------------------
July April January October July March December September
2000 2000 2000 1999 1999 1999 1999 1998
Net Sales................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.......... 86.4 87.6 84.8 87.6 87.4 80.6 88.9 87.2
----- ----- ----- ----- ----- ----- ----- -----
Gross profit................ 13.6 12.4 15.2 12.4 12.6 19.4 11.1 12.8
Operating expenses:
Selling, general and
Administrative............ 10.3 9.2 10.9 11.0 9.6 11.1 12.9 13.9
Research and development.... 2.6 3.1 3.8 4.7 3.8 3.3 3.4 2.8
---- ---- ---- ---- ---- ----
Operating income (loss)..... 0.7 0.1 0.5 (3.3) (0.8) 5.0 (5.2) (3.8)
Interest income (expense)... 4.4 0.3 (1.2) (1.9) (1.9) (2.0) (2.3) (1.2)
Other income (expense)...... (0.3) 1.1 0.2 2.4 1.0 (0.3) (2.2) 1.5
Equity earnings in affiliate 5.8 5.9 4.4 6.0 4.9 -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Income (loss) before income
taxes..................... 10.7 7.4 3.9 3.2 3.2 2.6 (9.7) (3.7)
Income tax benefit (provision) (0.7) (0.5) 4.1 (1.1) (1.1) (0.9) 4.6 1.4
---- ---- ---- ---- ---- ---- ---- ----
Net income (loss) before
cumulative effect of change
in accounting principle..... 10.0 6.9 8.0 2.1 2.1 1.7 (5.1) (2.2)
Cumulative effect of change
in accounting principle..... -- -- -- (0.7) -- -- -- --
Net income (loss)........... 10.0% 6.9% 8.0% 1.4% 2.1% 1.7% (5.1%) (2.2)%
===== ==== ==== ==== ==== ==== ===== ====
The increase in quarterly sales during the second half of fiscal 2000 was
driven by the demand for STN coated glass and recognition of revenue on the two
ATX-700 systems that were sold during the year. Net sales during fiscal 1999
were relatively flat due to reduced demand from customers for thin film coated
glass as well as a reduction in capital spending and thin film equipment
purchases in the industry. Net sales of thin film coated glass for fiscal 2000
totaled $35.2 million versus $26.9 million during fiscal year 1999 with STN
coated glass representing over 41% of fiscal 2000 glass sales. Sales and related
costs of thin film coated glass products are recognized when products are
shipped. Sales of thin film coating equipment totaled $7.1 million in fiscal
2000 versus $4.6 million in fiscal 1999 with revenue recorded on two ATX-700
systems in the second half of fiscal 2000. Approximately 94% of the revenue for
coating equipment was recorded in the second half of the year. We utilize the
percentage of completion accounting method for recognizing sales of equipment.
See "ITEM 8: Financial Statements and Supplementary Data -- Note 2: Significant
Accounting Policies -- Equipment Sales Revenue Recognition." During the year, we
sold two ATX-700 systems and on July 10, 2000, we announced the sale of a third
ATX-700 system to a major Japanese PDP manufacturer. This represents a major
market penetration for our latest equipment platform. We have successfully sold
the ATX-700 system into three different countries in the Far East.
In absolute dollars, total gross profits grew for each quarter in fiscal
2000. As a percentage of sales, gross profits were positively impacted beginning
in the third quarter of fiscal 2000 from margins on the ATX-700 system sales.
Margins in fourth quarter fiscal 2000 were negatively impacted due to the
refurbishment program, whereby we took a production coater off-line at the
beginning of June 2000 to be refurbished and sold it to the STEC for delivery in
first quarter of fiscal 2001. This drop in production in Longmont negatively
affected our margins for the fourth quarter. Once this system is in production
at STEC, it is anticipated to have a positive impact on equity earnings going
forward.
Selling, general and administrative expenses increased 16% per quarter
during fiscal 2000 due to the re-introduction of sales commissions for thin film
equipment sales, which escalated with equipment revenue in the second half of
the year. Included in the fiscal 1999 SG&A expenses are one time charges
totaling $433,000 for the completion of the relocation of our facilities to
Longmont and severance charges.
28
Interest expense decreased sequentially since the third quarter of fiscal
year 1999 and converted to interest income from the third quarter of fiscal
2000. Interest income was $447,000 in fiscal 2000 compared to an expense of
($553,000) in the prior year. At the end of third quarter 2000, we raised $55.5
million in a secondary offering and we have a large portion of these funds
invested in low-risk securities and instruments.
Equity earnings in affiliate have grown substantially since the joint
venture commenced production in April 1999, and is now contributing
significantly to our profits. The joint venture has also benefited from
increased demand for STN coated glass which allowed STEC to shift production to
the higher margin STN product.
Liquidity and Capital Resources
We have funded our operations with cash generated from operations, proceeds
from an initial and secondary public offerings of our common stock, and with
borrowings. Cash provided by operating activities for fiscal 2000 was $3.9
million compared to $3.9 million for the corresponding period in fiscal 1999 due
primarily to net income earned during the year. In fiscal 2000, we paid off our
bank debt under our line of credit from the proceeds of our secondary offering.
As of July 1, 2000, cash and cash equivalents were approximately $52.2 million
and working capital was $63.8 million. As of July 1, 2000, accounts receivable
were approximately $11.1 million.
Our $11.5 million credit facility with a commercial bank will expire on
September 17, 2002. As of July 1, 2000, we had no outstanding balances on our
credit facility. The interest rate under the credit facility was 9.25% at July
1, 2000. The credit facility generally restricts our ability to make capital
expenditures, incur additional indebtedness, enter into capital leases or
guarantee such obligations. To remain in compliance with the credit agreement,
we must also maintain certain financial ratios. At July 1, 2000 we were in
compliance with all of the financial covenants in our credit facility.
Capital expenditures were $484,000, $2.9 million and $5.4 million for
fiscal years 1999 and 1998, respectively. We anticipate capital expenditures of
approximately $6.5 million in fiscal 2001, consisting primarily of costs related
to the completion of additional coating capacity, additional research and
development hardware, thin film coating test equipment and development support
equipment. The majority of capital spending in fiscal 2000 was for machinery and
equipment to enhance our process capabilities in thin film coated glass and for
modifications to our ATX-700 demonstration.
We believe that our working capital and capital resource needs for the next
12 months will continue to be met by our current cash and cash equivalents,
operations, and borrowings under the existing credit facility. We believe that
success in our industry requires substantial capital in order to maintain
flexibility to take advantage of opportunities as they may arise. We may, from
time to time, invest in or acquire complementary businesses, products or
technologies and may seek additional equity or debt financing to fund such
activities.
Year 2000 Compliance
The Year 2000 issue did not have a material adverse effect on our financial
condition, results of operations or liquidity. However, the systems of other
companies that interact with us may not be Year 2000 compliant, which may
adversely affect us.
Recent Financial Accounting Standards Board Statements
Several new accounting pronouncements have been issued in fiscal 1997 and
1998, some of which are listed in the notes to the financial statements that
have impacted us in fiscal year 1999 and 2000. These standards may impact us
going forward. Management believes that these accounting standards will not have
a material impact on the operating results when implemented. See Item 8.
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposure
29
Market risk represents the risk of loss that may impact our financial
position, results of operations, or cash flows due to adverse changes in
financial market prices. We are exposed to market risk through interest rates.
This exposure is directly related to our normal funding and investing
activities.
Foreign Exchange Exposure
We are exposed to foreign exchange risk associated with our accounts
receivable and payable denominated in foreign currencies, primarily in Japanese
yen. At July 1, 2000, we had approximately $2.0 million of accounts receivable
and $2.4 million of accounts payable denominated in yen compared with July 3,
1999, when we had approximately $605,000 of accounts receivable and $1.0 million
of accounts payable denominated in yen. A one percent change in exchange rates
would result in an approximate $4,000 net impact on pre-tax income based on the
July 1, 2000 quarter end foreign currency denominated accounts receivable and
accounts payable balances. Our customers typically pay us for our yen
denominated sales within approximately 15 to 45 days of the date of sale. We
occasionally offer cash discounts for early payment and pre-payment.
Notwithstanding the above, actual changes in interest rates and foreign
exchange rates could adversely affect our operating results or financial
condition. The potential impact is likely greater the greater the magnitude of
the rate change. See also "Note 12 to Consolidated Financial Statements -- Fair
Value of Financial Instruments."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussions in this Report on Form 10-K and the documents incorporated
herein by reference which are not statements of historical fact (including
statements in the future tense and those which include terms such as "believe,"
"will," "expect," and "anticipate") contain forward-looking statements that
involve risks and uncertainties. The Company's actual future results could
materially differ from those discussed. Factors that could cause or contribute
to such differences include, but are not limited to, the effect of changing
worldwide economic conditions, such as those in Asia, the risk of overall market
conditions, product demand and market acceptance risk, risks associated with
dependencies on suppliers, the impact of competitive products and pricing,
technological and product development risks, and other factors including those
discussed in ITEM 1 above in this Report and in the Management's Discussion and
Analysis of Financial Condition and Results of Operations in ITEM 7, as well as
those discussed elsewhere in this Report and the documents incorporated herein
by reference.
30
ITEM 8: Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants.................................... 32
Consolidated Balance Sheets as of July 1, 2000 and July 3, 1999............. 33
Consolidated Statements of Operations for the fiscal years ended
July 1, 2000, July 3, 1999 and June 27, 1998............................. 34
Consolidated Statements of Stockholders' Equity for the fiscal
years ended July 1, 2000, July 3, 1999 and June 27, 1998................. 35
Consolidated Statements of Cash Flows for the fiscal years
ended July 1, 2000, July 3, 1999 and June 27, 1998....................... 36
Notes to Consolidated Financial Statements.................................. 37
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Applied
Films Corporation:
We have audited the accompanying consolidated balance sheets of APPLIED FILMS
CORPORATION (a Colorado corporation) and subsidiary as of July 1, 2000 and July
3, 1999 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the fiscal years ended July 1, 2000, July 3,
1999 and June 27, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Applied
Films Corporation and subsidiary, as of July 1, 2000 and July 3, 1999, and the
consolidated results of their operations and their cash flows for the fiscal
years ended July 1, 2000, July 3, 1999 and June 27, 1998, in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Denver, Colorado,
July 18, 2000.
32
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
July 1, July 3,
ASSETS 2000 1999
- ------ -------- --------
Current assets:
Cash and cash equivalents..................................................... $32,058 $ 1,163
Marketable securities......................................................... 20,167 --
Accounts and trade notes receivable, net of allowance of $188 and $73
Coated glass and other..................................................... 6,273 5,501
Costs and profit in excess of billings..................................... 4,571 --
Due from Joint Venture..................................................... 219 1,560
Inventories, net.............................................................. 10,006 8,152
Assets held for sale.......................................................... 2,251 --
Prepaid expenses and other.................................................... 187 675
Income tax receivable......................................................... -- 711
Deferred tax asset, net....................................................... 480 169
------- -------
Total current assets.............................................. 76,212 17,931
Property, plant and equipment:
Land.......................................................................... 270 270
Building...................................................................... 226 226
Machinery and equipment....................................................... 11,443 15,491
Office furniture and equipment................................................ 356 444
Leasehold improvements........................................................ 1,504 1,340
------- -------
13,799 17,771
Accumulated depreciation...................................................... (8,479) (9,144)
------- -------
Total property, plant and equipment........................................ 5,320 8,627
------- -------
Investment in Joint Venture....................................................... 5,746 3,637
Deferred tax asset, net........................................................... 136 --
Other assets...................................................................... 64 --
------- -------
$87,478 $30,195
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Trade accounts payable........................................................ $ 9,971 $ 3,950
Accrued expenses.............................................................. 2,138 1,656
Income tax payable............................................................ 98 --
Current portion of -
Deferred revenue........................................................... 164 236
Deferred gain.............................................................. 56 56
Long-term debt............................................................. -- 221
------- -------
Total current liabilities......................................... 12,427 6,119
Long-term debt, net of current portion............................................ -- 7,180
Deferred revenue, net of current portion.......................................... 1,210 1,356
Deferred gain, net of current portion............................................. 644 700
Deferred tax liability, net....................................................... -- 182
------- -------
Total liabilities................................................. 14,281 15,537
------- -------
Commitments (Note 10) Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares authorized;
no shares outstanding...................................................... -- --
Common stock; no par value, 10,000,000
shares authorized, 6,040,856 and 3,487,058
shares issued and outstanding at July 1, 2000 and
July 3, 1999, respectively................................................. 64,959 9,473
Other cumulative comprehensive gain (loss).................................... (20) --
Retained earnings............................................................. 8,258 5,185
------- -------
Total stockholders' equity........................................ 73,197 14,658
------- -------
$87,478 $30,195
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
33
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For The Fiscal Years Ended
---------------------------------------
July 1, July 3, June 27,
2000 1999 1998
------- -------- ---------
Net sales:
Non-affiliated.................................................... $ 42,292 $ 28,582 $ 53,041
Joint Venture..................................................... -- 2,941 --
-------- -------- --------
Total sales........................................................... $ 42,292 $ 31,523 $ 53,041
Cost of goods sold.................................................... 36,633 27,070 42,150
-------- -------- --------
Gross profit.......................................................... 5,659 4,453 10,891
Selling, general and administrative expenses.......................... 4,324 3,760 5,067
Research and development expenses..................................... 1,409 1,044 1,243
-------- -------- --------
Income (loss) from operations......................................... (74) (351) 4,581
Interest income (expense)............................................. 447 (553) (441)
Other income (expense)................................................ 272 40 197
Equity earnings in Joint Venture...................................... 2,381 382 --
-------- -------- --------
Income (loss) before income taxes and
cumulative effect of change in accounting principle............... 3,026 (482) 4,337
Income tax benefit (provision)........................................ 97 258 (1,480)
-------- -------- --------
Income (loss) before cumulative effect
of change in accounting principle................................. 3,123 (224) 2,857
-------- -------- --------
Cumulative effect of change in
accounting principle.............................................. (50) -- --
Net income (loss) .................................................... $ 3,073 $ (224) $ 2,857
======== ======== ========
Net income (loss) per share:
Basic............................................................. $ 0.72 $ (0.06) $ 0.90
======== ======== ========
Diluted........................................................... $ 0.69 $ (0.06) $ 0.85
======== ======== ========
Weighted average common shares outstanding:
Basic............................................................. 4,255 3,478 3,181
-------- -------- --------
Diluted........................................................... 4,439 3,478 3,375
======== ======== ========
The accompanying notes are an integral part of these consolidated
statements.
34
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JULY 1, 2000, JULY 3, 1999 AND JUNE 27, 1998
(In thousands, except share data)
Other
Cumulative Total
Common Stock Held by Affiliate Comprehensive Deferred Retained Stockholders'
Shares Amount Shares Amount Gain (Loss) Compensation Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, June 28, 1997 2,799,998 $4,245 (3,749) $ (26) -- $ (31) $ 2,552 $ 6,740
- ---------------------------------------------------------------------------------------------------------------------------------
Issuance of shares in
connection with IPO
(net of underwriters'
commissions of $297).......... 676,439 5,205 -- -- -- -- -- 5,205
Liquidation of affiliate........ (3,749) (26) 3,749 26 -- -- -- --
Comprehensive income:
Net income.................... -- -- -- -- -- -- 2,857 2,857
Amortization of deferred
compensation................ -- -- -- -- -- 24 -- 24
- ---------------------------------------------------------------------------------------------------------------------------------
Balances, June 27, 1998 3,472,688 9,424 -- -- -- (7) 5,409 14,826
- ---------------------------------------------------------------------------------------------------------------------------------
Net (loss)...................... -- -- -- -- -- -- (224) (224)
ESPP stock issuance............. 10,564 33 -- -- -- -- -- 33
Exercise of stock options....... 3,806 16 -- -- -- -- -- 16
Amortization of deferred
compensation.................. -- -- -- -- -- 7 -- 7
- ---------------------------------------------------------------------------------------------------------------------------------
Balances, July 3, 1999 3,487,058 9,473 -- -- -- -- 5,185 14,658
- ---------------------------------------------------------------------------------------------------------------------------------
Net income...................... -- -- -- -- -- -- 3,073 3,073
ESPP stock issuance............. 5,481 39 -- -- -- -- -- 39
Stock options, including income
tax benefits of $253.......... 48,317 383 -- -- -- -- -- 383
Issuance of shares in
Connection with secondary
offering (net of offering
costs of $461)................ 2,500,000 55,064 -- -- -- -- -- 55,064
Comprehensive income:
Unrealized gain (loss) on foreign
currency translation...... -- -- -- -- (20) -- -- (20)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances, July 1, 2000 6,040,856 $64,959 -- $ -- $ (20) $ -- $ 8,258 $73,197
--------- ------- ------ ----- ----- ----- ------- -------
The accompanying notes are an integral part of these consolidated
statements.
35
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For The Fiscal Years Ended
---------------------------------------
July 1, July 3, June 27,
2000 1999 1998
-------- --------- ----------
Cash Flows from Operating Activities:
Net income (loss)....................................................... $ 3,073 $ (224) $ 2,857
Adjustments to reconcile net income (loss) to net cash flows from
operating activities -
Depreciation......................................................... 1,826 1,759 1,800
Amortization of deferred compensation................................ -- 7 24
Amortization of deferred gain on lease and Joint Venture............. (220) (108) (22)
Cumulative effect of change in accounting principle.................. 50 -- --
Deferred income tax (benefit) provision.............................. (628) 530 (558)
Loss (gain) on disposals of property, plant and equipment............ 84 (20) (4)
Equity in earnings of affiliate...................................... (2,217) (330) (50)
Deferred gain on equipment sale to Joint Venture..................... -- 1,588 --
Cost of equipment sale to Joint Venture.............................. -- 1,693 --
Changes in:
Accounts and trade notes receivable, net........................... (991) 385 (985)
Costs and profits in excess of billings............................ (3,011) -- --
Inventories........................................................ (1,872) 1,903 (3,895)
Prepaid expenses and other......................................... 488 273 (520)
Accounts payable................................................... 6,021 (1,291) 1,439
Deferred revenue................................................... -- -- (1,500)
Accrued expenses................................................... 482 (1,243) 1,683
Income taxes payable (receivable).................................. 809 (1,002) (61)
------- ------- -------
Net cash flows from operating activities.................................... 3,894 3,920 208
------- ------- -------
Cash Flows from Investing Activities:
Purchases of property, plant, and equipment............................. (484) (2,959) (5,415)
Proceeds from sale of property, plant, and equipment.................... -- 159 2,184
Purchase of assets held for sale........................................ (369) -- --
Investment in Joint Venture............................................. -- (3,236) (71)
Proceeds from liquidation of investment in affiliate.................... -- -- 172
Proceeds from sale of lease purchase option............................. -- -- 834
Purchases of marketable securities...................................... (21,367) -- --
Proceeds from sale of marketable securities............................. 1,200 -- --
Other................................................................... (64) -- --
------- ------- -------
Net cash flows from investing activities.................................... (21,084) (6,036) (2,296)
-------- ------- -------
Cash flows from Financing Activities:
Proceeds from borrowings of long-term debt.............................. 3,623 12,747 16,715
Repayment of long-term debt............................................. (11,024) (9,598) (20,048)
Stock issuance on stock purchase plan, and stock options................ 422 49 5,205
Proceeds from secondary offering........................................ 55,525 -- --
Offering costs.......................................................... (461) -- --
------- ------- -------
Net cash flows from financing activities.................................... 48,085 3,198 1,872
------- ------- -------
Net increase (decrease) in cash............................................. 30,895 1,082 (216)
Cash and cash equivalents, beginning of period.............................. 1,163 81 297
------- ------- -------
Cash and cash equivalents, end of period.................................... $32,058 $ 1,163 $ 81
======= ======= =======
Supplemental cash flow information:
Cash paid for interest, net of amounts capitalized...................... $ 366 $ 735 $ 767
======= ======= =======
Cash paid (received) for income taxes, net.............................. $ (560) $ (100) $ 2,109
======= ======= =======
The accompanying notes are an integral part of these consolidated
statements.
36
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) COMPANY ORGANIZATION AND OPERATIONS
Applied Films Corporation, (the "Company" or "AFCO"), was originally
incorporated in 1992 as a Michigan corporation. In June 1995, the Company
reincorporated in Colorado. The Company's principal line of business is the
manufacture and sale of thin film glass for use in flat panel and liquid crystal
displays. During 1997, the Company began selling its thin film coating glass
manufacturing equipment to flat panel display manufacturers. The Company
experiences risks common to technology companies, including highly competitive
and evolving markets for its products.
The Company was formed in May 1992 as the result of a merger between
Applied Films, Inc. ("AFI") and a wholly owned subsidiary of Donnelly
Corporation ("Donnelly"), Donnelly Coated Corporation ("DCC"). As a result of
the merger, Donnelly owned 50% of the outstanding common stock of the Company,
with the remaining 50% owned by the former shareholders of AFI.
Initial Public Offering
In November 1997, the Company completed an initial public offering (the
"Offering") of 1,900,000 shares. In connection with this offering, Donnelly sold
its 50% interest in the Company, consisting of 1,400,000 shares. An additional
500,000 shares were newly issued in the Offering. In December 1997, an
additional 176,439 shares were issued to the underwriters in connection with
completion of the Offering. Donnelly paid substantially all costs of this
underwriting, other than commissions related to the 500,000 new shares.
Joint Venture
In June of 1998, the Company formed a 50/50 Joint Venture (the "Joint
Venture") in China with Nippon Sheet Glass Co. ("NSG"), to process, sell and
export certain types of thin film coated glass (Note 4).
Secondary Offering
In March 2000, the Company completed a secondary public offering of
3,066,500 shares, including 2,500,000 newly issued shares. In connection with
this offering, certain founders sold less than 50% of their interest consisting
of 566,500 shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the Company's
wholly owned subsidiary, DAF Export Corporation, which is treated as a Foreign
Sales Corporation ("FSC") for federal income tax purposes. The accounts of the
subsidiary have been consolidated with the accounts of the Company in the
accompanying financial statements. All intercompany accounts and transactions
have been eliminated in consolidation.
Joint Venture Income Taxes
During fiscal year 2000, the Company determined that the earnings from the
Joint Venture would not be distributed to the Company for the foreseeable
future, therefore a provision for U.S. income taxes need not be provided on the
earnings from the Joint Venture. During fiscal year 1999, the Company accrued
for income taxes to be paid on the earnings in the Joint Venture at a rate of
34%. Based on the fiscal year 2000 determinations, the taxes originally
37
provided during fiscal year 1999, as well as those provided through the first
quarter of fiscal year 2000 on the earnings from the Joint Venture, were
reversed in the second quarter of fiscal year 2000 resulting in an additional
tax benefit for fiscal year 2000 of approximately $260,000.
Fiscal Year
The Company has adopted a fiscal year ending on the Saturday nearest June
30, which will result in fiscal years composed of 52 or 53 weeks. Fiscal years
2000, 1999 and 1998 include 52, 53 and 52 weeks, respectively.
Cash and Cash Equivalents
The Company generally considers all highly liquid investments with an
original maturity of less than 90 days to be cash equivalents.
Marketable Securities
The Company classifies all of its short-term investments that do not
qualify as cash equivalents as trading securities. Such short-term investments
consist of municipal debt securities and corporate bonds. Trading securities are
bought and held principally for the purpose of selling them in the near term.
Realized gains and losses on such securities are reflected as other income in
the accompanying statement of operations. Trading securities are carried at
current market value which are based upon quoted market prices using the
specific identification method.
As of July 1, 2000, the Company had $3.5 million and $16.7 million in
corporate bonds and municipal debt securities, respectively. The Company had no
significant concentration of credit risk arising from investments and had no
significant unrealized gains or losses at July 1, 2000.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories at July 1, 2000, and July 3, 1999 consist of the following:
July 1,2000 July 3,1999
----------- -----------
(In thousands)
Raw materials, net............................. $ 4,003 $ 3,797
Work-in-process................................ -- 23
Materials for manufacturing systems............ 195 192
Finished goods................................. 5,808 4,140
--------- ---------
$ 10,006 $ 8,152
========= =========
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Replacements, renewals
and improvements are capitalized and costs for repairs and maintenance are
expensed as incurred. Depreciation is computed on straight-line or accelerated
methods over the following estimated useful lives. Leasehold improvements are
depreciated over the lesser of the useful life of the asset or lease term.
38
Estimated
Useful Lives
------------
Building............................................ 30 years
Machinery and equipment............................. 3-10 years
Office furniture and equipment...................... 3-5 years
Deferred Gain
During June 1997, the Company entered into a lease transaction with a third
party for the Company's manufacturing and administrative facility in Longmont,
Colorado, which included a purchase option early in the lease period. The
Company sold this purchase option to another third party, who exercised this
option and purchased the building. The Company then entered into a new lease of
the facility (see Note 10). The Company received $834,000 for this purchase
option, which is deferred and is being amortized on a straight line basis over
the term of the lease of 15 years.
Coated Glass Revenue Recognition
Coated glass revenues are recognized upon shipment to the customer pursuant
to the terms specified in the purchase order. A provision for estimated sales
returns and allowances is recognized in the period of the sale.
Equipment Sales Revenue Recognition
Revenues relating to the sales of thin film coating equipment are
recognized on the percentage-of-completion method in accordance with the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position No. 81-1 "Accounting for Performance of Construction - Type and Certain
Production-Type Contracts" ("SOP 81-1"). Pursuant to SOP 81-1, revenues are
measured by the percentage of the total costs incurred and applied to date in
relation to the estimated total costs to be incurred for each contract.
Management considers costs incurred and applied to be the best available measure
of progress on these contracts. Contract costs include all direct material and
labor costs and those indirect costs related to contract performance. General
and administrative costs are charged to expense as incurred. Changes in
performance, contract conditions and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined. Billings in excess of costs and profit,
represents amounts received pursuant to the contract terms which occur prior to
the Company's recognition of revenues on the contract for financial reporting
purposes. Costs and profits in excess of billings represents revenues earned
prior to billing.
Losses on contracts in process are recognized in their entirety when the
loss becomes evident and the amount of loss can be reasonably estimated. No such
losses have been identified for contracts in progress at July 1, 2000 or July 3,
1999. The Company did not have any contracts in progress at July 3, 1999.
Contracts in progress at July 1, 2000 are as follows:
Costs incurred on contracts in progress and estimated profit ................ $ 6,211
Less: billings to date....................................................... (1,640)
-------------
Costs and profit in excess of billings....................................... $ 4,571
The balances billed but not paid by customers pursuant to retainage
provisions in equipment contracts will be due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance at each balance sheet date will
generally be collected within the subsequent fiscal year. Retainage generally
ranges from 0% to 10% of amounts billed to customers during the progress
39
of the contract. Retainage amounts are included in accounts receivable in the
balance sheet.
The Company offers warranty coverage for equipment sales for a period
ranging from 3 to 12 months after final installation is complete. The Company
estimates the anticipated costs to be incurred during the warranty period and
accrues a reserve as a percentage of revenue as revenue is recognized. These
reserves are evaluated periodically based on actual experience and anticipated
activity. Provisions for anticipated losses on contracts, if any, are made in
the period they become evident.
Deferred Revenue
During fiscal 1999, the Company sold refurbished thin film coating
equipment to the Joint Venture (see Note 4). Because the Company owns 50% of the
Joint Venture, the Company recorded 50% of the revenue and related cost of the
sale and has deferred 50% of the gross margin, approximately $1.4 million,
(representing the Company's intercompany profit due to its ownership of the
Joint Venture), which will be recognized on a straight-line basis over ten
years, the estimated depreciable life of the equipment. The amortization of the
gross margin is included with equity in earnings of Joint Venture in the
accompanying statements of operations.
Research and Development Expenses
Research and development costs are expensed as incurred and consist
primarily of salaries, supplies, and depreciation of equipment used in research
and development activities. The Company incurred approximately $1.4 million,
$1.0 million and $1.2 million of research and development expenses for the
fiscal years ended July 1, 2000, July 3, 1999 and June 27, 1998 respectively,
net of reimbursements received from a contracting research organization.
Foreign Currency Transactions
The Company generated 93% and 85% of its revenues in fiscal years 2000 and
1999, respectively, from sales to foreign corporations, located primarily in
East Asia. In addition, many of its raw materials are purchased from foreign
corporations. The majority of the Company's sales and purchases are denominated
in U.S. dollars, with the remainder denominated in Japanese Yen. For those
transactions denominated in Japanese Yen, the Company records the sale or
purchase at the spot exchange rate in effect on the date of sale. Receivables
from such sales or payables for such purchases are translated to U.S. dollars
using the end of the period spot exchange rate. Transaction gains and losses are
charged or credited to income during the year, and any unrealized gains or
losses are recorded as other income or loss at the end of the period.
Other Cumulative Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", establishes a standard for reporting and displaying
comprehensive income and its components within the financial statements.
Comprehensive income includes charges and credits to equity that are not the
result of transactions with shareholders. Other cumulative comprehensive income
for the Company represents foreign currency items associated with the
translation of the Company's investment in the Joint Venture (Note 4).
Net (Loss) Income Per Share
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share." SFAS No. 128 establishes standards for computing
and presenting basic and diluted earnings per share ("EPS"). Under this
statement, basic earnings (loss) per share is computed by dividing the net
earnings or loss by the weighted average number of shares of common stock
outstanding. Diluted earnings (loss) per share is determined by dividing the net
earnings or loss by the sum of (1) the weighted average number of common shares
outstanding and (2) the dilutive effect of outstanding potential dilutive
securities, including stock options determined utilizing the treasury stock
method.
40
A reconciliation between the number of shares used to calculate basic and
diluted earnings per share is as follows (in thousands of shares):
2000 1999 1998
---- ---- ----
Weighted average number of common shares
outstanding (shares used in basic
earnings per share computation)................. 4,255 3,478 3,181
Effect of stock options (treasury stock method)...... 184 N/A 194
------- ------- -------
Shares used in diluted earnings per share computation 4,439 3,478 3,375
======= ======= =======
As all potentially dilutive securities were antidilutive for fiscal year
1999, the effect of common stock issuable upon exercise of all options has been
excluded from the computation of diluted earnings per share for fiscal year
1999.
Adoption of New Accounting Standards
In March 1998, the Accounting Standards Executive Committee ("AcSEC") of
the AICPA issued Statement of Position ("SOP") 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. Once the capitalization criteria of SOP 98-1 have been met,
certain internal and external direct costs of materials, services and interest
should be capitalized. SOP 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998, which is fiscal year 2000 for the
Company. The application of SOP 98-1 did not have a material impact on the
Company's financial statements.
In April 1998, the AcSEC issued SOP 98-5 "Reporting on the Costs of
Start-up Activities." SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs and requires such costs to be expensed as
incurred. Generally, initial application of SOP 98-5 should be reported as the
cumulative effect of a change in accounting principle. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. Through
the end of fiscal 1999, the Company has been deferring certain start-up costs
related to the Joint Venture in China (see Note 4). A charge for the application
of SOP 98-5 was recorded as a change in accounting principle during fiscal 2000.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS
No. 137 and SFAS No. 138, is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company has not yet quantified the
impact of adopting SFAS No. 133 on its financial statements and has not
determined the timing of or method of its adoption of SFAS No. 133. However,
based upon a preliminary assessment, management does not believe SFAS No. 133 as
amended by SFAS No. 137 and SFAS No. 138, will have a material impact on the
Company's financial statements.
SAB 101
In December 1999, the staff of the Securities and Exchange Commission (the
"Staff") issued Staff Accounting Bulletin No. 101 ("SAB 101") "Views on Selected
Revenue Recognition Issues" which provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
The Company has evaluated SAB 101 and it believes that there is no effect on the
revenue recognition policies currently in place. The staff has indicated that it
plans to issue interpretive guidance as it relates to SAB 101 in the form of a
question and answer
41
document. The Company will evaluate the impact, if any, of such guidance as it
becomes available.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Related Parties
In addition to the Company's Joint Venture investment described in Note 1,
the Company has engaged in the following related party transactions. During
fiscal 2000, the Company had $245,000 in sales to a company of which a member of
the board of directors is an officer, and the Company had $583,000 of purchases
from a company of which a member of the board of directors is an officer.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
42
(3) LONG-TERM DEBT
July 1, July 3,
2000 1999
----------------- ------------------
Revolving credit facility, due September 17, 2002, secured by eligible
accounts receivable, inventory, equipment and fixtures, as defined in
the agreement; interest payable quarterly and accruing based on the
prime rate and/or the Eurodollar rate, at the election of the Company
at the beginning of each month, plus a factor varying based on earnings
before interest, taxes, depreciation and amortization, as defined by
the agreement (9.25% and 8%, at July 1, 2000 and July 3, 1999,
respectively).......................................................... $ -- $ 7,000,000
Note payable secured by a deed of trust on land and
buildings, payable in 60 monthly installments of
principal and interest of $7,692 (final payment due
June 27, 2002); with interest accruing at 8.79%. The
note payable was retired during fiscal 2000............................ -- 241,000
Notepayable for insurance policy secured by any insurance proceeds and
dividends, payable in 17 monthly installments of principal and interest
of $13,984 (final payment due April 18, 2000); with
interest accruing at 7.17%............................................. -- 137,000
Other capital leases of equipment.......................................... -- 23,000
------------ ------------
-- 7,401,000
Less-current portion................................................... -- (221,000)
Total long-term debt................................................... $ -- $7,180,000
============ ============
On March 27, 1998, the Company entered into an Amended and Restated Credit
Agreement (the "Agreement"), which consolidated all outstanding debt into a
revolving credit facility with maximum availability of $11,500,000, due on June
30, 2000. Effective July 1999, the maturity Agreement was extended to September
17, 2002. The Company must maintain certain financial ratios to remain in
compliance with the Agreement, including a ratio of debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA"); a ratio of total
liabilities to tangible net worth and maintain a certain amount of tangible net
worth, all as defined in the Agreement. As of July 1, 2000, the entire facility
was available to the Company in accordance with these provisions. At the
beginning of each month, the Company may elect to have a portion of the
borrowings bear interest at the Eurodollar rate and any additional borrowings
bear interest at the Prime rate. As of July 1, 2000, the Company had $0 borrowed
against the facility.
(4) INVESTMENT IN JOINT VENTURE
In June 1998, the Company formed a 50/50 Joint Venture with NSG in China to
manufacture, process, sell and export certain types of thin film coated glass.
Each party contributed $3.2 million in cash to the Joint Venture. During the
third quarter 1999, the Company sold refurbished equipment to the Joint Venture
for use in the process of thin film coating of glass. The sales price was
approximately $5.1 million.
The Joint Venture began operations during the fourth quarter of fiscal
1999. The Company records 50% of
43
income or loss from operations of the Joint Venture after elimination of the
impact of interentity transactions. The Company's share of profits realized by
the Joint Venture on sale of inventory to the Company are eliminated as are
adjustments to inventory to the extent that such inventory is held by the
Company at the end of the period. The functional currency for the Joint Venture
is the applicable local currency. The Company's investment in the Joint Venture
is translated into U.S. dollars using the year-end exchange rate. The earnings
recorded by the Company from the Joint Venture are translated at average rates
prevailing during the period. The cumulative translation gain or loss is
recorded as other comprehensive income in Company's financial statements.
During fiscal year 2000, the Company purchased coated glass totaling $7.7
million from the Joint Venture, of which $1.2 million remained in inventory at
year end. In addition, the Company received royalties totaling $284,000 for the
year ended July 1, 2000, and $44,000 for the year ended July 3, 1999. In March
2000, the Company agreed to guarantee 50% of the debt of the Joint Venture.
Summarized income statement information for the Joint Venture for the year
ended July 1, 2000 and July 3, 1999 is presented below:
Year Ended Year Ended
July 1, 2000 July 3, 1999
----------------- ------------------
(In thousands)
Joint Venture:
Operating revenues................................ $ 23,882 $ 4,139
========= =========
Net income........................................ $ 4,095 $ 660
========= =========
AFCO's Equity in earnings:
Proportionate share of net income after
Eliminations................................. $ 2,217 $ 330
Amortization of deferred gain on sale of
Equipment.................................... 164 52
--------- ---------
Equity in earnings of Joint Venture............... $ 2,381 $ 382
========= =========
Summarized balance sheet information for the Joint Venture as of July 1,
2000 and July 3, 1999 is presented below:
Year Ended Year Ended
July 1, 2000 July 3, 1999
----------------- ----------------
(In thousands)
Assets:
Current assets.................................... $ 9,956 $ 5,411
Property, plant, and equipment, net............... 9,921 10,414
--------- ---------
$ 19,877 $ 15,825
========= =========
Capitalization and Liabilities:
Current liabilities............................... $ 5,397 $ 7,125
Long-term debt.................................... 2,800 1,596
Common shareholders' equity....................... 11,680 7,104
--------- ---------
$ 19,877 $ 15,825
========= =========
As of July 1, 2000, the Company had accounts payable to and receivables
from the Joint Venture of $2.7 million and $218,000, respectively.
(5) ASSETS HELD FOR SALE
During fiscal 2000, the Company entered into an agreement to sell
refurbished equipment to the Joint Venture for approximately $4.7 million. The
44
equipment had been used in the Company's thin film coated glass segment. The
sale is subject to customary terms, including installation and acceptance at the
Joint Venture's premises. The Company expects to fulfill those terms and record
the sale during the first quarter of fiscal 2001. Accordingly, the equipment has
been classified as assets held for sale at July 1, 2000. As the Company expects
to realize a gain upon sale, no adjustments have been made to the carrying value
of the equipment. Depreciation of the equipment has been suspended since the
date of the sales agreement.
(6) STOCKHOLDERS' EQUITY
Stock Options
In May 1993, the board of directors approved the Company's 1993 Stock
Option Plan (the "1993 Plan") covering 276,500 shares of common stock. The
exercise price of these options is determined by the board of directors. The
options granted in fiscal years 1994 and 1995 vested, over a four year period
and, under its original terms, were not exercisable until after an initial
public offering of common stock was completed by the Company. Accordingly, the
Company accounted for the 1993 Plan as a variable plan until June 30, 1995, at
which time the board of directors declared that the options then outstanding
were exercisable, subject to their vesting terms. The Company has recorded
approximately $597,000 of deferred compensation related to all options, which is
equal to the excess of the estimated fair market value of the common stock as of
July 1, 1995 over the exercise price. As of July 3, 1999, all of the
compensation has been expensed.
In April 1997, the Company adopted the 1997 Stock Option Plan (the "1997
Plan") covering 272,500 shares of common stock, as amended. The exercise price
of options granted under the 1997 Plan is determined by the board of directors
based upon estimated fair market value. The options granted are to vest ratably
over four years. In October of 1999, the shareholders of the Company approved an
increase of 100,000 shares to the 1997 Stock Option Plan, increasing the shares
available for granting to 372,500 shares.
Outside Directors Options
In October 1999, the Company adopted the Outside Director Stock Option Plan
covering 24,000 shares of common stock. The exercise price of the options under
this plan is determined based upon the estimated fair market value.
Statement of Financial Accounting Standards No. 123
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair
value based method of accounting for employee stock options or similar equity
instruments. However, SFAS No. 123 allows the continued measurement of
compensation cost in the financial statements for such plans using the intrinsic
value based method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), provided that pro forma
disclosures are made of net income or loss, assuming the fair value based method
of SFAS No. 123 had been applied. The Company has elected to account for its
stock-based compensation plans for employees and directors under APB 25.
Accordingly, for purposes of the pro forma disclosures presented below, the
Company has computed the fair values of all options granted during fiscal 2000,
1999 and 1998 using the Black-Scholes pricing model and the following weighted
average assumptions:
2000 1999 1998
---- ---- ----
Risk-free interest rate......................... 6.24% 5.21% 5.66%
Expected lives.................................. 7 years 7 years 5 years
Expected volatility............................. 136% 77% 64%
Expected dividend yield......................... 0.0% 0.0% 0.0%
To estimate expected lives of options for this valuation, it was assumed
options will be exercised at varying schedules after becoming fully vested. All
options are initially assumed to vest. Because of the exercise trend related to
45
both the 1993 and 1995 option grants, the expected life of the options has been
extended to seven years in 1999. Cumulative compensation cost recognized in pro
forma net income or loss with respect to options that are forfeited prior to
vesting is adjusted as a reduction of pro forma compensation expense in the
period of forfeiture. Until the Company's common stock was publicly traded, the
expected market volatility was estimated using the estimated average volatility
of three publicly held companies which the Company believes to be similar with
respect to the markets in which they compete. Actual volatility of the Company's
stock may vary. Fair value computations are highly sensitive to the volatility
factor assumed; the greater the volatility, the higher the computed fair value
of the options granted.
The total fair value of options granted was computed to be approximately
$738,000, $51,000 and $147,000 for the years ended July 1, 2000, July 3, 1999
and June 27, 1998, respectively. The amounts are amortized ratably over the
vesting period of the options. Pro forma stock-based compensation, net of the
effect of forfeitures, was $220,000, $88,000 and $82,000 for the fiscal years
ended July 1, 2000, July 3, 1999 and June 27, 1998, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income (loss) would have been
reported as follows (in thousands, except share data):
2000 1999 1998
---- ---- ----
Net income (loss):
As reported................................. $ 3,073 $ (224) $ 2,857
========== ========== ==========
Pro forma................................... $ 2,853 $ (313) $ 2,768
========== ========== ==========
Basic earnings (loss) per share:
As reported................................. $ 0.72 $ (0.06) $ 0.90
========== ========== ==========
Pro forma................................... $ 0.67 $ (0.09) $ 0.87
========== ========== ==========
46
A summary of the 1993 and 1997 Plans is as follows:
-------------------------------------------------------------------------------------------
For the Fiscal Years Ended
-------------------------------------------------------------------------------------------
July 1, 2000 July 3, 1999 June 27, 1998
--------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
Price Price Price
------- ----- ------- ----- ------- -----
Outstanding at beginning of year 390,053 $ 3.45 379,645 $ 3.77 345,100 $ 3.43
Granted 124,160 6.30 25,000 2.75 34,545 7.20
Forfeited (10,820) (4.28) (10,786) (6.61) -- --
Exercised (48,337) (2.69) (3,806) (2.87) -- --
Outstanding at end of year 455,056 4.29 390,053 3.63 379,645 3.77
======= ========= ======= ======== ======= =======
Exercisable at end of year 242,937 3.46 306,756 3.29 255,695 3.05
======= ========= ======= ======== ======= =======
Weighted average fair value of
options granted $ 5.94 $ 2.05 $ 4.26
========= ======== =======
The following table summarizes information about employee stock options
outstanding and exercisable at July 1, 2000:
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------------------
Number of Weighted
Options Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of July 1, Contractual Exercise July 1, Exercise
Exercise Prices 2000 Life in Years Price 2000 Price
- ---------------------------------- ------------- ------------------- ------------- ---------------- -------------
$ 2.32 - $3.27 260,125 7.1 $ 2.80 101,760 $ 2.48
3.28 - 6.55 169,916 5.9 4.11 135,420 4.08
6.55 - 9.83 11,515 7.2 7.20 5,757 7.20
9.84 - 32.75 13,500 10.0 32.75 -- --
--------- ------- ------- ---------
455,056 $ 4.29 242,937 $ 3.46
======= ======= ======= ========
Employee Stock Purchase Plan
On September 5, 1997, the board of directors of the Company adopted, and
the shareholders subsequently approved, the Applied Films Corporation Employee
Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan will permit
eligible employees of the Company to purchase shares of common stock through
payroll deductions. Shares are purchased at 90% of the fair market value of the
common stock on the last trading day in each quarterly purchase period. Up to
30,000 shares of common stock may be sold under the Purchase Plan. Shares sold
under the Purchase Plan may be newly issued shares or shares acquired by the
Company in the open market. Unless terminated earlier by the board of directors,
the Purchase Plan will terminate when all shares reserved for issuance have been
sold thereunder. The Purchase Plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code of 1986, as
amended, and will be administered in accordance with the limitations set forth
in Section 423 and the rules and regulations thereunder.
During fiscal 2000, the Company issued shares to employees under this plan
at a grant price ranging from $3.15 to $32.96 per share. A total of 16,045
shares have been issued under the plan.
(7) INCOME TAXES
47
The Company accounts for income taxes through recognition of deferred tax
assets and liabilities for the expected future income tax consequences of events
which have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The net deferred tax asset (liability) is comprised of the following:
July 1, July 3,
2000 1999
--------- --------
(In thousands)
Inventories.................................................. $ 160 $ 54
Accrued expenses............................................. 334 281
Deferred compensation........................................ 181 219
Deferred gain................................................ 261 261
Deferred revenue............................................. 513 86
Other ...................................................... 1 --
------- ------
Total deferred tax assets............................. 1,450 901
------- ------
Property, plant and equipment................................ (794) (748)
Equity earnings in Joint Venture............................. -- (135)
Foreign currency............................................. (41) (31)
------- ------
Total deferred tax liabilities........................ (835) (914)
------- -----
Total deferred tax (liability) asset, net............. $ 615 $ (13)
======= ========
Income tax (benefit) provision for the years ended July 1, 2000, July 3,
1999 and June 27, 1998 consist of the following:
----------------------------------------------
Fiscal Years Ended
----------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
------------- --------- ----------
(In thousands)
Taxes currently payable/(receivable):
Federal...................................................... $ 484 $ (718) $ 1,858
State........................................................ 47 (70) 180
------- ------- -------
Total current (benefit) provision.............. 531 (788) 2,038
Taxes deferred:
Federal...................................................... (572) 483 (509)
State........................................................ (56) 47 (49)
------- ------- -------
Total deferred (benefit) provision............. (628) 530 (558)
------- ------- -------
Total tax (benefit) provision.................. $ (97) $ (258) $ 1,480
======= ======= =======
48
Reconciliations between the effective statutory federal income tax
(benefit) expense rate and the Company's effective income tax (benefit)
provision rate as a percentage of net (loss) income before taxes were as
follows:
----------------------------------------------
Fiscal Years Ended
----------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
----------- ----------- -----------
Statutory federal income tax (benefit) expense rate.............. 34.0% (34.0)% 34.0%
State income taxes............................................... 3.3 (3.3) 3.3
Equity earnings in Joint Venture................................. (33.2) -- --
Tax exempt interest income....................................... (6.4) -- --
Decrease in valuation allowance.................................. -- -- (1.1)
Effect of FSC.................................................... (1.1) (18.1) (4.4)
Other............................................................ 0.1 2.0 2.3
-------- ------- -----
(3.3)% (53.4)% 34.1%
======== ======= =====
Under the provisions of the Internal Revenue Code, as amended, the
Company's FSC may exempt a portion of its export related taxable income from
federal and state income taxes.
(8) PROFIT SHARING PLAN
In August 1992, the board of directors adopted a profit sharing plan for
all non-executive employees. The amount to be contributed to the profit sharing
pool, subject to the approval of the Company's board of directors, is generally
10% of pre-tax income before royalty income and profit sharing expense. Profit
sharing is paid to employees monthly based on their length of service with the
Company. The Company expensed approximately $299,000, $0 and $482,000 in fiscal
years 2000, 1999 and 1998, respectively, related to this plan.
(9) SIGNIFICANT CUSTOMERS
During fiscal years 2000, 1999 and 1998, approximately 93%, 85% and 78%,
respectively, of the Company's gross sales were to overseas customers. The
Company's ten largest customers accounted for in the aggregate, approximately
79%, 62% and 78% of the Company's gross sales in fiscal 2000, 1999 and 1998,
respectively. Two individual customers represented 29% and 11%, and 15% and 11%
of sales in fiscal years 2000 and 1999, respectively. The loss of, or a
significant reduction of purchases by, one or more of these customers would have
a material adverse effect on the Company's operating results.
The breakdown of sales by geographic region is as follows:
----------------------------------------------------------
Fiscal Years Ended
(In thousands)
--------------------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
------------ ------------ -----------
Asia (other than Japan) $ 25,901 $ 18,900 $ 32,800
Japan 13,929 7,645 7,824
United States 2,934 4,924 12,224
Europe and Other 788 1,263 2,304
--------- --------- ---------
Gross sales 43,552 32,732 55,152
Less: sales returns and allowances (1,260) (1,209) (2,111)
--------- --------- ---------
Net sales $ 42,292 $ 31,523 $ 53,041
========= ========= =========
49
The Company's sales are typically denominated in U.S. dollars. However,
certain customers of the Company currently pay in Japanese Yen. As a result, the
Company recognized approximately ($43,000), $24,000 and $174,000 of foreign
currency exchange rate (loss) gain on foreign currency exchange rate
fluctuations for the fiscal years ended July 1, 2000, July 3, 1999 and June 27,
1998, respectively. The Company has approximately $2.0 million of its accounts
receivable and $2.4 million of its accounts payable denominated in Japanese Yen
as of July 1, 2000.
(10) COMMITMENTS
The Company is obligated under certain noncancelable operating leases for
office, manufacturing and warehouse facilities. During June 1997, the Company
entered into a lease for the Company's manufacturing and administrative location
in Longmont, Colorado, which is accounted for as an operating lease. The lease
commenced on January 30, 1998, and payments are fixed until the first day of the
second lease year, at which time payments increase annually one and one-half
percent plus one-half of the increase in the Consumer Price Index per annum.
Lease payments have been normalized over the term of the lease. The initial
lease term is 15 years, with two additional 5 year options to extend.
The future minimum rental payments under the leases are as follows (in
thousands):
Fiscal Year
-----------
2001................................. $ 981
2002................................. 915
2003................................. 911
2004................................. 887
2005................................. 890
Thereafter........................... 7,196
--------
$11,780
(11) SEGMENT INFORMATION
The Company manages its business and has segregated its activities into two
business segments, the sale of "Thin Film Coated Glass" for use primarily in
liquid crystal displays, and the sales of "Thin Film Coating Equipment" to flat
panel display manufacturers. Certain financial information for each segment is
provided below:
2000 1999 1998
---- ---- ----
Net sales:
Thin film coated glass........................ $ 35,159 $ 26,906 $ 39,133
Thin film coating equipment................... 7,133 4,617 13,908
-------- -------- --------
Total net sales.................. $ 42,292 $ 31,523 $ 53,041
======== ======== ========
Operating (loss) income:
Thin film coated glass........................ $ 1,628 $ (148) $ 3,657
Thin film coating equipment................... (1,702) (203) 924
-------- -------- --------
Total operating (loss) income.... $ (74) $ (351) $ 4,581
======== ======== ========
Identifiable assets:
Thin film coated glass........................ $ 3,734 $ 6,634 $ 7,927
Thin film coating equipment................... 1,403 38 28
Corporate and other........................... 180 1,955 1,304
-------- -------- --------
Total identifiable assets........ $ 5,317 $ 8,627 $ 9,259
======== ======== ========
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
50
The carrying amount of cash and cash equivalents approximates fair value
due to the nature of the investments and the length of maturity of these
investments. The fair value of the Company's debt is based on borrowing rates
that would approximate existing rates; therefore, there is no material
difference in their fair market value and the carrying value.
ITEM 9: Changes in and Disagreements With Accountants and Financial Disclosure
There have been no changes in or significant disagreements with
Accountants.
PART III
ITEM 10: Directors and Executive Officers of the Registrant
Information required to be furnished by Items 401 and 405 of Regulation S-K
is included in our definitive Proxy Statement for our 2000 annual meeting of
shareholders filed with the Commission (the "2000 Proxy Statement") and is
incorporated herein by reference.
ITEM 11: Executive Compensation
Information required to be furnished by Item 402 of Regulation S-K is
included in our 2000 Proxy Statement and is incorporated herein by reference.
ITEM 12: Security Ownership of Certain Beneficial Owners and Management
Information required to be furnished by Item 404 of Regulation S-K is
included in our 2000 Proxy Statement and is incorporated herein by reference.
ITEM 13: Certain Relationships and Related Transactions
We supply thin film coated glass to Information Products, Inc. for use in
touch screen displays. Chad Quist, a director of our company, is the President
of Information Products, Inc. Our net sales to Information Products, Inc.
totalled $1.0 million and $245,000 for fiscal 1999 and fiscal 2000,
respectively. We believe the terms of our sales to Information Products, Inc.
were negotiated on an arms-length basis and are no less favorable than the terms
we would have negotiated with an independent third party.
We purchase power supplies and components from Advanced Energy Industries,
Inc. for use in our ATX-700. Richard P. Beck, a director of our company, is the
Executive Vice President and Chief Financial Officer of Advanced Energy. Our
purchases from Advanced Energy totalled $583,000 for fiscal 2000. We believe the
terms of our purchases from Advanced Energy were negotiated on an arms-length
basis and are no less favorable than the terms we would have negotiated with an
independent third party.
PART IV
ITEM 14: Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements.
The Registrant's consolidated financial statements, for the year ended July
1, 2000, together with the Report of Independent Certified Public Accountants
are filed as part of this Form 10-K report. See "ITEM 8: Financial Statements
and Supplementary Data." The supplemental financial information listed and
appearing hereafter should be read in conjunction with the financial statements
included in this report.
51
2. Financial Statement Schedules.
Financial statement schedules are not submitted because they are not applicable
or because the required information is included in the consolidated financial
statements or notes thereto.
3. Exhibits.
Reference is made to the Exhibit Index which is found on the last page of
the body of this Form 10-K Annual Report preceding the exhibits.
(b) Reports on Form 8-K
52
The Registrant did not file any reports on Form 8-K during the last quarter
of the fiscal year ended July 1, 2000.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate section
of this report.
(d) Financial Statement Schedules
The response to this section of Item 14 is submitted as a separate section
of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
APPLIED FILMS CORPORATION
By: /s/ Thomas T. Edman
Thomas T. Edman, President
August 1, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated on
August 1, 2000. The persons named below each hereby appoint Thomas T. Edman and
Lawrence D. Firestone, and each of them severally, as his attorney in fact, to
sign in his name and on his behalf, as a director or officer of the Registrant,
and to file with the Commission any and all amendments to this report on Form
10-K.
Signatures Title
President, Chief Executive Officer and Director
/s/ Thomas T. Edman (principal executive officer)
Thomas T. Edman
Chief Financial Officer and Treasurer (principal
/s/ Lawrence D. Firestone accounting and financial officer)
Lawrence D. Firestone
/s/ John S. Chapin Director
John S. Chapin
/s/ Cecil Van Alsburg Director
Cecil Van Alsburg
/s/ Chad D. Quist Director
Chad D. Quist
/s/ Vincent Sollitto, Jr. Director
Vincent Sollitto, Jr.
/s/ Richard P. Beck Director
Richard P. Beck
EXHIBIT INDEX
Exhibit Description
No.
3.1 Amended and Restated Articles of Incorporation of Applied Films
Corporation are incorporated by reference to Exhibit 3.1 of
Registrant's Registration Statement on Form S-1, as amended (Reg. No.
333-35331).
3.2 Amended and Restated Bylaws of Applied Films Corporation are
incorporated by reference to Exhibit 3.2 of Registrant's Registration
Statement on Form S-1, as amended (Reg. No. 333-35331).
4.1 Specimen common stock certificate is incorporated by reference to
Exhibit 4.1 of Registrant's Registration Statement on Form S-1, as
amended (Reg. No. 333-35331).
10.1 1993 Stock Option Plan is incorporated by reference to Exhibit 4 of
Registrant's Registration Statement on Form S-8 (Reg. No. 333-51175).
10.2 1997 Stock Option Plan, as amended, is incorporated by reference to
Exhibit 10.2 of Registrant's Registration Statement on Form S-1, as
amended (Reg. No. 333-35331) and by reference to Exhibit 4.2 of
Registrant's Registration Statement on Form S-8 (Reg. No. 333-38426.)
10.3 Employee Stock Purchase Plan is incorporated by reference to Exhibit
10.3 of Registrant's Registration Statement on Form S-1, as amended
(Reg. No. 333-35331).
10.4 Form of Indemnity Agreement between Registrant and each of its
Directors and Executive Officers is incorporated by reference to
Exhibit 10.4 of Registrant's Registration Statement on Form S-1, as
amended (Reg. No. 333-35331).
10.5 Lease Agreement dated January 30, 1998, between 9586 East Frontage
Road, Longmont, CO 80504 LLC and Registrant is incorporated by
reference to Exhibit 10.9 of Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended December 27, 1997.
10.6 Agreement, dated as of November 18, 1997, between Nippon Sheet Glass
Co., Ltd., NSG Fine Glass Co., Ltd. and Registrant is incorporated by
reference to Exhibit 10.8 of Registrant's Annual Report on Form 10-K
for the fiscal year ended June 27, 1998.
10.7 Amended and Restated Credit Agreement, dated as of September 17, 1999,
between Registrant and Bank One, Michigan is incorporated by reference
to Exhibit 10.7 of Registrant's Annual Report on Form 10-K for the
fiscal year ended July 3, 1999.
10.8 Security Agreement dated June 30, 1994, between Registrant and Bank
One, Michigan, formerly NBD Bank, is incorporated by reference to
Exhibit 10.5 of Registrant's Registration Statement on Form S-1, as
amended (Reg. 333-35331).
10.9 Outside Director Stock Option Plan is incorporated by reference to
Exhibit 4.1 of Registrant's Registration Statement on Form S-8 (Reg.
No. 333-95367).
11.1 Statement re: computation of per share earnings.
21.1 Subsidiary of Applied Films Corporation is incorporated by reference
to Exhibit 21 of Registrant's Registration Statement on Form S-1, as
amended (Reg. No. 333-35331).
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (included on page 53).
27.1 Financial Data Schedule (EDGAR filing only).
Exhibit 11.1
COMPUTATION OF EARNINGS PER COMMON SHARE
(in thousands, except per share amounts)
July 1, 2000
BASIC EARNINGS PER SHARE ------------
Net income (loss) $3,073
Weighted average number of common shares outstanding 4,255
Basic earnings per share $.72
DILUTED EARNINGS PER SHARE
Net income (loss) $3,073
Shares Outstanding:
Weighted average number of common shares outstanding 4,255
Assuming exercise of stock options 455
Assuming repurchase of treasury stock (271)
Net incremental shares 184
Weighted average number of common shares
Outstanding, as adjusted 4,439
Diluted earnings per share $.69
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this Form 10-K
and to the incorporation of our report into the Company's previously filed
Registration Statement File Numbers 333-47951, 333-47967, 333-38426, 333-51175
and 333-95367.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Denver, Colorado
July 28, 2000